We should be thankful to the great investor Peter Lynch, who has time and again been generous in sharing his investing ideas, most notably in his books like One Up On Wall Street. As the portfolio manager of Fidelity Magellan Fund from 1977 through 1990, he has been able to achieve a staggering annualized return of 29.2%. That means, over the 13-year period if you invested $10,000, it would have grown to almost $280,000.
There has always been debate about whether Warren Buffett or Peter Lynch is the best investor of all time. While Buffett has been able to generate an annualized return of 20.9% in about 54 years, Lynch’s nearly 30% return in 13-year is just as impressive. At the same time, Lynch’s investing methodology isn’t too difficult to learn. In fact, many of his strategies can be easily implemented in your portfolio ahead of the new year.
Lynch aims to acquire shares of companies that have a compelling growth story with a low price-to-earnings (PEG) ratio. Fast-growing companies, undoubtedly, are those that are increasing their profit margins at a faster pace than its peers. In turn, investors get handsome returns through capital appreciation. Needless to say, that PEG ratio compares the company’s underlying growth rate in terms of earnings per share. Theoretically, PEG ratio lower than 1 is considered better, indicating a stock is undervalued.
So, which stocks would the legendary investor love for the next year? Here’re the promising names we have zeroed in on –
Office Depot, Inc. ODP provides business services and supplies, products, and technology solutions. Office Depot’s Business Acceleration Program (BAP) helped its profit margins across all segments increase in recent times.
The program aims at reducing costs, improving operational efficiencies, strengthening service delivery system and identifying potential investment opportunities. BAP, actually, saved the company almost $40 million this year, while it is expected to save more than $100 million annually going forward, per management.
Office Depot’s move to acquire CompuCom Systems helped it acclimatize to the fast-changing retail landscape, and at the same time enabled the company to provide enterprise-level tech services and products to customers.
In order to increase productivity in the long run, the company continues to focus more on optimal store site. Office Depot intends to improve sales per square foot through an increase in customer traffic and by converting them into potential buyers through targeted advertising, ongoing sales training and customer-oriented initiatives.
Office Depot, thus, has a Growth Score of B and a Zacks Rank #2 (Buy). In fact, the company’s expected earnings growth rate for the next year is 12.8%, more than the Retail - Miscellaneous industry’s projected rise of 11.3%. What’s more, the company has already outpaced the industry over the past one-month period (+18% vs +3.8%). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Office Depot currently has a PEG ratio of 0.62 compared with 0.75 for the industry.
Winnebago Industries, Inc. WGO manufactures and sells recreation vehicles and marine products primarily for use in leisure travel and outdoor recreation activities. The recreational vehicle maker’s initiative to acquire Grand Design and Chris-Craft helped the company diversify its business, in turn boosting its top and bottom-line growth.
The Grand Design acquisition helped Winnebago improve its existing towable RV products, while the Chris-Craft takeover was a shot in the arm for its marine segment. To top it, Winnebago recently signed a contract with Newmar Corporation, which will add high-end motorized products to the existing Winnebago brand line-up.
Winnebago’s cash flows also continue to improve at a steady pace. For instance, the company’s operating cash flow for fiscal 2019 came in at $133.8 million, up 61% from the prior year. Increasing cash flow indicates that the company’s liquid assets are rising, enabling it to settle debts and return money to shareholders.
Hence, Winnebago possesses a Growth Score of A and a Zacks Rank #2. The company’s expected earnings growth rate for the next year is 18.9%, more than the Building Products - Mobile Homes and RV Builders industry’s projected rise of 12.4%. The company has already outpaced the industry over the past one-month period (+15.1% vs +9%).
Winnebago currently has a PEG ratio of 0.60 compared with 1.06 for the industry.
D.R. Horton, Inc. DHI operates as a homebuilding company in East, Midwest, Southeast, South Central, Southwest, and West regions in the United States. D.R. Horton is well poised to gain in the near term as for most part of 2020, the U.S. housing market is expected to remain strong. After all, it’s the millennials who are anticipated to propel the housing market next year. Most of these individuals will turn 30 next year and consider buying their first home. In fact, millennials are expected to take half of all mortgages next year, surpassing both Generation X and Baby Boomers, per realtor.com.
Moreover, mortgage rates are lower, which adds to the bullish sentiment. Healthy domestic economic growth and record low unemployment rate will also boost disposable income, leading to higher demand for new homes in 2020.
Nonetheless, skeptics may say that higher building material costs are compelling homebuilders to increase home prices. But D.R. Horton strategic shift toward providing entry-level affordable homes has helped drive the company’s profits in recent times. On the other hand, management has quite successfully been able to reduce both construction and selling, general and administrative expenses.
D.R. Horton, thus, has a Growth Score of A and a Zacks Rank #2. In fact, the company’s expected earnings growth rate for the next quarter and year is a solid 14% and 9.6%, respectively. The company has already outperformed the Building Products - Home Builders industry so far this year (+52.7% vs +47%)
D.R. Horton currently has a PEG ratio of 0.92 compared with 1.40 for the industry.
Another company from the construction industry that stands to gain from the aforesaid positives is TopBuild Corp. BLD. After all, with the probability of a housing crash next year remaining limited, TopBuild surely stand to gain. Currently, year-over-year cash flow growth for TopBuild is 60.1%, higher than the industry average of 17.4%.
The company primarily engages in the installation and distribution of insulation and other building products. TopBuild possesses a Growth Score of A and a Zacks Rank #1. The company’s expected earnings growth rate for the next year is 15.1%, more than the Building Products - Miscellaneous industry’s projected rise of 12.8%. The company has already outpaced the industry over the year-to-date period (+128.5% vs +48.5%).
TopBuild currently has a PEG ratio of 0.68 compared with 1.34 for the industry.
Zacks Top 10 Stocks for 2020
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