PETER LYNCH 00:00
If you start by looking at the entire universe of stocks, more than 3000 stocks on the New York Stock Exchange alone and over 13,000 public companies in total, you will blow a gasket. So, I break stocks into categories, partly to make the job of researching more manageable.
Putting stocks into categories is the first step in developing the story. At least you will know what kind of story it is supposed to be. The category tells you what questions you should be asking about a company. You simply can’t expect all stocks to behave the same.
Basing a strategy on general maxims like sell when you double your money or sell when the price falls 10% is absolute folly. No formula will apply to all stocks. Different stocks behave differently. So, they require different approaches, different expectations and different kinds of stories.
Suppose you have made a 50% gain on two companies. One is a fast grower with a long way to go and the other is a big lumbering slow growth company that is already saturated 95% of its market and that market itself is growing slowly. The 50% return is fantastic for the slow grower. The chances are it’s time to sell it. The same 50% return could be just the tip of the iceberg for the fast grower.
There are basically five categories. One would be fast growers. Two would be slow growers. Three will be cyclical. Four will be asset plays. And the fifth one would be turnarounds.
At the end of this presentation you will have an opportunity to explore each category in more detail. In the meantime, remember, categories are guidelines. They are not hard rules. Some companies may not fit neatly into a category. Others may seem to be in two categories at once. Almost all companies change categories at some time throughout their lifetimes.
Fast growers, if successful, will always eventually slow their growth. They will run out of places to go. Cyclicals, experiencing long down cycles may become turnarounds. Once recovered, they probably will be cyclical again. Use the categories as guides to help you build your story, but don’t let them limit the questions you ask or the research you do.
One thing we can say about companies in general. It is easier to go from $100 million in sales to $200 million in sales, than is to go from $10 billion in sales to $20 billion in sales. So smaller companies tend to have more upside potential than larger companies.
But don’t dismiss all big companies out of hand. Some big companies defy their size and find exciting new ways to grow their earning. As well, good opportunities exist in companies that are cyclical, regardless of their size.
5 Stock Categories:
1. Fast Growers
2. Slow Growers
4. Asset Plays
Remember, categories are guidelines. They are not hard rules. Some companies may not fit neatly into a category. Others may seem to be in two categories at once. Almost all companies change categories at some time throughout their lifetimes. ~Peter Lynch