Legendary investor Peter Lynch delivered a total return of 2,510 percent to his investors over the 13 years he managed the Fidelity Magellan Fund, starting in 1977. What was his secret?
Keep in mind that the gains Lynch realized for his investors were more than five times greater than the return of the Standard & Poor's 500 Index over that same time.
Lynch's 1989 book, "One Up on Wall Street," describes several strategies that individual investors could use to mimic his techniques. One of these, Fast Growers, looks for companies with easily identified characteristics:
-Little debt, which we quantify with a debt-to-equity ratio of less than 20 percent. We also require this ratio to be less than the average for other companies within the same industry.
-Earnings growing at least 20 percent over the past year.
-Projected earnings for next year are greater than the earnings growth rate for this year.
These few criteria identify stocks of companies with solid fundamentals and rapidly growing earnings. Here's a list of stocks Lynch would find attractive:
CommVault Systems, Inc. (CVLT) This bargain priced software company is growing earnings at more than 20 percent a year and trading near 13, giving it a P/E ratio of less than 9.
Force Protection Inc. (FRPT) A very speculative stock, recently trading at 2.51, this company is expected to grow earnings by more than 40 percent a year for the next five years. Analysts expect FRPT, which adds blast protection to vehicles for the U.S. military, to at least double in price over the next two years.
IPG Photonics Corporation (IPGP) Making lasers used in materials processing, medical applications and telecommunications networks, IPGP gets a majority of its sales outside of North America, giving investors some diversification away from a struggling U.S. economy. A recent price of 16.14 offers a potential upside near 50 percent according to analyst estimates.
Medifast Inc. (MED) This well managed company sells diet products, always a growth industry. Its competitive advantage is that it allows dieters to eat six times a day, and sells the meals. Almost all fundamental measurements are significantly better than its peers. Recent price: 4.65.
MEDTOX Scientific Inc. (MTOX) MTOX sells drug screening devices used for employment testing and law enforcement settings. At a recent 14.06, the stock has a P/E ratio of 18, about half of next year's projected earnings growth rate.
NDS Group (NNDS) NDS is the market leader for digital pay-TV solutions, providing cable systems with the tools they need to offer pay-per-view services. Among its largest shareholders is Renaissance Technologies, the hedge fund run by James Simons which has averaged annual returns of 35% a year since 1989. Recently trading at 49.86.
SORL Auto Parts (SORL) A supplier to commercial truck manufacturers, SORL is a bet on an improving economy as companies will buy new equipment during a recovery. At a recent price of 5.55, SORL has a below average P/E ratio and above average profit margins.
Wipro (WIT) WIT is an India-based, IT outsourcing company. Recently beaten down on fears of a US slowdown, the company is still expected to grow earnings at more than 20 percent a year for the next five years. Recent price: 11.98.
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