From 1977 until he retired in 1990, Peter Lynch guided Fidelity's Magellan Fund to an astounding average annual return of 29%. With results like that, when Lynch talks, it behooves us Fools to listen. In his best-seller One Up on Wall Street, Lynch offers 13 characteristics of the "perfect" stock. He devised these criteria from some of his most successful picks over those years at the helm of Magellan.
Today, we will examine a stock everyone seems to have an opinion about: Sirius XM Radio (Nasdaq: SIRI), provider of satellite radio in both the United States and Canada.
1. It sounds dull.
I kind of have a rule that any word with an X in it doesn't count as boring. Complain if you want about it, but it makes sense to me. No point
2. It does something dull.
I think music and talk shows are around to make sure life isn't boring, so there's no way Sirius XM is getting credit for this. No point
3. It does something disagreeable or gross.
Though I think we may all have an opinion about the appropriateness of Howard Stern's talk show, the majority of Sirius XM's offerings are perfectly agreeable. No point
4. It's a spinoff.
Instead of being the product of a spinoff, Sirius XM is quite the opposite: a merger of Sirius and XM Radio. No Point
5. The institutions don't own it; analysts don't follow it.
Currently, institutions hold only 34.2% of shares, but 11 analysts have price targets on the company -- a medium range number of analysts. Half-Point
6. Rumors abound.
Sirius XM has always been controversial. When the separate entities of Sirius and XM were created, the government only granted two licenses for satellite radio. Keeping them separate was key to ensuring that there was competition. With the merger, the government was apparently no longer concerned about creating a monopoly. Point
7. There's something depressing about it.
See Nos. 2 and 3 above. Music brings joy and news brings education to the world. No Point
8. It's a low-/no-growth industry.
When Napster came on the scene back in the 1990s, people began to realize that they didn't have to pay for music anymore. After Apple (Nasdaq: AAPL) introduced iTunes, it seemed like it might be a stopgap. That being said, I'm not quite sure where I'd say the music industry is today. Half-point
9. It's got a niche.
Sirius XM's largest base of installations has always been in cars. This niche, however, could be in danger. Pandora (NYSE: P) seems to be a favorite at home and at work ... for now. The use of Apple iPods and iPhones in the car also poses a threat. While there is a niche, it's being encroached upon. Half-point
10. People have to keep buying it.
Because Sirius XM uses a subscription model and most people like to listen to music, this easily passes the test. Point
11. It's a user of technology.
When Lynch published his book in 1989, the Internet was in its infancy. He wanted to find organizations that used technology in any part of their business model. I'd argue that today, nearly every publicly traded company qualifies, including this maker of lubricant that helps technology run more efficiently. Point
12. The insiders are buying.
There have been no insider purchases in the last two years. No Point
13. It's buying back its shares.
Though rumors abound about a possible start to share buybacks, none have been announced. No point
As you can see, Sirius XM only garnered four and a half out of 13 points. This does not, however, make Sirius XM unworthy of your attention.
On one hand, the company narrowly avoided bankruptcy during the financial crisis. Only with help from Liberty Capital (Nasdaq: LCAPA) did the company survive.
On the other hand, investors who were willing to buy the company when it was on the brink -- trading for just $0.05 on Feb. 11, 2009 -- have been rewarded with a 42-bagger. It's hard to argue with results like that.
Foolish takeaway
Lynch didn't earn his results simply by passing all companies through a screen like this. It provided him with a starting point for his due diligence. By taking this information and starting your own research on Sirius XM and its competitors, and adding them to your watchlist, you'll be following in the footsteps of an investing legend.
