The Six Categories of Stock Investments

November 9, 2020

Secret #3 

Now, secret #3 

Peter moves on to talk about the six categories of stock investments 

All investment opportunities aren’t created equal 

  1. Slow growers 

Large companies, in a mature industry, and with low, expected growth, typically 1-4%. But remember, even though the percentage might be low, for big companies that deal with enormous quantities and amounts, even small percentages can yield large numbers. 
The thing though is that if the company isn’t going anywhere, most like wont the stock price. 

2. Stalwarts  

The in betweenness. Usual growth is 10-12% per year 

3. Fast growers 

Aggressive growers at a rate of 20% or more per year. The big question here is: can it keep up with that growth in the future? 

4. Cyclicals 

These companies’ revenues and profits rise and fall with the cycle of the market. Typically, they produce services and/or products that the consumers will postpone consumption of in times of financial uncertainty. Look at the COVID 19 pandemic. Online eCommerce had a huge boom when people preferred to buy things online instead of going to physical stores. Car manufactures is another example. During uncertain times, people might not take the risk to buy a new car, even though their car is getting relatively old. 

You will have the advantage when investing and trading these companies if you can identify early signs of a booming or busting cycle  

5. The fifth category is turnarounds  

Such companies are potential fatalities, that is companies with declining profits or a problematic balance sheet. If you can buy into such companies at a discount, and the company manages to turn things around, you as a shareholder will be rewarded thereafter.  

The reason for putting companies into this category is because their ups and downs aren’t related to the market cycle, but other events. One such company as of recording of this episode in 2020, is the German company Wirecard. They realized that one of the bank accounts stated in their balance sheets wasn’t existing after all… The result is something we dig into with our students. 

6. The final class of companies is Asset plays  

These companies are considered to be undervalued. That means the market has missed out on something valuable in the company’s balance. Undervalued assets could be real estate, patents, resources, subscribers or losses because losses are deductible from future earnings in terms of tax advantages.  

Benjamin Graham, one of warrant buffets mentors, looked for companies where the value of their assets was higher than the market capitalization. market capitalization is the the total dollar market value of a company's outstanding shares of stock. Commonly referred to as "market cap," it is calculated by multiplying the total number of a company's outstanding shares by the current market price of one share 

A fundamental understanding to utilize this categorization is that companies don’t necessary stay in one category forever, and that a company can belong to several categories at once.  

Thanks to Peter Lynch for putting this topic to my attention.

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