3 Stocks Peter Lynch Would Love
Peter Lynch, one of the stock market’s most legendary investors, transformed mutual fund management with his remarkable tenure at Fidelity’s Magellan Fund from 1977 to 1990. Under his leadership, Magellan delivered an annualized return of 29.2%, growing from $18 million to over $14 billion in assets, outperforming the S&P 500 in 11 of 13 years. […] The post 3 Stocks Peter Lynch Would Love appeared first on 24/7 Wall St..
Peter Lynch, one of the stock market’s most legendary investors, transformed mutual fund management with his remarkable tenure at Fidelity’s Magellan Fund from 1977 to 1990. Under his leadership, Magellan delivered an annualized return of 29.2%, growing from $18 million to over $14 billion in assets, outperforming the S&P 500 in 11 of 13 years.
Lynch’s investing philosophy emphasized “buy what you know,” focusing on companies with strong fundamentals that investors could understand through everyday observation. He sought stocks with low price-to-earnings ratios relative to growth rates (PEG), robust earnings growth, and low debt. His knack for spotting undervalued “tenbaggers” — stocks that increase tenfold — made him a Wall Street icon.
Recently I ran a stock screen based on Lynch’s criteria (results may vary depending on the site used), and three stocks emerged as compelling buys. Let’s explore each to see if these Lynch-inspired opportunities are right for your portfolio.
24/7 Wall St. Insights:
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Legendary investor Peter Lynch achieved 29% annual returns over his 14-year stint at the helm of Fidelity Magellan.
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Lynch had certain criteria he sought in potential investments that made them candidates for “tenbagger” status, or stocks that grew 10 times your initial investment.
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Of the thousands of stocks that trade on the market, the three companies below fit different niches that Lynch looked at, but all exhibit the same qualities of growth and discounted valuations.
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Block (XYZ)
Fintech stock Block (NYSE:XYZ), the tech innovator behind Square and Cash App, embodies Lynch’s “fast-grower” investment archetype, making it a compelling pick for growth-oriented investors.
Lynch prized companies growing earnings 20% to 25% annually with low PEG ratios. Block’s first-quarter earnings per share earlier this month rose 19% year-over-year, driven by rising gross profits at both Cash App and Square. XYZ’s PEG ratio of 0.9 signals undervaluation relative to Wall Street’s 15% long-term annual earnings growth projection.
Its accessible business model — empowering small businesses and consumers with digital payments — fits Lynch’s “buy what you know” philosophy, as its services are ubiquitous. Block’s focus on blockchain and lending innovations also aligns with Lynch’s knack for spotting firms capitalizing on emerging trends.
With a trailing and forward P/E ratio of 13, Block looks cheap, possibly due to competition from PayPal (NASDAQ:PYPL) and Apple‘s (NASDAQ:AAPL) Apple Pay. Despite these challenges, Block’s robust growth, reasonable PEG, and familiar business model make it a Lynch-style investment, ideal for those comfortable with its tech-driven risk profile.
Kinross Gold (KGC)
The second Peter Lynch stock to consider is Kinross Gold (NYSE:KGC), a mid-tier gold miner that aligns with his cyclical investment strategy. He sought cyclicals with strong earnings during upcycles, low debt, and low PEG ratios, and in today’s elevated gold price environment, KGC stock is an attractive pick.
Gold is currently priced at over $3,200 per ounce, a 34% gain over the past year. Kinross reported first-quarter adjusted earnings per share that tripled from the year-ago period, rising from $0.10 to $0.30 per share, reflecting the robust cash flows flowing from its global mines. Its PEG ratio of 0.88 and debt-to-equity ratio of 0.17 signal undervaluation and financial stability, fitting Lynch’s criteria for cyclicals poised for growth.
The gold sector’s lack of Wall Street hype also aligns with Lynch’s preference for overlooked industries, and Kinross’s straightforward business — extracting and selling gold — is easy for investors to grasp.
However, gold price volatility poses risks, as a downturn could erode earnings, a concern Lynch noted for cyclicals. Yet in today’s high-gold-price environment, Kinross’s strong fundamentals and attractive valuation make it a Lynch-style investment worth buying.
American International Group (AIG)
Global insurance giant American International Group (NYSE:AIG) would best fit Lynch’s “turnaround” investment category, offering a compelling case for value-focused investors. Lynch sought companies recovering from setbacks with strong earnings, low P/E ratios (below industry averages), and low PEG ratios.
AIG’s first-quarter adjusted EPS fell year-over-year due to higher catastrophe losses that impacted the entire industry, but it still exhibited strong top-line growth with net premiums written (NPW) rising 8% on a comparable basis from last year.
Although the insurer’s P/E ratio of 18 is above the diversified insurance industry average, its PEG ratio of 0.86 signals undervaluation given its 21% long-term earnings growth outlook, making AIG an intriguing stock for your portfolio.
Since the 2008 financial crisis, AIG has restructured by divesting non-core assets and focusing on property-casualty and life insurance, mirroring Lynch’s Chrysler turnaround example. Its recognizable brand aligns with his “buy what you know” philosophy, as AIG’s insurance products are widely used.
Yet as the first quarter demonstrates, risks like catastrophic losses or economic slowdowns, which Lynch noted are something to consider in turnarounds, could pressure profitability. AIG’s recovery trajectory, disciplined capital allocation, and attractive valuation make it a Lynch-style pick that appeals to investors seeking a rebound story with solid fundamentals, provided they monitor macro risks.
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