From 1977 to 1990, investor Peter Lynch achieved a 29.2% compound annual growth rate (CAGR) while managing the Magellan Fund for Fidelity. This allowed him to earn about 28 times his initial investment in just 13 years.
Let's put this in perspective. Let's assume that Lynch started with $1 million and earned a 29.2% CAGR for 30 years -- a career of normal length. At that rate, an investment of $1 million would have become a staggering $2.2 trillion. Hopefully, this illustrates just how stellar a 29.2% CAGR is. Lynch simply didn't play the game very long, which is perhaps why he doesn't get more recognition.
With as good as his track record is, you'd think that Lynch wouldn't have any regrets. But when asked about his regrets by Yahoo! Finance, he quickly says that he regrets not investing in Apple (AAPL -0.35%). If he had only taken his own advice -- the advice that Lynch is most known for -- he would have made millions.
Lynch may not be able to turn back time. But investors today can learn from Lynch's regret and find opportunities like Apple. Here's how.
Lynch and Apple stock were a match made in heaven
Regarding investing in the stock market, Peter Lynch is best known for saying, "Buy what you know." It's pretty much the central thesis of his best-selling book, One Up on Wall Street. Lynch suggests that ordinary investors can look at the businesses they regularly interact with to get a sense of how these companies are doing.
Apple launched the iPod way back in 2001, and Lynch says his daughter gifted him one. Therefore, Apple was a company that Lynch was interacting with. Had he taken his own advice of buying what you know, he would have researched Apple stock then. But he didn't.
Fast-forward to 2009, and Apple stock was trading at a split-adjusted price of just $2.79 per share, down more than 60% from its high. The company had just released the iPhone in 2007, and it had sold well. But investors worried that phones from competitors, including BlackBerry, Nokia, Acer, Palm, and more, would erode market share by undercutting Apple on price.
At the start of 2009, Apple's market capitalization had dropped to around $80 billion. At the time, the company had almost $26 billion in cash and short-term investments, as well as zero long-term debt. It was the kind of situation that Lynch loves. And considering Apple stock now trades at over $180 per share, it would have made him millions if he had bought back then.
AAPL Market Cap data by YCharts
Apple stock in 2009 reminds me of another great Lynch investment. Lynch says that during a period of market volatility in 1972, Taco Bell stock (then a stand-alone company) dropped from $14 per share to $1 per share. The business was fine, and the company had no debt. As Lynch wryly says, "It's very hard to go bankrupt when you don't have any debt."
Lynch was a buyer of Taco Bell stock because it was a well-known business, business was good, the company had no debt, and the stock was way down. PepsiCo later acquired Taco Bell for $42 per share -- a huge win for Lynch.
Are there any opportunities today?
I believe that Lynch's advice provides a good starting place for investors who are looking for ideas. And I believe there's one stock that fits the bill today.
Granted, Apple stock was down 60% and Taco Bell stock was down more than 90% -- my suggestion hasn't had that extreme of a drop. But Ulta Beauty (ULTA -0.40%) stock checks several of Lynch's boxes right now, including:
- It's a well-known, consumer-facing brand, with 1,359 locations.
- Business is good, considering same-store sales jumped 9.3% year over year in the first quarter of 2023.
- The company is profitable, has cash and cash equivalents of $636 million, and has no long-term debt.
- The stock is down 18% from its high, as of this writing.
Like I said, Ulta Beauty stock isn't trading at the deep discount that Apple was in 2009 or Taco Bell in 1972. But it's still the kind of company that Lynch would suggest looking into today.
Ulta Beauty expects to earn at least $1.6 billion in operating income this year. And a good portion of these profits will go to shareholders in the form of share repurchases -- it's authorized to repurchase over $800 million in stock right now. This will help boost the company's earnings per share, which can help the stock go up from here. Indeed, I believe Ulta Beauty stock can rebound with this simple formula.
Even if Ulta Beauty stock isn't something that interests you today, Peter Lynch's simple advice is still a great way to generate investible ideas. Look at the products and services in your life -- like Lynch's iPod gift -- and then research the fundamentals of the business. Doing this may just allow you to find generational opportunities that Wall Street overlooks.
