Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

3 Stocks Peter Lynch Would Love

By Jason Hall, Steve Symington, and Leo Sun - Jun 17, 2019 at 10:46PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Three different stocks; three different Lynch principles.

Peter Lynch's record as an investor has few parallels. Under his management from 1977 to 1990, the Fidelity Magellan Fund ( FMAGX ) was the best-performing mutual fund in the world, absolutely crushing the market during his tenure. Yet despite his market-beating success as a professional, Lynch was a steadfast believer that individual investors could -- and should -- be able to beat Wall Street at its own game. 

Lynch wrote several best-selling books explaining his principles, as well as the advantages individuals have over the "smart money," and even used as evidence many examples of investing ideas he discovered well away from the mahogany halls of the big investment firms. 

We asked three contributors with a solid understanding of Lynch's investing principles to offer their most "Lynch-like" investing ideas today, and they came up with three picks you might not have expected to see Momo ( MOMO -12.88% ) iRobot ( IRBT -3.75% ), and ( AMZN -1.81% ). Keep reading to learn why we think Lynch would love them, and whether they might belong in your portfolio. 

Blocks with black arrows all going to the right with one block with a red arrow going to the left.

Image source: Getty Images.

China's online-dating leader

Leo Sun (Momo): Peter Lynch often recommends buying stocks that trade at lower P/E ratios than their earnings growth rates. One stock that fits the bill is Momo, a Chinese company that owns two of the country's most popular dating apps -- Momo and Tantan.

Momo's stock plunged about 40% over the past 12 months on concerns over the trade war, the removal of Tantan from China's app stores, Apple's ( AAPL -0.32% ) suspension of in-app payments for Tantan, and the suspension of its news feed posts for both Momo and Tantan for an internal review.

Those issues sound dire, but the temporary suspensions won't cut current users off from its apps, and Momo generates most of its growth and over 70% of its revenues from live video streams on Momo -- which aren't affected by the recent suspensions. Momo also shook off some of those concerns last quarter, as its sales surged 35% annually and its adjusted net income rose 1%.

Momo expects its revenue to rise 27%-30% during the second quarter, which it called a "conservative" forecast that assumes that the suspensions will continue. Wall Street expects Momo's revenue and adjusted earnings to rise 24% and 19%, respectively, for the full year -- solid growth rates for a stock that trades at just 9 times forward earnings. That low multiple indicates that investors are shunning the stock, but they could return quickly if Momo restores its apps and the Chinese economy stabilizes.

The niche player in a huge but boring industry

Steve Symington (iRobot): You may not know much about the world of robotics. But chances are you know a thing or two about the pains of keeping your house clean. And that's entirely the point of iRobot's growing -- and increasingly autonomous -- portfolio of home robots.

In fact, late last month the company unveiled a new robotic vacuum, the Roomba s9+, and a floor-mopping robot, the Braava jet m6, that can work together to first vacuum and then mop your floors, complete with advanced mapping, navigation, recharge-and-resume functionality, and, in the Roomba's case, even the ability to empty its own dirt bin for weeks at a time.

Then later this year, iRobot will launch its first robotic lawn mower, Terra, both in Germany and as a beta in the United States, opening up a new multibillion-dollar market in the process.

Perhaps best of all, iRobot shares are still reeling from a steep post-earnings drop in April after the company released first-quarter results that were technically mixed relative to Wall Street's expectations but arrived exactly in line with its own internal projections.

As such, I think opportunistic investors would do well to grab shares of iRobot before the stock rebounds, and before its relative strength and growth potential become more clear to the broader market.

A Lynch favorite hiding in plain sight

Jason Hall ( In One Up on Wall Street, Peter Lynch stressed the value of using what you already know as an advantage. And while, in general, the intent of his message was to teach people to open their eyes to new opportunities that hadn't shown up on Wall Street's radar, I think we can apply a version of the same idea to Amazon, a household name for millions of consumers and Wall Street's biggest investors. 

Here's how I see it. Amazon is my first, and often last, destination for a growing list of items from the mundane to the exotic -- fresh jackfruit, anyone? -- because I know I'll pay a reasonable price, and Amazon has fixed the few problems I've had quickly and to my satisfaction. 

But that's only part of it. Second, and maybe more importantly, is that I see more and more other companies using Amazon's cloud service, Amazon Web Services (AWS), to support their own operations, even ones that sell cloud services to consumers. And AWS is incredibly profitable for Amazon, even as it continues to prove to be one of the cheapest cloud services enterprise-level users can buy. 

Third, Amazon is quickly seeing the revenue it earns selling advertisements grow, too. Simply put, the traffic to its website is enormously valuable to marketers, and the company's smart to monetize that value. 

The combination of dominant existing businesses, massive growth prospects, and a lot more optionality than it seems strike me as a perfect growth business hiding in plain sight. Seems to me like a stock Lynch would love -- and load up on. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned, Inc. Stock Quote, Inc.
$3,443.72 (-1.81%) $-63.35
iRobot Stock Quote
$73.06 (-3.75%) $-2.85
MOMO Stock Quote
$10.08 (-12.88%) $-1.49
Apple Inc. Stock Quote
Apple Inc.
$164.77 (-0.32%) $0.53
Fidelity Magellan Fund Stock Quote
Fidelity Magellan Fund

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/02/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.