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.