Peter Lynch’s Picks

This scanner gives you a list of Indian stocks based on Peter Lynch’s investing rules and strategy. Peter Lynch was one of history’s most successful and renowned American investors. Lynch is the legendary former manager of the Magellan Fund at Fidelity. Taking over the fund in 1977 at the age of 33, Lynch managed it for 13 years, achieving an annualized return of 29.2% – more than double the S&P 500’s return during the same period. After an illustrious career, Lynch retired in 1990 at the age of 46.

Let’s learn a little about his investing strategy.

According to Lynch, there are some key areas to consider when searching for fast-growing and promising companies, namely:

Market Capitalization

Peter Lynch preferred small-cap companies because of their longer growth runway and potential for being undiscovered. He used to say, “Big companies have small moves, small companies have big moves.” For Indian companies, we’ll take the minimum market capitalization as 500 crores and a maximum of 15,000 crores.

The Price-to-Earnings (P/E) ratio

It is a metric that evaluates a company’s current stock price in relation to its earnings per share (EPS) and indicates whether it is overvalued or undervalued. Companies whose P/E ratio is less than their industry P/E multiples can be considered undervalued and vice versa. According to Lynch, important metrics like this cannot be looked at in isolation, so he prefers to study it over several years along with its industry average to see if the company is at a bargain. Therefore, he uses two conditions while analyzing the company’s P/E ratio. The first one is that the current P/E of the company should be lower than its 5-year historical P/E and the second is that the current P/E of the company should be lower than its industry P/E multiple.

Earnings Growth

Peter Lynch prefers companies that grow their earnings at a rate of at least 15% annually. Hence, we apply a filter to look for companies that have a 5-year profit growth CAGR of at least 15%.

Price/Earnings-to-Growth (PEG) ratio

The price/earnings-to-growth ratio (PEG ratio) is a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings over a specified period. The PEG ratio helps determine a stock’s value by considering the company’s expected earnings growth, offering a more comprehensive assessment than the standard P/E ratio. The PEG ratio helps bring companies from different industries or sectors together on a uniform measurement scale. According to Peter Lynch, the P/E ratio of any company that’s fairly priced will equal the fairly priced company will equal its growth rate which is why, which is why companies that have a PEG ratio less than 1 are considered undervalued. Peter Lynch employs a slightly modified version of the PEG ratio, a dividend-adjusted PEG ratio called the PEGY ratio. Companies with a PEGY ratio of less than 1 are flagged as undervalued.

Strong Balance Sheet

Peter Lynch mainly refers to a strong balance sheet as the amount of debt in the company’s books, which is why he recommended a debt ratio of less than 25%. The debt ratio is the ratio of total debt to total assets, expressed as a decimal or percentage. It indicates the proportion of a company’s assets financed by debt. The lesser this ratio, the better

Institutional Ownership

Peter Lynch prefers the company’s institutional ownership number to be lower since they could still be undiscovered. So, we are looking for companies where the combined percentage of domestic and foreign institutional ownership is less than 20%.

Other than these factors, Lynch preferred companies,

• With boring names & those operating in boring industries, citing that they’re often overlooked and represent untapped opportunities.
• Niche companies that control a large part of the market, especially those reflecting a ‘MOAT’.
• Companies whose products are always in demand, representing an evergreen industry.
• Where there is some kind of insider buying happening with the stock.

Conversely, some characteristics Peter Lynch didn’t find attractive were going after hot stocks in hot industries, companies with big, unproven plans, profitable companies diversifying via acquisitions, and companies where one customer accounted for 25% to 50% of total sales.

Using the above filters for the scanner, we have obtained a list of fast-growing companies available at reasonable valuations.