The Perfect Stock, What A Deal!
Peter Lynch says that it is easier to develop a company if its business is easy to understand. In this chapter of his book, he provides his readers with 13 attributes that can make it easier for them to find a company:
1. It sounds dull and boring: The author writes that a perfect stock will also be attached to an ideal company. These companies should engage in simple businesses and have a boring name because the more boring the name, the better it is.
2. The work it does is also dull and boring: It is exciting if the company with a boring name also has an equally dull function. Lynch says that both these factors can keep the oxymorons away until there is some good news which ‘compels them to buy in, thus sending the stock price even higher.’
3. It has a disagreeable function: According to Peter Lynch, a stock which is disgusting and boring at the same time, which will make people shrug in disgust, is ideal to invest in.
4. It is a Spinoff: According to Lynch, “Spinoffs of divisions or parts of companies into separate, freestanding entities—such as Safety-Kleen out of Chicago Rawhide or Toys “R” Us out of Interstate Department Stores—often result in astoundingly lucrative investments.”
He says that a large parent company does not want to reflect a wrong impression of itself because its spin-off is in trouble. Thus, there is independence entrusted in the spin-offs, with a strong balance sheet, so that they can run their own show.
5. The analysts don’t follow it, and the institutions don’t own it: If an individual finds a stock which has little or no institutional ownership, then they have found a potential winner. Next, they need to find a company that has never been visited by an analyst or is not very well known. This will make a person a double-winner.
6. There are rumours about the company being involved with toxic waste or the Mafia: When such rumours surround a company, it usually trades at a steep discount as institutional investors as well as Wall Street, steer clear of it. Thus, these kinds of companies may present an excellent opportunity to the investors.
7. It has an unfortunate aspect to it: Businesses like the mortuary are an excellent example because it is depressing. Lynch says that Wall Street would ignore mortality, aside from toxic waste.
8. It is an industry with no growth: The author says that this is where the most significant winners evolve and rise. In a no-growth industry which is both boring as well as upsetting for people, there is no problem with competition. Thus, one does not have to protect their flanks from rivals who are potential, because nobody else will be interested.
9. The company must have a niche: Peter Lynch wrote in his book that he always looked for niches and that the perfect company would have one. He said that chemical companies, as well as drug companies, have niches or products, which nobody else is allowed to make. He said that “Chemical companies have niches in pesticides and herbicides. It’s not any easier to get a poison approved than it is to get a cure approved.”
10. People have to keep buying it: Invest in companies that make drugs, soft drinks, etc., then in ones that sell toys because someone can make a doll that every child has to have, but can only have one each. Thus, there’s no point in taking chances on fickle purchases as there are several businesses around, which are stable.
11. It uses technology: The author believed that we should invest in companies which benefit from a price war, rather than investing in computer companies which struggle to survive in an endless cycle of the price war. Thus, instead of investing in a company which makes an electronic product, it makes more sense to invest in supermarket companies which install these electronic products.
12. The buyers are insiders: There is no better tip-off than the probability of success behind a stock than those people in the company who are putting their own money into it. The insiders who buy stocks, do it for only one reason, that is, they think that the stock price is undervalued and will go up eventually.
13. The company is repurchasing shares: Buying back shares is the simplest and best way in which a company can reward its investors, according to Lynch. He also adds that if a company has faith in its owner, then why should it not invest in itself?
After completing this chapter, he moves on to talk about what stocks one should avoid, in the next chapter.