Beating the Street

by Peter Lynch

One way to estimate the actual worth of a company is to use the home buyer’s technique of comparing it to similar properties that recently have been sold in the neighborhood.

When insiders are buying, it’s a good sign—unless they happen to be New England bankers.

inventory, which may or may not be worth what the company claims. A steel plant might be listed at $40 million, but if the equipment is outdated, it might fetch zero in a garage sale.

The goodwill is the amount that has been paid for an acquisition above and beyond the book value of the actual assets. Coca-Cola, for instance, is worth far more than the value of the bottling plants, the trucks, and the syrup.

for the Coca-Cola name, the trademark, and other intangibles. This part of the purchase price would appear on the balance sheet as goodwill.

What you want to see on a balance sheet is at least twice as much equity as debt, and the more equity and the less debt the better.

A high debt ratio like this would in some cases be enough to cause me to take the company off the buy list,

Every company in existence likes to tell its shareholders that business is going to get better, but what made General Host’s assertion believable was that management had a plan. The company wasn’t waiting for begonia sales to improve, it was taking concrete steps (the kiosks, the remodeled nurseries, the satellite system) to boost its earnings.

In merely two years of operation, that store is expected to generate a 50 percent pretax return on equity, which beats almost any return any of us could get elsewhere and explains why the company has an easy time recruiting future franchisees.

Barber

The biggest expense is in training the stylists. Supercuts hires a new trainer (at $40,000 a year) for each 10 new shops, but then these 10 new shops should contribute $300,000 a year to the annual revenues.

Supercuts stylists are all licensed professionals who have to take a refresher course every seven months, and that the medical benefits and the tips will attract good people. What I worried about here was high turnover and poor hedgemanship among poorly qualified and/or disgruntled employees. I asked about the turnover rate, which Mr. Thompson said had been low so far.

The biggest plus of all was that 250 million Americans needed haircuts every month, and with the mom-and-pop haircutters closing their doors, no dominant chain store had emerged to fill the void.

I’m always on the lookout for great companies in lousy industries. A great industry that’s growing fast, such as computers or medical technology, attracts too much attention and too many competitors.

The greatest companies in lousy industries share certain characteristics. They are low-cost operators, and penny-pinchers in the executive suite. They avoid going into debt. They reject the corporate caste system that creates white-collar Brahmins and blue-collar untouchables. Their workers are well paid and have a stake in the companies’ future. They find niches, parts of the market that bigger companies have overlooked. They grow fast—faster than many companies in the fashionable fast-growth industries.

Here was a 25–30 percent grower with a 15 p/e. Several of its competitors were struggling to stay in business.

“The fact that a company you put your money in has a big building doesn’t mean that the people in it are smart, but it does mean that you’ve helped pay for the building,”

All else being equal, invest in the company with the fewest color photographs in the annual report.

When even the analysts are bored, it’s time to start buying.

Equity-to-Assets Ratio The most important number of all. Measures financial strength and “survivability.” The higher the E/A, the better. E/As have an incredible range, from as low as 1 or 2 (candidates for the scrap heap) to as high as 20 (four times stronger than J. P. Morgan). An E/A of 5.5 to 6 is average, but below 5, you’re in the danger zone of ailing thrifts.

Before I invest in any S&L, I like to see that its E/A ratio is at least 7.5. This is not only for disaster protection, but also because an S&L with a high E/A ratio makes an attractive takeover candidate.

A lot of the most profitable Jimmy Stewarts are selling at well below book value today.

Price-Earnings Ratio As with any stock, the lower this number, the better. Some S&Ls with annual growth rates of 15 percent a year have p/e ratios of 7 or 8, based on the prior 12 months’ earnings. This is very promising, especially in light of the fact that the overall p/e of the S&P 500 was 23 when I did this research.

The five Jimmy Stewarts got excellent marks in several categories: book value (four sold at a discount), equity-to-assets ratio (all 6.0 or better), high-risk loans (under 10 percent), 90-day delinquencies (2 percent or less), real estate owned (less than 1 percent), and p/e ratio (below 11). That two of them had been buying back their own shares in recent months was another positive.

I like companies that stick to business and let the images take care of themselves.

“Are you adding any new branches

احد اسألة بيتر لينش

All things considered, I’d rather invest in an S&L that’s proven it can survive in a depressed state than in one that thrives in a booming economy and has never been tested in bad times.

Before we hung up, I asked the usual parting question: name your most impressive competitor.

سؤال يتكرر من بيتز لينش

The popular prescription “Buy at the sound of cannons, sell at the sound of trumpets” can be misguided advice. Buying on the bad news can be a very costly strategy, especially since bad news has a habit of getting worse. How many people lost substantial amounts of investment capital when they bought on the bad news coming out of the Bank of New England after the stock had already dropped from $40 to $20, or from $20 to $10, or from $10 to $5, or from $5 to $1, only to see it sink to zero and wipe out 100 percent of their investment?

Buying on the good news is healthier in the long run, and you improve your odds considerably by waiting for the proof. Maybe you lose a dollar a share or so by waiting for the announcement of a signed contract between Sears and Green Acres, as opposed to buying the rumor, but if there’s a real deal it will add many more dollars to the stock price in the future. And if there isn’t a real deal, you’ve protected yourself by waiting.

This is a useful year-end review for any stockpicker: go over your portfolio company by company and try to find a reason that the next year will be better than the last. If you can’t find such a reason, the next question is: why do I own this stock?

Having the ear of management will not necessarily make you a better investor, any more than having the ear of the owner of a racehorse will make you a better handicapper. Owners can always give you a reason their horses will win, and they are wrong 90 percent of the time.

لما تسمع لمسؤولين في الشركة

I didn’t ask Kinzel “How are the earnings going to improve?” straightaway. I asked about the weather in Ohio. I asked about the condition of the Ohio golf courses, the economy in Cleveland and Detroit, and whether it had been hard getting summer help this year. Only after I’d warmed up my source did I pop the important questions.

كيف بيتر لينش يسأل المدراء

A company with a 60 percent gross margin is making a $40 profit on every $100 worth of stuff that it sells.

Since I always think positively, and assume that the economy will improve no matter how many bleak headlines appear in the papers, I’m willing to invest in cyclicals at their nadir.

Unless you’re a short seller or a poet looking for a wealthy spouse, it never pays to be pessimistic.

A stock’s having gone nowhere is not necessarily a reason to ostracize it, and it may be a reason to buy more.

The most important question to ask about a cyclical is whether the company’s balance sheet is strong enough to survive the next downturn.

I also looked at capital spending, which is the ruination of so many industrial companies.

cash flow exceeded capital spending. It’s always a good sign when a company is taking in more money than it spends.

The autos, often misidentified as blue chips, are classic cyclicals. Buying an auto stock and putting it away for 25 years is like flying over the Alps—you may get something out of it, but not as much as the hiker who experiences all the ups and downs.

One useful indicator for when to buy auto stocks is used-car prices. When used-car dealers lower their prices, it means they’re having trouble selling cars, and a lousy market for them is even lousier for the new-car dealers. But when used-car prices are on the rise, it’s a sign of good times ahead for the automakers.

more reliable indicator is “units of pent-up demand.” I located this telling statistic in a chart that’s published in a Chrysler Corporation publication called Corporate Economist

اسهم السيارات

In each instance, you could have waited until the crisis had abated and the doomsayers were proven wrong, and still you could have doubled, tripled, or quadrupled your money in a relatively short period.

buy when the first good news has arrived in the second stage. The problem that some people have with this is that if the stock falls to $4 and then rises to $8, they think they have missed it. A troubled nuke has a long way to go, and you have to forget about the fact that you missed the bottom.

a simple way to make a nice living from troubled utilities: buy them when the dividend is omitted and hold on to them until the dividend is restored.

CMS will receive $25 million in annual profits by 1995. This $25 million will add 20 cent a share to earnings.

When Uncle Sam or the Queen of England is having a garage sale, I always try to attend. Not-So-Great Britain is way ahead of us in sponsoring these events, having sold everything from the waterworks to the airlines,

شراء ما تبيعه الحكومة

Privatization is a strange concept. You take something that’s owned by the public and then sell it back to the public, and from then on, it’s private.

The reason is not hard to imagine. In the democratic countries, the buyers of privatized industries are also voters, and governments have enough trouble getting reelected without having to contend with a mass of disgruntled investors who’ve lost money on the telephone company or the gasworks.

Whatever the queen is selling, buy it.