Collection: Peter Lynch - #40 'Second Category of Stocks; Slow Growers'
[Transcript]
PETER LYNCH 00:00
The fast growers get all the attention in the media, but there is nothing wrong with slow growing stock, provided you get it at a very decent price.
Some would say to you, I am going to sell you a business for $100,000 and they are earning $50,000 a year. You say what is the bad news? You say, the bad news is that earnings are never going to grow. They're going to earn $50,000 a year forever. So, this is a price earnings multiple of two. You pay $100,000 for $50,000 earnings. But they were never going to grow. You say, I don’t care. I’m going to get a $50,000 return every year. In two years, I get all my money back, then I make $50,000 a year on my $100,000 investment forever.
So sometimes, even for a company that has a very low growth rate in earnings, if the stock is selling at the right price, it may still be a very good deal.
A slow to moderate grower will have earnings growth of 3% to 15% a year. One company that I was very lucky with was Service Corporation International (NYSE:SCI). It is a funeral home company that bought up local Family Funeral Homes, a very steady business.
Service Corp could grow earnings at 15% a year when I owned it with very little problems. A slow grower that turns into a no grower is a very bad news situation. So, when you start researching a stock, look for these signs.
Steady earnings growth, you can find annual earnings growth rates in the research section as well as estimates for the coming year (through various sources).
Rising dividends, companies that raise their dividends each year have to have the earnings to do so. A rising dividend is normally a good sign for a stock.
Room to keep growing, you want slow growers to go on forever. That is one reason I liked Service Corp International so much. This was a great stock to me in the 1980s. At that point it had a long way to go.
(Source: https://youtu.be/cRMpgaBv-U4)
[YAPSS Takeaway]
Signs of great Slow Grower Stocks:
- Stable earnings and dividend with long runways.
- Price matter in slow grower stocks.
