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3 Stocks Peter Lynch Would Love

By Brian Withers - Oct 25, 2020 at 5:07PM

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Sometimes the best investments are companies you know and love.

Peter Lynch ran the Fidelity Magellan fund from 1977 to 1990 and returned an incredible 29% annually, soundly beating the S&P 500 over that time. He didn't use complex strategies or invest in high-risk tech start-ups; he focused on common consumer products and brands. He described his easy-to-follow investing approach in two books: Beating the Street and One Up on Wall Street. He would start by finding businesses that consumers would use every day, study their financials to ensure they were built to last, and buy with an intent to hold for the long term.

Starbucks ( SBUX -0.98% ), Amazon ( AMZN -1.53% ), and Home Depot ( HD -1.53% ) look like three stocks that Lynch would love today.

Starbucks: A part of the morning ritual

For coffee lovers, Starbucks has become a part of their daily routine. Even with the coronavirus eliminating the morning commute for many, its loyalty members have replaced their drive-through pick up on the way to work with a mid-morning break to make a Starbucks run. Lynch would love that the company added 3 million new rewards members in a quarter during a global pandemic. But he'd also like the financials, even in the face of an unprecedented situation.

There's no way of beating around the bush -- the company's performance in its fiscal third quarter ending June 28, 2020, was especially challenging. Revenue dropped 40% year over year, and with increased costs due to the coronavirus, the bottom line was a loss of $678 million. Although losing money is never a positive sign for investors, given the tremendous year-over-year drop in revenue and added costs due to the coronavirus, things certainly could have been worse.

Even with all of the negative news, there was cause for optimism from the earnings call. In July, Starbucks' loyalty members -- who now account for nearly half of the company's revenue -- actually increased their spending from July of last year. That's a sign that many of Starbucks' best customers are coming back to visit on a more regular basis. Management is projecting a Q4 global revenue decline between 10% and 15%, indicating that the worst is likely behind it. But even if the pandemic extends longer than expected, Starbucks' balance sheet is solid. With $4.2 billion of cash and short-term investments, the company is on a solid financial footing.

Woman studying stock graphs on computers

Image source: Getty Images.

Amazon: Convenient for the busy household

Amazon was popular before the coronavirus, but once people were stuck at home, its online store became more popular than ever. Last quarter, the e-commerce juggernaut's retail revenue growth accelerated to 42% year over year, up from its mark of 25% from the previous quarter. More consumers are adopting e-commerce habits because of the incredible convenience, reliable delivery, and tremendous selection. For a busy family trying to juggle work-from-home situations and virtual schooling for the kids, getting out to local retail shops even for everyday supplies is a challenge. Online shopping habits are here to stay, even as the coronavirus becomes a thing of the past, and Amazon will continue to be top of mind for millions of consumers.

Although Lynch wouldn't be excited about Amazon's on-and-off relationship with bottom-line profits, he would like its free cash flow, which reached 10% of revenue for the 12 months ending June 30. With its incredible optionality, founder leadership, and culture of customer obsession, I wouldn't be surprised if you saw this e-commerce operator on Lynch's shortlist of stocks if he were running a mutual fund today.

Home Depot: Adapting to the times

There are lots of things about Home Depot that Lynch would like: Loyal customers, an ever-improving business model, and solid financials. In fact, he did own the stock for a time in his fund but sold it a short twelve months later. He later noted that it was one of the "two worst sell orders of his whole career." Today, I imagine that he would recommend the home improvement retailer unequivocally.

Home Depot has adapted with the times and thrived in the face of online competition and even the coronavirus. Its stores have become tremendous cash generators, and it is using its technology prowess to enhance its digital capabilities. Last quarter, Home Depot had record downloads of its mobile app, 100% growth in online orders, and 60% of digital orders were picked up in its stores. With the coronavirus keeping people in their houses, Home Depot has been a go-to, as many consumers have started home improvement projects to make better use of their space. The retailer's revenue grew an amazing 23.4% year over year in its most recent quarter, with its bottom line growing even faster at 24.5%.

Lastly, Lynch would love Home Depot's dividend. The company's financial strength has allowed it to raise its dividend payout to shareholders every year for the last 11 years.

The bottom line for investors

These three have many of the attributes that Lynch liked in his investments. If you are a customer of this trio, maybe it's time you checked out the financials for yourself to see if these stocks are worth adding to your portfolio. When you do, I don't think you will be disappointed.

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.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$3,507.07 (-1.53%) $-54.50
Starbucks Corporation Stock Quote
Starbucks Corporation
$109.64 (-0.98%) $-1.09
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$400.61 (-1.53%) $-6.21

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

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