22 Stocks Good Enough For Buffett And Lynch
1.00%February 01 | MyPlanIQ portfolio symbol P_33618
Here’s a trick question: Who has the best strategy for picking winning stocks, Warren Buffett or Peter Lynch?
It really doesn’t matter. Each man made billions of dollars with his stock-picking strategies. Both systems find companies that make profits for investors year after year. We would all, of course, like to replicate the success of Buffett and Lynch in our own investment portfolios.
In following either guru’s advice on things like which fundamentals to value and what qualities to seek, the theory goes, anyone can pick a money-making share. The problem with this approach is that it usually leads to an awfully long list of possible investments. In Buffett and Lynch world, whole teams of researchers spend a lot of time conducting due diligence—often at the companies themselves—to finalize the winning list of shares. Most individual investors don’t have the time, training or access for such work, so their chances of picking the wrong stocks are high.
YCharts, which charts historical company performance in dozens of ways, has found a way to shorten those starting lists considerably. Rather than quibble over which billionaire is more worthy of following, we looked for stocks both Buffett and Lynch can appreciate. The result: A list of 22 solid companies worthy of any value investors’ attention.
We created this Buffett and Lynch hybrid list by taking a key fundamental in each investor’s strategy and merging them into one stock-picking model.
Buffett is known to value earnings yield as an important indicator of a company’s potential. Adding up the earnings from the past four quarters and dividing them by the share price gives an indication of how much return an investor is getting for his money. With 10-year Treasury bills inching above 3.5%, a good earnings yield generally is considered somewhere north of 5.5%.
Lynch looks harder at historic earnings growth, emphasizing the price to earnings growth (PEG) ratio for stock picking. The lower the PEG, the more growth an investor can buy for his money.
Neither investors like companies with a lot of debt and both want to see healthy cash flow. Buffett prefers companies with market dominance; Lynch tends to pick smaller ones. Both men stress the importance of sticking with companies in businesses you actually understand. Importantly, both men invest for the long haul.
With apologies to Lynch, we limited the universe for the Buffett/Lynch Hybrid List to large-cap companies in order to add an element of stability. Searching all the U.S.-based large-caps for shares that have an earnings yield above 6% and a PEG of less than 1 produced a list of 33 solid possibilities in a variety of sectors. In deference to the debt and cash preferences of both investors, we kicked out companies with anything less than stellar numbers on current and debt-to-equity ratios; long-term average cash; and long-term debt compared to net income.
The resulting 22 stocks are not, of course, the only shares a Buffett or Lynch investor might consider. But for fans of these strategies, it narrows the possibilities to companies with respectable earnings growth and yields, decent share prices and strong balance sheets. It’s a safer place to start.
From the list of 22 stocks, here’s a look at five good prospects and one stock to avoid: