Growth investing

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4. Anatomy of a growth stock - Peter Lynch

A quick introduction to one of the great growth investors of all time, Peter Lynch.

Lynch became manager of Fidelity's Magellan fund in 1977 when it was worth $20m and grew it to $14bn by the time he retired in 1990. Anyone who went along for the ride would have seen their money increase 30-fold in that time.

Lynch was never exclusively a growth stock investor, but 'fast growers' had a firm place in his portfolio, and he was keen on finding 'tenbaggers' - stocks that rise in value ten times. In picking fast growers he observed the following rules:

• Fast growers are small aggressive enterprises growing at 20%-25% a year.
• They don't have to be in a growth industry, but they do need a winning repeatable formula that has proven itself in more than one location and still has room to grow.
• They need a reasonably healthy balance sheet and, ideally, are making healthy profits (Body Shop was a good example in its heyday).
• They need to be simple businesses that anyone can run.
• Ideally they should not be in 'hot' industries which everyone is following. The less fashionable the industry the better.
• You need to get in on the ground floor, and be first to sell when growth slows.
• The P/E should be at, or near, the growth rate, which ought to be accelerating. i.e. EPS rising 20% p.a. and a P/E ratio of 20.

1. What is a growth stock? 2. Comparison with value investing 3. Traditional characteristics of a growth stock 4. Anatomy of a growth stock - Peter Lynch 5. Ten dos and don'ts from Peter Lynch 6. Jim Slater - The Zulu Principle 7. Earnings growth 8. The PEG factor 9. Competitive advantage 10. Do growth stocks have to be small? 11. A short diversion into internet stocks 12. When to sell a growth stock 13. Other factors 14. Case study of a growth stock - Sage 15. Conclusion

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