Peter Lynch knows how to pick stocks. Between 1977 and 1990 he grew the assets of Fidelity’s Magellan Fund from $18m to $16bn. In 1989, the year before Mr Lynch handed over the reigns of the Magellan fund to someone else, he realised a book detailing his approach to finding stocks worth owning.
That book was “One up on Wall Street” and it was fairly unconventional in that part of methodology contained within its pages involved listening to your spouse.
Buy stocks in companies you know
Peter Lynch put at least some of his performance down to watching what new products his wife was buying, and listening to her when she said which were great, or which new stores were popping up, or how busy a local shop was becoming.
That is how you can get one up on Wall Street. Analysts there might miss the upstart shoe retailer that Main Street shoppers are all over. They get in later once it’s stock has moved through the indexes, and swelled in market cap. They initiate coverage once a lot of gains have been had.
The biggest stocks are the most followed. The smallest might have no analyst coverage or perhaps a few from boutique firms. So yeah, if you think that new something you bought is incredible, maybe check out if it’s manufacturer is publicly traded. Chances are it is, and it’s called Unilever. But maybe not. Maybe it is a small company going places. Well, Peter Lynch suggests it might be worth buying, assuming the financials, management and plans past muster.
But, small caps tend to offer a big slice of risk in addition to potentially higher rewards, and it seems Mr Lynch was aware of this. At one point he owned 1,400 stocks which suggests a willingness to spread his bets around. That’s not possible for most retail investors, whom the book is meant for.
Nevertheless, the message is sound. And its a message that I followed to get interested in and eventually buy Marks and Spencer (LSE: MKS) stock.
Waiting for the world to change
I do not claim to be a stock picker of Peter Lynch’s calibre. I’m just another investor who happened to found himself standing in a Marks and Spencer store wondering what happened.
It was early 2022. I hadn’t shopped in person for years. That’s the pandemic fault, not me being an antisocial curmudgeon. It was raining. I drove to the high street. I parked at the back of Marks and Spencer’s fulling intending to walk through the store to the high street and shop elsewhere. But I ended up browsing.
Last time I was in the store it looked tired. It looked cluttered. This time it looked modern. The clothes looked better and laid out laid out logically and on and in attractive displays. The endless rows of pants and socks near the checkout were gone. It was busy.
I knew about Marks and Spencer. I knew that it had been struggling for years and years. I knew that it was trying to turnaround, again. But, this visit hinted that maybe, just maybe, it’s management might just pull it off.
So, I go home and over months I read. I see the plans. I like the purchase of their logistics supplier, closing stores that simply don’t pull in profit, buying an online retailer with a unique technology proposal, the dual CEO approach to focus online and in-store equally. Eventually I decide to buy. And it’s working out well.
Why I bought Marks and Spencer shares
The point of this article is that it is possible to generate stock picking ideas in the real world. You don’t have to read the FT or Institutional Investor. They tend to cover the biggest companies and stocks first. The trade magazines might be a better bet. Perhaps better still talk to people you know, look about when you are out. Is your carpenter friend run off his feet? Do they get a lot of stuff from Screwfix?
Now it might be he is run off his feet, has been for nine months and Screwfix’s parent companies stock price is up 40%. I might think I’ve missed the boat here. But what if that small restaurant chains new place that always looks busy has a stock price that’s barely moved. Well, I would think it’s stock might be worth buying assuming I can justifiably have confidence they can keep opening stores, and keep them busy, without diluting out their shareholders.
I buy stocks when I think the price is going up or they will pay a an increasingly chunky dividend. For that to happen the company has to do something like:
- Expand. For retailers, preferably expand through organic sales and store growth.
- Improve margins and profitability.
If it can do something positive then the market, which previously undervalued the stock, might just change its mind. If I can get in before the market realises, then I stand to profit. The best chance of me pulling that off is by buying stocks I know personally. That is to say getting ideas by real world interactions with the products and services companies produce.
DISCLAIMER: James J. McCombie owns shares in Marks and Spencer. The Storied Investor has no beneficial ownership position in any of the stocks or securities mentioned. No comment in this article should be construed as a recommendation of, or opinion regarding the future performance of, any stock or security or collection of them mentioned herein. Opinions expressed are the author’s and do not represent the views of The Storied Investor.
The Storied Investor 