Canada Markets closed

Steal These Stock Ideas From Legendary Investor Peter Lynch

Nelson Smith
Oil pumps against sunset

In the investing world, Peter Lynch is a beast. You won’t find many investors with a better track record.

As the manager of Fidelity Investments’ Magellan Fund, Lynch annihilated the market. He posted a 29.2% annual return during his tenure that spanned from 1977 to 1990.

He then followed that up with several best-selling books that revealed all his secrets, including two that every investor should read — One Up on Wall Street and Beating the Street.

Needless to say, when Lynch talks, you should listen.

Recently, Lynch sat down with Barron’s magazine to give us his thoughts on the investing world today. Although he wouldn’t discuss specific stocks, he did treat investors to some general thoughts on the overall market — insights that can be applied to your own portfolio. Let’s take a closer look.

It’s all about growth

Lynch became famous by doing the research and putting investor cash into companies with a lot of long-term growth potential. He never cared much about valuation.

Even after all these years, he reiterated that stance to Barron’s, saying, “After 50 years of doing this professionally, it reinforces that growth stocks are better than non-growth stocks.”

One of my favourite growth stocks in the Canadian market today is goeasy Ltd. (TSX:GSY), which has quietly expanded to dominate the subprime unsecured credit market.

Its signature loan — which is worth up to $10,000 and comes with a 46% interest rate — has really taken off because it’s a far better solution than the alternative, which is usually a payday loan.

The company is also expanding by offering other products, including furniture financing and secured loans against real estate.

Together, these avenues are expected to grow the top line by approximately 20% per year in 2020, with similar increases expected for a few more years. Remember, goeasy has just scratched the surface of the Canadian credit market. It could easily have a decade of growth potential left.

Despite the growth, however, goeasy shares can still be had for a reasonable value. Currently, the share price is approximately $70.

Earnings for 2020 are projected to be $7.18 per share at writing. Yes, this growth stock trades at just a 10x P/E ratio, which is insanely cheap. It also pays a 1.7% dividend, a payout that should grow by 10-20% annually for at least the next few years.

Buy energy

Lynch is also bullish on energy, telling Barron’s, “Oil is interesting. Look, longer term, solar, windmills really work. But you need natural gas and oil to bridge to this.”

One of my favourite energy stocks today — and one I think Lynch might own too, since he values stability in the space — is Imperial Oil (TSX:IMO)(NYSE:IMO), which has an impressive array of assets including oil sands production, a growing conventional oil subsidiary, and, perhaps most important, significant downstream operations.

I like the oil sands operations because there’s no exploration risk. These are long-life assets with decades of production left at current levels. Once the price of crude recovers, Imperial has several growth initiatives in the area to which it will give the green light.

In the meantime, the company will relentlessly work on getting costs down, including investing in technology like automated trucks.

The real jewel of the company are the downstream operations. Imperial’s four oil refineries — which convert some 500,000 barrels of oil per day into gasoline, diesel, jet fuel, and asphalt — and its over 1,800 Esso and Mobil locations across Canada deliver plenty of predictable earnings — cash that’s used to pay the dividend and fund the share buyback program. The current yield is 2.5%.

The bottom line

When Peter Lynch, a legendary growth investor, goes on record to recommend the energy sector, investors should probably take notice.

And, of course, there’s no poor time to buy a great growth company, especially if the valuation is very reasonable today, which is exactly what goeasy offers investors.

No matter which Lynch advice you choose to apply to your own portfolio, both of these stocks should be long-term winners. Perhaps both would be great choices.

More reading

Fool contributor Nelson Smith owns shares of Imperial Oil. 

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2020