9 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 six traits that Lynch looks for (for the first six, go here and here):

Trait 7: Companies with low institutional ownership and little analyst coverage

Lynch is a well-known bargain-hunter in the stock market.

He believes that bargains could be found in companies that are neglected by Wall Street. Based on this principle, he would look for companies that were not owned by institutional funds (think unit trust) as these companies are likely to be still under the radar, and comparatively cheap.

Trait 8: Insiders are buying shares  

For Lynch, a good indication that a company is performing well is when insiders are buying shares.

In his mind, insider share purchases often signal confidence in the business, or a belief that the company’s stock price is undervalued. Or in Lynch’s own words:

“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

In other words, Lynch believes that insider buying could be a telltale sign of an undervalued stock.

Trait 9: The company is buying back shares

Likewise, when a company buys back its own shares, it is possible that management team believes the stock is undervalued. Again, this may be a good indicator of confidence in the business’s prospects.

Buybacks can also help to support the company’s share price, and is one way of rewarding shareholders by reducing the number of outstanding shares.

It’s not a perfect indicator, though. Investors might want to be wary of companies that buy back shares at an elevated price. This action could have negative effects on shareholders as the company may be using the  capital available to buy back shares that trade greater than its worth.

The Foolish bottom line

Lynch has a lot of lessons to share from his successful tenure as an investor.

He has been able to share his investment thoughts in an accessible way so that the common investor can learn from it. And that includes you, dear reader. If we want to find winning shares, the nine traits outline over our last three articles would be a good place to start.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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