Jakarta, Armfalcon.com – Peter Lynch is a legendary investor who has an average investment growth of up to 29.2% in the period 1977-1990. Peter Lynch’s portfolio performance has made the Magellan Fund mutual funds recognized as the best performing in the world.
Peter Lynch’s investment strategy focuses on growth stock or companies that grow in tandem with the performance of the funds under management.
Peter Lynch’s proficiency in choosing stocks is due to his ability to understand the business, to the products of the companies he invests in.
In his book One Up on WallstreetPeter Lynch made a categorization of stocks to make it easier for investors to understand the characteristics of the company.
Slow growers (slow growth)
Company slow growers or slow growth is usually caused by the business that has started mature or the market potential is already limited.
Slow growth is usually caused by limited innovation and market saturation.
Company growth slow grower typically have growth below that of the country’s gross domestic product (GDP) growth.
The limited growth is caused by growth that depends on an increase in the number of people and the level of consumption due to the maximum target market.
Usually, this type of company has a large market capitalization or is classified as big cap.
Issuers in this category tend to be attractive for investment during a recession, because their businesses tend to be stable and pay dividends with high value.
In addition, companies that have slowed down will tend to be at risk of making big changes. This would disrupt the business order, so Peter Lynch gave him the term ‘diworsification’ or even worse diversification.
One of the companies that fall into this category is PT Gudang Garam Tbk. The cigarette industry’s market share is quite saturated, so shareholders decide to enjoy the results through dividends.
However, recently GGRM has made innovations that are not in line with its main business in the cigarette sector.
They even penetrated into the toll road and airport infrastructure sector. This causes a decrease in net income due to financial expenses.
The market did not appreciate this decision, so GGRM’s shares fell ~70% from their highest point of Rp 95,000 per share.
Stalwarts (medium growth)
Stalwarts or moderate growth issuers usually have profits that grow above GDP. Investment in this type of company requires ability timings sell and buy.
This type of company is usually well established, but still has room for growth. Good buying timing will provide an opportunity capital gains 30-50%.
Issuers included in this category are PT Kalbe Farma (KLBF). In the past year, KLBF shares have increased by 34.6%. These issuers tend to innovate adding products slowly.
The success of adding products will provide potential growth in the company’s net profit. However, the net profit is already large enough to make the contribution to the total net profit not so significant.
Fast growers (fast growth)
This type of company usually has a small market capitalization and aggressive growth of 20-25% annually. In the long term, this type of issuer has the potential to provide returns multi bagger or many times over.
The company’s small business scale has the potential to provide room for growth. The analogy is that a net profit of 1 million is easier to grow to 10 million than 100 trillion to 1000 trillion.
This category is Peter Lynch’s favorite. Usually, this type of company operates in an industry that tends not to have many competitors. This can make the company own margins due to the uniqueness of its business.
In addition, companies in this category need to innovate fast, because fast growth invites competitors. Therefore, this type of company needs to continue to innovate to defend itself from competitors.
However, companies also need to pay attention to funding and liquidity to maintain business from potential mountain debt.
The JCI issuer that has these characteristics is PT Akasha Wira International (ADES). Since 2017, the company has consistently posted net profit growth. One of the factors is the company’s unique product.
Hair cosmetic products and Korean food are the driving factors for the company’s growth. This causes large margins, so that the company can act as price maker.
Cyclicals (movement with cycles)
This type of company depends on the movement of economic conditions in a sector. This category is quite a lot in the JCI, considering the number of companies engaged in the commodity sector.
Commodity companies’ net profits depend on commodity price conditions. An increase in commodity prices causes net profit to increase, while a decrease in commodity prices causes a decrease in profits, even to the point of making a loss.
Investment strategy in this category requires good sectoral understanding. Investors need to have the confidence to buy when the industry is down.
When the market is at the height of the euphoria, investors need to be careful and exit when the cycle is at the top.
One of the companies in this category is PT Bumi Resources Tbk (BUMI). In 2020, BUMI recorded losses of up to IDR 4.7 trillion. However, in 2021 the company will be able to make a profit of IDR 3.1 trillion. In fact, in 2022 it will reach its highest point of up to IDR 8.6 trillion.
Turnarounds (reversal of direction)
This category has the characteristics of a company that is in a crisis condition, but can survive and some cases become a turning point for growth.
The thing to consider when investing in this type of company is the potential, both internally and externally, to make improvements.
An Indonesian company that falls into this category is PT Blue Bird Tbk (BIRD).
The Covid-19 pandemic has limited people’s mobility, causing the demand for taxis to decline. In addition, there is a disruption of the taxi market on line causing the demand for conventional taxis to decline.
This caused the company’s net profit in 2020 to experience a loss of IDR 161 billion. However, management continues to innovate through collaboration with technology companies.
This success has enabled the company to rise in 2021 with a net profit of IDR 9 billion. The company was able to bounce back in 2022 with a higher net profit than pre-pandemic.
The success of collaborations with technology companies is an opportunity for companies to grow in the future without the need to ‘burn money’.
Asset plays (hidden assets)
This category is a company that has hidden assets whose value needs in-depth investigation, either in financial statements or other data.
These assets can be land, trademarks, patents, and other invisible assets.
One of the asset play companies is PT Bekasi Fajar Tbk (BEST). According to the pubex presentation, BEST owns land assets or land bank with an area of 699 hectares and a selling price per meter of IDR 2.7-3.5 million per square meter.
Assuming a land price of IDR 500 thousand per square meter, BEST land assets are ~ IDR 3.5 trillion. Meanwhile, the company’s market capitalization as of Tuesday (9/5/2023) is only valued at IDR 1.5 trillion.
From land assets alone, the company’s valuation is discounted by 57%. Under this assumption, if BEST goes bankrupt and all of its assets are liquidated, the shareholders will still benefit.
Usually, this type of stock will soar when net profit performance improves. Investors will begin to glance at the company’s assets and discover these hidden facts that make stocks contested.
Investor understanding regarding the company’s business categorization will create related understanding timings, prospects, and characteristics of a stock.
Market participants can better understand the relationship between performance and stock movements, so that they can maximize profits.
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