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 micro-cap stock based out of Chicago: Female Health Co. (Nasdaq: FHCO), the manufacturer and distributor of the female condom -- its newest version being called FC2. While not nearly as well-known as its male counterpart, the female condom represents an interesting investment opportunity. A look at how Female Health fares in Lynch's 13-point test will show why.
1. It sounds dull.
Female. Health. Company. That's dull. Point
2. It does something dull.
Sorry. Sex, STDs, and unwanted pregnancies aren't dull. No Point
3. It does something disagreeable or gross.
Without getting into details, suffice it to say that Female Health easily earns this distinction. Point
4. It's a spinoff.
Before being Female Health Co., this company was known as Wisconsin Pharmacal Co., LLC (WPC). FHC purchased a British company in order to secure the worldwide rights to the female condom. No Point
5. The institutions don't own it; analysts don't follow it.
Currently, only 17.5% of shares are held by institutions and no analysts follow it. Point
6. Rumors abound.
Lynch wanted to point out that some industries, like garbage collection, might have shady connections with the mob. The same cannot be said of Female Health or the contraceptive industry in general. No Point
7. There's something depressing about it.
Around 11.6 million children from sub-Saharan Africa are orphaned due to AIDS. Though it's encouraging that Female Health, along with drug companies Merck (NYSE: MRK), Gilead Sciences (Nasdaq: GILD), and Abbott Laboratories (NYSE: ABT) are making advances to remedy this problem, it's not a bright and shiny issue. Point
8. It's a low-/no-growth industry.
Female Health won't garner this point, especially because of the exploding international market in places like India, where sales of contraceptives grew 30% last year. No Point
9. It's got a niche.
Church and Dwight (NYSE: CHD) owns the rights to the market-leading Trojan (male) condom, but FC2 is the only female condom endorsed for use by the World Health Organization. Point
10. People have to keep buying it.
Human nature is on this company's side here. Point
11. It's a user of technology.
When Lynch published his book in 1989, the Internet was in its infancy. Today, almost any company would earn this distinction. Point
12. The insiders are buying.
In the month of August, there were five separate insider purchases, and the stock is up substantially since their purchases. Point
13. It's buying back its shares.
Female Health is currently buying back 3 million shares of its own stock. Point
Congratulations go to Female Health, receiving nine out of 13 points. This does not, however, make Female Health an immediate "buy." 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 Female Health, you'll be following in the footsteps of an investing legend.
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