Peter Lynch  deserves a place in the hall of fame with his average returns of 25+% per year during his 13 years tenure at Fidelity Magellan Fund.  In one phrase his investment style can be summed as “buy what you know” Although it is very difficult to quantify his philosophy as a rule of thumb, however after reading his classic best selling book ” One up on wall street”  reader do get an insight into his stock selection method. Putting together 5 key tenets below

1. High growth – Earnings drive prices, companies growing fast have to be bought to make inflation beating long term returns on invested capital. Lynch always liked high growth companies however he was wary of very high growth companies as their could be earnings manipulation, he avoided companies growing at 40%+

2.  Price earnings growth – The price/earnings to growth (PEG) ratio is used to determine a stock’s value while taking the company’s earnings growth into account, and is considered to provide a more complete picture than the P/E ratio. Lynch considered stocks quoting at PEG < 1 as attractive, they fitted well in his theory of growth available at reasonable prices (GARP)

3. Low debt – Low debt firms are able to face off recession well, in addition low debt firms are able to raise debt  relatively cheap compared to levered firms even during times of economic boom

4. Companies having low institutional ownership –  In Indian context I would tend to ignore this or would not keep as my mandatory criteria. FIIs are still not comfortable with corporate governance of small companies and they would continue to pump in money to reliable names, also I would be wary to invest in very small companies ~ less than 500 crore sales given huge promoter driven price manipulation is such stocks

5. Reasonable price – Companies satisfying all above but available at 100 PE , I would avoid them. As Lynch said we have to buy growth at reasonable price.  High PE is not sustainable, look what happened to Infosys as an example

 

Based on above I have created screener for you and here are top 15 results sorted with Market Cap

S.No. Name CMP
Rs.
Profit growth
%
P/E
Mar Cap
Rs.Cr.
ROE
%
Sales
Rs.Cr.
PEG
Debt / Eq
P/CF
1. Tata Consultancy Services Ltd. 2213.55 37.63 22.63 433568.04 43.68 81809.36 0.86 0.01 29.39
2. Lupin Ltd. 983.40 39.74 24.01 44095.66 28.52 11086.64 0.94 0.19 35.25
3. Amara Raja Batteries Ltd. 491.45 28.16 22.61 8393.97 30.45 3436.66 0.85 0.08 25.02
4. MindTree Ltd. 807.65 32.86 14.98 6751.95 29.88 3031.60 0.52 0.02 25.35
5. DB Corp Ltd. 299.70 40.57 17.93 5499.50 22.30 1764.91 0.67 0.13 23.24
6. CMC Ltd. 1689.20 21.80 18.25 5118.28 26.68 2230.92 0.76 0.00 22.52
7. Persistent Systems Ltd. 1060.75 32.86 17.02 4243.00 20.19 1669.16 0.73 0.00 19.62
8. Lakshmi Machine Works Ltd. 3697.35 66.23 21.78 4178.01 12.64 2165.18 -1.76 0.00 42.39
9. Monsanto India Ltd. 2131.50 82.49 28.41 3687.50 17.01 575.22 -3.79 0.00 41.25
10. eClerx Services Ltd. 1169.15 48.99 13.81 3530.83 43.93 841.00 0.40 0.00 23.03
11. NIIT Technologies Ltd. 427.50 24.15 12.45 2594.93 24.57 1308.48 0.68 0.03 47.34
12. Finolex Cables Ltd. 162.10 42.96 12.57 2480.13 16.85 2336.67 0.94 0.18 15.77
13. Dhanuka Agritech Ltd. 380.35 44.52 20.42 1901.75 27.00 738.40 0.66 0.13 40.84
14. Zensar Technologies Ltd. 394.65 36.10 7.28 1728.57 26.75 2315.60 0.29 0.18 16.30
15. VST Tillers Tractors Ltd. 1818.15 70.74 18.85 1563.61 21.62 622.71 0.67 0.00 31.33
earnings growth was a primary driver of stock prices – See more at: http://www.stockopedia.com/content/peter-lynch-investing-screen-searching-for-undiscovered-growth-stories-55855/#sthash.J6jp5XxX.dpuf
earnings growth was a primary driver of stock prices – See more at: http://www.stockopedia.com/content/peter-lynch-investing-screen-searching-for-undiscovered-growth-stories-55855/#sthash.J6jp5XxX.dpuf
“buy what you know”buy
“buy what you know”
What Criteria would add or delete from above ? Share below in comments
Please note this is not an investment recommendation, Be smart – research on your own before investing.