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One Up On Wall Street

I’ve Got It, I’ve Got It—What Is It?

Lynch propagates, in his book that the best place to start looking for the ten-bagger is close to one's own home. One needs to keep both their mind as well as their eyes open. There are several companies at shopping malls, workplace, etc., which we can come across.

 

According to him, people need to invest in companies that they have prior knowledge about because this will give them an edge. The primary aim of an investor should be to analyze the stocks after identifying them. Based on the timing of the business, companies can have six categories. Let us see what the author tells us about it. 

 

1. Slow Growers - When a popular growing industry slows down, most of the companies in that industry slowdown as well. Mr. Lynch elaborates that a company starts paying high dividends when they cannot think about new ways to expand their business. 

 

2. Stalwarts- Stalwarts are faster than slow growers, but are not the fastest in terms of growth. They are multi-billion dollar companies like Coca Cola, Procter and Gamble, etc. If we invest our money at the right time, we can make sizable profits from stalwarts. The author says that stalwarts have good protections during times of recessions

 

3. Fast Growers - These are the most aggressive investments an investor makes that can earn him up to 25% a year. A fast growing company might not necessarily belong to a fast growing industry. There are plenty of risks involved with fast growers as they might be a new company or under financed. An investor should look for good balance sheets and substantial profits when searching for these types of companies. 

 

4. Cyclicals - Cyclicals are the regular ups and downs in companies, and some of these cyclicals may be big companies and could be confused easily with Stalwarts. Companies like TISCO, banks, automakers, etc. fall into this category, and it is important to know when one should get into these stocks and when they should get out of them.

 

5. Asset Plays - Asset Plays are companies which hold significant and enough numbers of assets which are held in their books, and the market is not aware of this. Some of what is included in these assets consist of Carry forward losses which provide tax benefits to the company, real estate held at book value, huge customer base, investments in the shares of other companies, etc. 

 

6. Turnarounds - Turnarounds are companies that have very little to no growth. These companies go so down in their values because of their cyclical nature that people start thinking they will not be able to survive. For example, Ford, General Public Utilities, etc. Can be considered as turnarounds. There are several types of turnarounds which are: 

 

  1. Bail-us-out-or-else 
  2. Who-would-have-thought
  3. Little-problem-we-didn't anticipate
  4. Perfectly-good-company-inside-a-bankrupt-company
  5. Restructuring-to-maximize-shareholder-value

 

1) Bail-us-out-or-else -  In these types of turnarounds, the company is on the verge of a bankruptcy and a government loan guarantee might be the only way they are saved. Examples include Lockheed or Chrysler. 

 

2) Who-would-have-thought - In this kind of turnaround, the author explains by giving an example of Con Edison. The stock prices fell from $10 to $3 in 1974, which is uncommon for a utility company, but by 1987, the stock prices rose from $3 to $57 in 1987. Such major turnarounds are generally predictable and an investor can gamble on it.

 

3) Little-problem - we-didn't anticipate - There are little problems that nobody anticipated with these kinds of turnarounds. For example, in General Public Utilities, there was a minor tragedy that people anticipated it to be worse than it actually was. We need to be patient and ignore the news about this stock with dispassion. The outcome of the tragedies should be measurable for the investor. Immeasurable tragedies like The Bhopal Disaster cannot be interpreted and should be left out.

 

4) Perfectly-good-company-inside-a-bankrupt-company - Toys “R” Us, is an example of such a turnaround. Where, Interstate Department, a subsidiary of Toys, was spun out of its parent, and did pretty well after that.

 

5) Restructuring-to-maximize-shareholder-value- Penn Central, can be an example of this kind of turnaround. Companies generally decide to restructure their entire structure, to maximize the shareholder value. Companies whose CEOs come out and announce this news to the public, are warmly applauded by the shareholders.

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Units 10/24