The Two-Minute Drill
Peter Lynch, in the 11th chapter, writes that the 1st step is to know if one is dealing with a slow grower, fast grower, a cyclical, a turnaround, a stalwart or an asset play alongside the P/E ratio which gives one a rough idea of whether the stock is undervalued, currently priced or overvalued.
The next step that follows is to learn about a company and about how it can bring an added prosperity.
He also says that before buying a stock one should be able to give a monologue of two minutes. This would cover the reasons which make a person interested in the company, what should be done for the company to succeed and the problems that stand in its path.
He gave some examples of the two-minute monologue of different classes of Companies.
1)Slow grower — Focus on the dividend.
"This company has increased earnings every year for the last ten, it offers an attractive yield, it's never reduced or suspended a dividend, and in fact, it's raised the dividend during good times and bad, including the last three recessions. it's a telephone utility, and the new cellular operations may add a substantial kicker to the growth rate."
2)Cyclical — Focus is on business conditions, inventories and prices.
"There has been a three-year business slump in the auto industry, but this year things have turned around. I know that because car sales are up across the board for the first time in recent memory. I notice that GM's new models are selling well, and in the last eighteen months the company has closed five inefficient plants, cut twenty percent off labour costs, and earnings are about to turn sharply higher."
3)Stalwart — Focus is on the P/E ratio. This also focuses on if the stock has had a dramatic rise in price in recent months, and if anything, to accelerate the growth rate is being done.
He writes, "Coca-Cola is selling at the low end of its P/E range. The stock hasn't gone anywhere for two years. The company has improved itself in several ways. It sold half its interest in Columbia Pictures to the public. Diet drinks have sped up the growth rate dramatically."
According to him, "Last year the Japanese drank 36% more cokes than they did the year before, the Spanish upped their consumption by 26%. That's phenomenal progress. Foreign sales are excellent in general. Through a separate stock offering, Coca Cola Enterprises, the company has bought out many of its independent regional distributors. Now the company has better control over distribution and domestic sales. Because of these factors, Coca-Cola may do better than people think."
4)Fast Grower —Focus is on how and where it plans to continue growing fast.
These are a few examples amongst many. Lastly, he concludes by saying that the more one knows, the better, and in several cases, one needs to devote a lot of time in developing and creating a script.