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3 Traits of A Winning Stock

Peter Lynch is one of the most recognisable names in the investment world.

As manager of the Magellan Fund between 1977 and 1990, Lynch’s average returns was an astounding 29.2% a year. It’s a remarkable record, by any account. As such, investors might have a thing or two to learn from the investing maestro.

Thankfully for investors, he also penned two books, namely “One Up on Wall Street” and “Beating the Street”. Within the books, he highlighted the key tenets of his winning investment approach. Here are three traits that Lynch looks for:

Trait 1: The name is boring, the company operates in a boring sector, or there are rumours of something bad about the company

Lynch believes that companies that operate in exciting industries attract too much attention for their own good. On the other hand, companies that operate in boring sectors might not gain as much interest, or even analyst coverage. The lack of interest could mean opportunities for investors because these boring sounding companies tend to trade at a discount to their intrinsic value, and its earnings potential.

It is worth nothing that Lynch will aim for companies that have temporary, but solvable problems.

These troubled companies can attract negative headlines which lead to their share price being beaten down. If the problems prove to be temporary, the aforementioned companies could then be bought at a massive discount to their real long-term value.

Trait 2: The company is a spin-off

Another area of interest lies with companies that were spun-off from their larger parent company. Like the boring company category, these spin-offs usually receive little attention from analysts. Again, the lack of interest in the area could mean that the company may be trading cheaply compared to its counterparts.

Lynch believes that the common investor should look out for this group of companies as they could have potential for satisfying returns in the long-term.

Trait 3: Fast-growing companies in a no-growth industry

You might be sensing a theme here.

Growth industries like software companies and e-commerce companies may attract a lot of interest from money-managers and investors alike. However, the attention could result in extremely high valuations.

In contrast, Lynch preferred to look at companies that were growing fast despite operating in industries that were not showing growth. He preferred to look in this area as it attracts less interest from investors. With that, he stands a better chance in finding reasonably priced companies. 

The Foolish bottom line

Bargains can be hard to come by, especially in a rising stock market.

Lynch, however, had the knack of finding winning investments wherever the market is trading. Over his investing tenure, he had been able to find bargains in companies that were unreasonably hammered due to short-term problems. He has also found opportunities with companies that were not in the spotlight whereby stock prices were more reasonable. With a fair stock price, investors stand a better chance in obtaining great long-term returns.

By looking out for the same traits that Lynch prefers, we might increase our chances in finding good long-term investments at bargain prices.

We have more to say about Lynch in the coming days, so stay tuned!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.