2 Stocks I'm Buying, Peter Lynch Style

Following Peter Lynch's advice is a great way to make money. His bite-sized bits of wit and wisdom put everything is perspective. For instance:

  • Behind every stock is a company. Find out what it's doing. Check.
  • Time is on your side when you own shares of superior companies. Got it.
  • Know what you own, and know why you own it. Yes, sir.

That's timeless advice. Those quotes, along with three others, lay the foundation for my next stock purchases.

Before I share what they are, let me quickly review the types of companies I'm looking for in my Trends and Trades portfolio (follow along on Twitter). I want to own businesses with:

  • Tranformational technologies.
  • Nascent performance.
  • Talented management.

These are the companies that can generate multibagger returns. And I think both of my choices are up to the task.

A 2-for-1 deal
I draw inspiration from two more of Lynch's quotes. One's a classic. The other one is obscure but right on target.

  • The best stock to buy may be one you already own.
  • When even the analysts are bored, it's time to buy.

Optical-networking hardware maker Infinera (Nasdaq: INFN  ) satisfies both of Lynch's quips. The company has asked investors to be patient as the company prepares to roll out its next-generation product. And since there's no action, the stock has been tossed to the "uninterested" piles on sell-side analysts' desks. Just look at the breakdown of their recommendations.


Number of Analysts

Buy 1
Outperform 1
Hold 5
Underperform 2
Sell 1

Source: S&P Capital IQ.

Yeah, analysts are bored stiff waiting for the catalyst to come in 2012. But Infinera has a differentiated technology compared with incumbents such as Ciena (Nasdaq: CIEN  ) and Alcatel-Lucent (NYSE: ALU  ) . TNT already owns shares. I still think it's a home-run stock and am willing to wait for the payoff.

I'm adding another 3% to the portfolio.

A bright future
Back to Lynch:

  • You can't see the future through a rearview mirror.

Lynch may have said that first, but I give David Gardner credit for encouraging me to dream about the possibilities companies can have. That's why I'm excited to invest 5% of the TNT portfolio in InvenSense (Nasdaq: INVN  ) . Let's look at this company in terms of what I look for in an investment.

Transformational technology: InvenSense is changing the way we interact with electronic devices. The company designs and builds micro-electro-mechanical systems (MEMS), namely accelerometers, gyroscopes, compasses, and pressure sensors. It all started with the Wii: InvenSense's MEMS are in the system's handheld, motion-sensitive controllers that gave users a fuller gaming experience. And InvenSense wants to take the resulting desire to be more closely connected with devices and have it spread like wildfire.

Nascent performance: At the same time, Wii controllers are quickly moving into the rearview mirror. But InvenSense is already on to the next big opportunity: smartphones and tablets. According to IHS iSuppi, smartphones and tablets with motion-control technology with increase from 37 million units in 2010 to 512 million units in 2014. STMicroelectronics (NYSE: STM  ) will continue to put similar chips in Apple's (Nasdaq: AAPL  ) iPhones and iPads, leaving InvenSense to continue to supply sensors to many of the other big players, including Samsung, HTC, and Research In Motion (Nasdaq: RIMM  ) , which made up 40.8% of the shipments in 3Q 2011. InvenSense serves those customers, as well as LG Electronics.

InvenSense generated almost $130 million of revenue and nearly $23 million of free cash flow over the 12-month period ended October 2011. And the smartphone and tablet markets haven't even really taken off yet. There are also plenty of other opportunities for the company to explore: smart TVs, toys, navigation devices, cameras, and industrial tools, to name a few. Given the huge opportunity ahead of it, I think InvenSense could be three to five times as large in five years, delivering incredible performance to shareholders.

Talented management: Steven Nasiri has been and remains a critical part of the company's success. Nasiri founded InvenSense and developed the Nasiri-Fabrication platform, which puts motion sensors on microprocessors in a cost-effective manner. InvenSense made the most of the Wii opportunity, but its MotionApps ecosystem may be more important, as it opened the door to the smartphone and tablet market. MotionApps gives developers access to the sensors to create new applications. More applications should lead to higher adoption rates and more growth in the future. And with a 12% stake in the company, Nasiri has interests that are clearly aligned with shareholders.

2 today, more tomorrow
I believe investors need to kick the door down when opportunity knocks. That's why I'm adding to my Infinera position as well as bringing InvenSense into the fold. These companies not only have home-run potential but are also businesses I want to be a part of over time.

The Trends and Trades portfolio is just getting started. There's still plenty of cash left to go after these additional attractive opportunities. I have a number of them in mind and am writing about them all the time. You don't want to miss any of the action. The best way to stay up to date is to click the @trendsandtrades link to follow me on Twitter.

David Meier is an associate advisor for Million Dollar Portfolio. He and The Motley Fool both own shares of Infinera and Apple. David Gardner owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Infinera and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (22)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2011, at 9:57 PM, Paladin306 wrote:

    I certainly don't claim to be an expert on Lynch. But, I have used much of his style for about the past 20 years in investing. The second caveat is, it's always possible that you've found the next two McDonald's. However, it's beyond me why MF would recommend either of these stocks. So far, neither one has proven to investors that they will ever make a dime much less raise shareholder value. Peg ratio, one of Lynch's famous criteria? Nope, there's no way to even calculate it, best I can tell. Very high risk investment and I'm being very liberal, IMHO, referring to it with that term. Just my 2 cents, your mileage may very well vary.

  • Report this Comment On December 08, 2011, at 10:48 AM, Gator626 wrote:

    P/S is very low for INFN, and they seem to be in a stable cash position. I'll probably keep an eye out over the next few months and do some additional DD. Thanks for the recommendation!

  • Report this Comment On December 08, 2011, at 6:18 PM, robbylit wrote:

    what is the 2012 catalyst and is its differentiated technology better technology?

  • Report this Comment On December 10, 2011, at 5:10 AM, goalie37 wrote:

    Articles like this are why I love TMF. I would never have stumbled across companies like these. I won't be buying because they don't fit my own investing strategies, but keep up the good work.

  • Report this Comment On December 12, 2011, at 7:07 PM, CMFTomBooker wrote:

    like goalie37, I'm always up for an idea. But good ideas have to be filtered out of an immense world of casual noise. So I have a huge filter, and a very small drip of ideas which get through. And it's always based on my own experience with the analyst.

    Except when it came to Whitney Tilson, whose explanation for going long on NFLX was so lead-pipe sure in a situation, which was, and remains, entirely foggy and obfuscated... that I took money I was saving for a lawn mower (fixed the old one's carb instead) and actually put it in the ZH Anti-Tilson ETF. Short NFLX and long GMCR.

    Now, "It was an experiment" butters the biscuit fine, considering the bygones.

    But what is TNT now, channel trade or long?

    I'm a big boy now, and don't always need coverage. But I reverse engineer your trading ranges, so I know exactly which way you are valuing the company. Then I can pick it up and carry it.

    So what's up? ;)


  • Report this Comment On December 14, 2011, at 11:50 PM, zacharymeisel wrote:

    Peter Lynch strongly advised against buying companies that had not yet have positive earnings as he felt it was not worth the risk to invest in an unproven company. I really don't think he'd have any interest in either one of these.

  • Report this Comment On December 20, 2011, at 2:30 PM, buffalonate wrote:

    Peter Lynch liked boring companies with a good moat around them. I don't remember him ever investing in tech companies. I seem to remember reading his book and him telling stories of investing in a hotel, a rock quarry, and a muffler shop.

  • Report this Comment On January 27, 2012, at 5:28 PM, Vismxr wrote:

    As a DUKE STREET member I circle my wagons around and their jockeys and buy LEAPS ITM on any of the common recommends / trends. I have some bragging rights of very high returns. Little bets pay off big time. You only need a few winners to boost you over the fence. ZIP/MAKO/INFN are all huge opportunities for growth as is INVN. Get a large basket of stalwarts / dividends stocks. WM, MCD, JNJ, GS (leaps) etc... and what's worked for me has been these growth stories. Meir & Alice are two great jockeys on Rising Stars. Always wait for the IPO stocks, after 9 months to take their big hit, like ZIP has done and now grab it!

  • Report this Comment On May 30, 2012, at 4:39 PM, CMFSircc wrote:

    To add , Lynch in One Up On Wall Street

    ......Chapter 8.. The Perfect Stock , What a Deal!

    ... lists thirteen favorable attributes of the perfect company in which to buy stock.

    '9. It's got a Niche' -pnones and tabs , tv ....

    '10. People have to keep buying it'.- phones and tabs ... and tv ....

    '11. It' a user of technology.'

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