Peter Lynch made a name for himself as the manager of the Magellan Fund, which absolutely walloped the performance of the S&P 500 with an average annual return of 29.2% over a 14-year period. For those of you keeping score at home, that would have turned a single $10,000 investment into over $361,000 in that span. How'd he do it? By buying great businesses at great prices and not worrying about timing the market.
As fears of a global recession mount, investors might take solace in one of Lynch's quotes: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves."
With that long-term mindset, we asked three contributors at The Motley Fool for a stock that Peter Lynch might love. Here's why they chose WestRock (WRK +0.00%), NV5 Global (NVEE +0.00%), and Brookfield Infrastructure Partners (BIP +0.17%).
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A paper-based packaging leader
Maxx Chatsko (WestRock): Peter Lynch felt strongly about buying stocks at a reasonable price, so he might really like WestRock right now. Shares of the paper manufacturer trade at just 0.74 times book value and 10 times earnings. Earnings and operating efficiency are growing as it more deeply integrates a massive acquisition. And demand for paper-based packaging is growing at a historic clip.
Paper isn't the most exciting investment out there, but WestRock is uniquely positioned to capitalize on trends sweeping its industry. The rise of online shopping has pushed demand for cardboard boxes to an all-time high, while negative consumer attitudes about single-use plastics and plastic packaging are causing consumer-facing brands to run toward paper-based solutions.
Through the first nine months of fiscal 2019 (the period ended June 30), the business reported a 13% increase in revenue and a 31% increase in operating income compared to the year-ago period. Cash from operations jumped 23% in that span, which provides confidence in the long-term sustainability of the stock's healthy 5.4% annual dividend yield.
WestRock expects the growth in cash flow to continue as it reaps the benefits of operating efficiency improvements and organic growth initiatives in the next few years. That includes modernization investments at existing manufacturing facilities and new product launches to better serve the needs of commercial customers. With shares trading near five-year lows, investors with a long-term mindset and looking for income might not hesitate to buy the stock.
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Lynch's best advice says NV5 is a "buy now" stock
Jason Hall (NV5 Global): Peter Lynch is well known for telling people to use what they know to find great investments. Whether it's knowledge gleaned from one's profession, or simply the observations we make in our everyday lives, sometimes the best investment opportunities are hiding in plain sight, not (trust me, I see the irony in the statement I'm about to make) in some newsletter or investing article on the internet.
With that said, here's what I see: a massive, massive global need to improve and expand infrastructure of all kinds over the next several decades. By 2040, it's estimated that more than $90 trillion will need to be spent on global infrastructure.
A substantial amount of that money will pay for steel, concrete, and the construction labor to put it all together, but infrastructure projects are also incredibly complex, requiring engineering across multiple disciplines, project management, and a litany of other technical and professional services to remain on track and on budget.
That's where NV5 comes in, providing services across those disciplines, and from more than 100 offices worldwide. Yet even at that size, it's still a small player, on track to surpass $500 million in annual revenue for the first time this year and is steadily growing sales and earnings per share at a double-digit rate.
Moreover, a recent market sell-off has made NV5 incredibly attractive, with shares trading for about 23 times the midpoint of company guidance for this year's earnings. Lynch says "buy what you know," and I know that we will see many trillions of dollars spent on infrastructure in coming decades. I also know that NV5's management has a great track record of success. Sounds like a stock Peter Lynch would love to me.
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A consistent winner
Matt DiLallo (Brookfield Infrastructure Partners): Peter Lynch had a remarkable track record as he consistently beat the market by a wide margin. One of the keys to his success was filling his portfolio with steady performers. That enabled him to avoid holding too many duds that would have weighed down his returns.
Given that Lynch favored consistency, he probably would have loved Brookfield Infrastructure Partners. The global infrastructure giant has been a model of stability over the years. In the past decade, the company has grown its cash flow per share an 18% compound annual rate. That's enabled it to increase its high-yield dividend each year by a healthy 11% compound annual rate.
That consistent growth of both cash flow and the shareholder payout has enabled Brookfield to delivery Lynch-like outperformance. Over the past 10 years, Brookfield Infrastructure has generated an annualized total return of 17%, which has crushed the S&P 500's 9% total return over that time frame.
While past success is no guarantee of future gains, Brookfield Infrastructure does appear well-positioned to continue outperforming. The company currently expects that it can grow its cash flow per share at a fast enough pace to support 5% to 9% yearly growth in its 4.4% yielding dividend. That sets it up to produce total annual returns in the 9.4% to 13.4% range, which should be enough to continue outpacing the market.
