Peter Lynch, the super-star manager of the Fidelity Magellan Fund until 1990, says the famous advice to “invest what you know” attributed to him leaves out the importance of fundamental stock research. As reported in the Wall Street Journal recently, Lynch “explains his philosophy this way: Use your specialized knowledge to hone in on stocks you can analyze, study them and then decide if they’re worth owning.” Lynch also noted changes in the market since his retirement 25 years ago, especially the rise of exchange-traded funds. “People accept that active managers can’t beat the market,” he said,” and it’s just not true.” Indeed, Fidelity reports that three-quarters of its 49 funds that have retained the same manager for over five years are beating their benchmark over the manager’s tenure.
How do Apple, Facebook, Berkshire Hathaway, and other market giants stack up against the strategies used by history’s greatest investors? In his latest column for Forbes.com, Validea CEO John P. Reese takes a look at how 10 market titans fare, and the results might surprise you.
Reese notes that, historically, small stocks have beaten large stocks by a significant margin. Small stocks have an advantage because they can fly under the radar in a way that larger stocks cannot, and they usually come with an added risk premium because they tend to be less stable and more susceptible to bankruptcy. But, he says, that doesn’t mean you should ignore the big guys.
“Mega-cap stocks have advantages of their own,” Reese writes. “Their size and name recognition can give them what [Warren] Buffett would call ‘durable competitive advantages’ over their competitors. They also tend to be less volatile and safer plays during tough times. … And often times the big guys will offer nice dividends or implement major share buyback plans because of their more stable cash flows, making up for the slowing of growth that inevitably occurs when a company gets to be as big as these firms.”
So how do the 10 largest companies by market capitalization score using Reese’s Guru Strategies, which are based on the approaches of Buffett and other great investors? Apple, for one, fares quite well, earning strong interest from Reese’s Buffett- and Peter Lynch-based models. Facebook, on the other hand, misses the mark. To see how the others stack up, click here.
Putnam manager Jerry Sullivan takes a three-pronged approach to picking stocks, including approaches reminiscent of Fidelity’s Peter Lynch, with whom Sullivan began his career. As a student intern 30 years ago, Sullivan caught Lynch’s eye and was offered a permanent position with Fidelity. He turned it down, but his approach to managing Putnam funds includes elements that suggest he learned a lot in those early days.
Sullivan’s Putnam Multi-Cap Core fund has returned an annualized 15.8% over five years, placing it among the top 3% of its peers, although it has under-performed in the last year. As a manager, he divides stocks in his fund into three categories. The first is stocks he has researched in the past. Like Lynch, he spends a few minutes each week reviewing these companies, “looking for a change in the fundamentals, however subtle, that could move the stock one way or the other.” Second, in a technique learned from Lynch, Sullivan watches for insider buying. Noting that American Eagle Outfitter’s interim CEO is buying the company’s stock, for example, he added to his position in the company despite its recent declines. Third, he studies initial public offerings closely, seeing them as an opportunity to “ask deeper questions” of the company than usual because “it is like no other time in the history of that company, because they need me more than I need them.” Overall, Sullivan says, “whether it’s a value name or a growth story, I’m fascinated by what could move the stock.”
This week, we bring you the Stock Screen of the week from Validea. On Validea.com, you can screen for stocks using the site’s Guru Stock Screener, which scores stocks based on the fundamental stock selection criteria of legendary investors. The firm’s models are based on investing legends such as Warren Buffett, Peter Lynch, Benjamin Graham, Kenneth Fisher, Martin Zweig, David Dreman, Joel Greenblatt and others. The Advanced Guru Stock Screener allows users to create their own fundamental screens using a combination of the strategies of these investing greats and their own criteria.
This week’s screen looks for stocks that pass our Peter Lynch-based model and also have low valuations, solid long-term earnings growth, and an above average dividend yield. The criteria used and resulting companies are below.
- Pass our Lynch-based strategy with 90% or greater (you can read about Validea’s Lynch-based PE/Growth investor model here);
- Share price above $5 and market cap greater than $300M;
- Price-to-Sales ratio of less than 1.0;
- 5 Year Earnings Growth of at least 20%
- Dividend Yield of at least 3%.
Here are the seven stocks that currently make the cut. Interested in the Guru Stock Screener – try it out with a 7 day trial to Validea.
Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the Peter Lynch-inspired strategy, which has averaged annual returns of 11.2% since its July 2003 inception vs. 6.4% for the S&P 500. Below is an excerpt from the newsletter, along with several recent top-scoring stock ideas from the Lynch-based investment strategy.
Every other issue of the Validea Hot List newsletter examines one the investing greats behind John P. Reese’s computerized Guru Strategies. This latest issue looks at the James O’Shaughnessy’s research into the best sector for the long term.
Every other issue of the Validea Hot List newsletter examines in detail one of John P. Reese’s computerized Guru Strategies. This latest issue looks at the Peter Lynch-inspired strategy, up 10.9% annualized since its mid-2003 inception vs. 6.6% for the S&P 500. Below is an excerpt from the newsletter, along with several top-scoring stock ideas from the Lynch-based investment strategy.