Peter Lynch became one of the most well-known investors in America as the manager of the Magellan Fund at Fidelity Investments from 1977 to 1990. During those 13 years, he consistently outperformed the S&P 500 and generated an average annual return of 29.2% for his clients.
Lynch retired after leaving Fidelity, but his legacy continues to influence investors thanks to his evergreen books such as One Up on Wall Street. Let's discuss three of his most well-known mantras, and how they apply to three stocks he might approve of.
Lynch famously told investors to "invest in what you know," but that oft-repeated quote doesn't mean to blindly buy a stock simply because you like or a familiar with the company's products. Instead, it means to use your knowledge about the company as a starting point to do more due diligence.
In an interview with The Wall Street Journal in late 2015, Lynch admitted to missing out on a few big winners after his retirement. One of those was Apple (AAPL 0.19%).
Lynch stated that after his daughters bought him an iPod, he "should have done the math" to figure out how much Apple was making on each device. Since the launch of the first iPod in 2001, Apple's stock has generated total returns of more than 40,000% -- thanks to the company's subsequent launches of the iPhone, iPad, and other devices and services.
Apple probably won't replicate those gains over the next two decades, but customer loyalty to the iPhone remains high, the company is boosting its revenues per user with accessories like the Apple Watch and AirPods, and it's aggressively expanding its extremely sticky software and services ecosystem.
Wall Street expects Apple's revenue and earnings to rise 5% and 9% this year, respectively, before accelerating to double-digit percentage rates next year as it sells its more 5G iPhones and tethers more users to its subscription-based services.
2. Best Buy
Lynch also told investors that if you "like the store, chances are you'll love the stock." The retail apocalypse has decimated a lot of chains since Lynch retired, but Best Buy (BBY 1.37%) weathered the storm and pulled off an inspiring turnaround over the past eight years.
Back in 2012, customers often used Best Buy's stores as "showrooms" to test out products before going home and buying them from Amazon (AMZN -1.08%) or other e-commerce operations. That was also the year that CEO Brian Dunn abruptly resigned due to an inappropriate relationship with an employee.
But Dunn's successor, Hubert Joly, revived the company by fixing its broken inventory systems, investing in better employee training, matching Amazon's prices, and embracing its "showroom" reputation by renting out floor space to Apple, Samsung, and other popular brands. Joly also aggressively expanded Best Buy's e-commerce ecosystem and used its brick-and-mortar stores to fulfill online orders.
Best Buy's stock rallied more than 260% during his seven-year tenure, which ended last June. His successor, Corie Barry, has stuck to Joly's playbook throughout the COVID-19 crisis -- and the retailer's sales actually accelerated through the pandemic as people bought new PCs and the other tech gear they required in order to work from home.
Wall Street expects Best Buy's revenue and earnings to rise by 4% and 15%, respectively, this year, before decelerating slightly in 2021 due to the tough comparisons to this year with its pandemic-fueled purchases.
3. Kimberly Clark
Lastly, Lynch told investors to "avoid hot stocks in hot industries" -- since "great companies in cold, no growth industries are consistent big winners." Kimberly Clark (KMB 0.71%), the consumer staples giant which produces paper-based products such as Kleenex, Kotex, Cottonelle, and Huggies, fits that description. It sells its products in over 175 countries and provides essential products to nearly a quarter of the world's population.
Over the past 20 years, Kimberly Clark's stock rallied over 190%, outperforming the S&P 500's gain of about 130%. But after factoring in reinvested dividends, Kimberly Clark delivered a total return of nearly 460% -- which highlights the "magic" of compound growth over the long term.
Kimberly Clark typically generates slow and steady growth, but the COVID-19 crisis temporarily lifted its sales in the first half of 2020. In response to the pandemic, it suspended share buybacks and postponed the end of its restructuring plan from the end of 2020 to 2021, but it resumed its buybacks in July and continues to execute its restructuring plan with cost-cutting measures and investments in its higher-growth brands.
Analysts expect Kimberly Clark's revenue and earnings to rise by 2% and 12%, respectively, this year, before cooling off to 1% revenue growth and 3% earnings growth next year. Those near-term growth rates might seem anemic, but investors looking for a "cold" long-term winner should take a closer look at this stock.