“Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it.”
Peter Lynch
What are the characteristics to look for in a stock?
It’s more than what’s hot in the (wall) streets right now. For a wildly speculative game, there are way too many people spreading way too much stock “advice” out there. I don’t plan to add my asinine thoughts to the scuttlebutt. If I contribute anything, it’s the approach originated from legendary fund manager, Peter Lynch. He has three basic tenets of investing, and 13 attributes he seeks out in an investment.
Peter Lynch’s Three Basic Investing Tenets
1. Only Buy What You Understand.
2. Always Do Your Homework.
3. Invest for the Long Run.
Peter Lynch’s Thirteen Attributes to Look for in Investments
1. It sounds dull or ridiculous
Lumber
About as exciting as wood, yet companies like UFP Industries ($UFPI) have nearly doubled their value in the past year due to rising demand for timber commodities.
2. It does something dull
Air conditioning
Trane ($TT) rebranded itself into a climate-minded centaur with parts of both creator and eliminator of carbon. We believe buyers cared more about the increase in residential building and doubled down on the growing climate crisis, leadin to a doubling of the stock price in the last year. More heat, more AC, more profit for Trane. The results have been awesome for the company so far in the market.
3. It does something disagreeable
Guns
Historically we’ve seen strong returns with a liberal POTUS and this year has been no different; Ruger’s stock ($RGR) is higher than it ever was under Trump.
Adult clubs
The boom boom rooms are booming as the world is returning to hedonistic normalcy. Check out and throw a couple dollar bills at Rick’s Clubs ($RICK)
Stem cell research
Both stem cell research and practice have been major lightning rods in the last decade. These scientific advancements are proven to be important to human life, and companies like Vistagen ($VTGN) demonstrate their reciprocal success as they grow from penny stocks to legitimate contenders in the market.
4. It’s a spin-off
Companies spin off their subsidiaries for different reasons. Some may demerger so analysts can better grade and analyze their offerings. Others might do so under investor pressure, like Cadbury Schweppes. The company spun off its US beverage arm from the core confectionery unit after 13 years due to the provocation of investor Norman Peltz. Dr. Pepper is now Keurig Dr. Pepper and traded under the $KDP ticker.
IAC has been the king of the spin off in the past 15 years: Vimeo recently, and Ticketmaster, Lending Tree, Match Group (among others) before it.
5. Institutions and analysts don’t follow it
Analysts should cover spin offs, but perhaps have a historical bias against them. In this category, you’re looking for stocks that guys like Cramer don’t talk about. My update to this rule: It’s not trending, not a Reddit stock. There are real value stocks out there that go beyond GameStop and memes.
6. It’s involved in a gross or illegal process
Cannabis is illegal on a federal level and in many states, but it is being legalized in many other states. Publicly traded companies, like Curaleaf ($CURLF), are popping up like mushrooms and stalwart alcohol companies, like Constellation Brands ($STZ), are increasing their cannabis offerings to grab market share.
7. Something depressing about it
Think long, dark hours with no glory and a high level of physical labor. Look at the depressing Service Corporation International ($SCI), a provider of funeral goods and services as well as cemetery property and services. Disease treatment stocks Amicus Therapeutics (NASDAQ:FOLD), Catalyst Pharmaceuticals (NASDAQ:CPRX), Crinetics Pharmaceuticals (NASDAQ:CRNX), and Sarepta Therapeutics (NASDAQ:SRPT) are interesting new takes on this attribute.
8. In a no-growth industry
Look at metal and mineral wholesalers; contractors, like equipment, building finishers, non-residential construction, construction aggregates (e..g Martin Marietta Materials and Vulcan Materials); and land subdivision to service land and subdivide real property into lots for subsequent sale to builders.
No-growth companies tend to give great dividends. High growth companies (like those in tech) typically do not give any dividends.
9. It’s got a niche
Floor & Decor ($FND) company is big, but it’s got a niche. Also, Par Technology ($PAR), which provides point of sale technology to mega corporations like Pizza Hut and Taco Bell.
10. People have to keep buying it
People can and will keep buying anything they need from Target ($TGT), and for their pets at places like Chewy ($CHWY). These are typically more stable stocks that can endure lean times.
11. It’s a user of technology
The FAANGs are the most classic example and consist of Meta, formerly known as Facebook ($FB); Apple ($APPL); Amazon ($AMZN); Netflix ($NFLX); and Alphabet, formerly known as Google ($GOOGL). But, newcomers like Pinduoduo ($PDD) are also high tech users and potential disruptors.
12. Insiders are buyers
This information is accessible at sites like Gurufocus, which shares real time insider trades. Many tech, growth stocks fit in this category, like Amazon ($AMZN), as the insiders believe the stock is undervalued currently.
13. The company is buying back shares
This was a big topic during the pandemic. This article looks at Kohls ($KSS) and Worthington Industries Inc. ($WOR) in particular.
And, the Finance For Fathers 14th addition:
14. It has a patent with a stranglehold for next 10-20 years; then you can plan when to exit before generics come into the market
Align is a great example ($ALGN) of a company that rode out its patent exclusivities, and witnessed myriad direct-to-consumer competitors enter the market once the patent protection ended. The twist? Their stock price has skyrocketed since.
Disclaimer: The author has a position in Apple stock ($AAPL) and possibly in other stocks through mutual funds which may add some of the stocks mentioned above without the author’s knowledge as of the date of this posting. Investors should consider the above information not as a de facto recommendation.
