One Up On Wall Street: How To Use What You Already Know To Make Money In

by Peter Lynch

(1) IT SOUNDS DULL—OR, EVEN BETTER, RIDICULOUS

the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring n...

What Wall Street analyst or portfolio manager in his right mind would recommend a stock called Pep Boys—Manny, Moe, and Jack—unless of course the Street already realizes how profitable it is, and by then it’s up tenfold already.

If you discover an opportunity early enough, you probably get a few dollars off the price just for the dull or odd name,

(2) IT DOES SOMETHING DULL

I get even more excited when a company with a boring name also does something boring.

Agency Rent-A-Car? That’s the glamorous outfit that provides the car the insurance company lets you drive while yours is being repaired.

Worth exploring for India

A company that does boring things is almost as good as a company that has a boring name, and both together is terrific.

If a company with terrific earnings and a strong balance sheet also does dull things, it gives you a lot of time to purchase the stock at a discount. Then when it becomes trendy and overpriced, you can sell your shares to the trend-followers.

(3) IT DOES SOMETHING DISAGREEABLE

Better than boring alone is a stock that’s boring and disgusti...

Safety-Kleen goes around to all the gas stations and provides them with a machine that washes greasy auto parts. This saves auto mechanics the time and trouble of scrubbing the parts by hand in a pail of gasoline, and gas stations gladly pay for the service. Periodically the Safety-Kleen people come around to remove the dirty sludge and oil from the machine, and they carry the sludge back to the refinery to be recycled. This goes on and on, and you’ll never see a miniseries about it on network TV.

It has since branched out into restaurant grease traps and other sorts of messes. What analyst would want to write about this, and what portfolio manager would want to have Safety-Kleen on his buy list?

(4) IT’S A SPINOFF

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.

Large parent companies do not want to spin off divisions and then see those spinoffs get into trouble, because that would bring embarrassing publicity that would reflect back on the parents. Therefore, the spinoffs normally have strong balance sheets and are well-prepared to succeed as independent entities. And once these companies are granted their independence, the new management, free to run its own show, can cut costs and take creative measures that improve the near-term and long-term earnings.

If you hear about a spinoff, or if you’re sent a few fractions of shares in some newly created company, begin an immediate investigation into buying more. A month or two after the spinoff is completed, you can check to see if there is heavy insider buying among the new officers and directors. This will confirm that they, too, believe in the company’s prospects.

(5) THE INSTITUTIONS DON’T OWN IT, AND THE ANALYSTS DON’T FOLLOW IT

If you find a stock with little or no institutional ownership, you’ve found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you’ve got a double winner.

I’m equally enthusiastic about once-popular stocks the professionals have abandoned, as many abandoned Chrysler at the bottom

(6) THE RUMORS ABOUND: IT’S INVOLVED WITH TOXIC WASTE AND/OR THE MAFIA

It’s hard to think of a more perfect industry than waste management. If there’s anything that disturbs people more than animal casings, grease and dirty oil, it’s sewage and toxic waste dumps.

(7) THERE’S SOMETHING DEPRESSING ABOUT IT

Now, if there’s anything Wall Street would rather ignore besides toxic waste, it’s mortality.

(8) IT’S A NO-GROWTH INDUSTRY

I prefer to invest in a low-growth industry like plastic knives and forks, but only if I can’t find a no-growth industry like funerals. That’s where the biggest winners are developed.

There’s nothing thrilling about a thrilling high-growth industry, except watching the stocks go down.

Carpets in the 1950s, electronics in the 1960s, computers in the 1980s, were all exciting high-growth industries, in which numerous major and minor companies unerringly failed to prosper for long. That’s because for every single product in a hot industry, there are a thous...

As soon as a computer company designs the best word-processor in the world, ten other competitors are spending $100 million to design a better one, and it will be on the market in eight months. This doesn’t happen with bottle caps, ...

(9) IT’S GOT A NICHE

Once you’ve got an exclusive franchise in anything, you can raise prices. In the case of rock pits you can raise prices to just below the point that the owner of the next rock pit might begin to think about competing with you. He’s figuring his prices via the same method.

I always look for niches. The perfect company would have to have one.

Drug companies and chemical companies have niches—products that no one else is allowed to make.

So are dominant newspapers

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.

Brand names such as Robitussin or Tylenol, Coca-Cola or Marlboro, are almost as good as niches. It costs a fortune to develop public confidence in a soft drink or a cough medicine. The whole process takes years.

(10) PEOPLE HAVE TO KEEP BUYING IT

I’d rather invest in a company that makes drugs, soft drinks, razor blades, or cigarettes than i...

(11) IT’S A USER OF TECHNOLOGY

Instead of investing in computer companies that struggle to survive in an endless price war, why not invest in a company that benefits from the price war—such

Such as cheaper computers, scanners cutting 3% of supermarket costs etc.

(12) THE INSIDERS ARE BUYERS

In general, corporate insiders are net sellers, and they normally sell 2.3 shares to every one share that they buy.

When insiders are buying like crazy, you can be certain that, at a minimum, the company will not go bankrupt in the next six months. When insiders are buying, I’d bet there aren’t three companies in history that have gone bankrupt near term.

Since bigger companies tend to pay bigger salaries to executives, there’s a natural tendency for corporate wage-earners to expand the business at any cost, often to the detriment of shareholders. This happens less often when management is heavily invested in shares.

it’s more significant when employees at the lower echelons add to their positions.

If you see someone with a $45,000 annual salary buying $10,000 worth of stock, you can be sure it’s a meaningful vote of confidence.

If the stock price drops after the insiders have bought, so that you have a chance to buy it cheaper than they did, so much the better for you.

in normal situations insider selling is not an automatic sign of trouble within a company. There are many reasons that officers might sell.

But there’s only one reason that insiders buy: They think the stock price is undervalued and will eventually go up.)

(13) THE COMPANY IS BUYING BACK SHARES

When stock is bought in by the company, it is taken out of circulation, therefore shrinking the number of outstanding shares. This can have a magical effect on earnings per share, which in turn has a magical effect on the stock price. If a company buys back half its shares and its overall earnings stay the same, the earnings per share have just doubled. Few companies could get that kind of result by cutting costs or selling more widgets.