Legendary investor Peter Lynch, who is known for his perfomance while managing the Magellan Fund, simplified his investment process using a chart that is known today as the Peter Lynch chart.
According to a previous article, the chart compares the price of a stock over time against its earnings line, which is a theoretical price equal to 15 times earnings per share.
Lynch developed this idea with the belief that mature, stable companies are worth 15 times their annual earnings, which is known as the price-earnings ratio.
When evaluating stocks based on this metric, the lower the ratio, the better as low price-earnings ratios mean a shareholder is getting more earnings per dollar invested. In addition, since most large-cap companies eventually trade for at least 15 times earnings, investors are more likely to see share price appreciation if they buy when the stock is trading well below this standard.
Consumer packaged goods
In a market that is currently rocked by volatility as fears of a trade war persist, among the more stable sectors is the consumer defensive sector, of which the consumer packaged goods industry is part. The companies in this industry make nondurable everyday goods like cleaning products, toiletries and pantry items.
The GuruFocus industry overview page shows Procter & Gamble Co. (PG, Financial) commands the largest percentage of the consumer packaged goods industry at 22.6%. The Kraft Heinz Co. (KHC, Financial) comes in second at 8.9%, followed by Mondelez International Inc. (MDLZ, Financial) at 7.1%.
The industry’s average price-earnings ratio was 19.71 as of Monday morning.
According to the GuruFocus All-in-One Screener, some consumer packaged goods companies that are currently trading below their Peter Lynch values that have a business predictability rating greater than two are General Mills Inc. (GIS, Financial), Tyson Foods Inc. (TSN, Financial) and JM Smucker Co. (SJM, Financial).
General Mills
The Minneapolis-based manufacturer of branded consumer foods, which include cereal, ice cream, yogurt and refrigerated dough, has a market cap of $25.78 billion; its shares were trading around $45.87 on Monday with a price-earnings ratio of 12.09, a price-book ratio of 5.19 and a price-sales ratio of 1.69.
The Peter Lynch chart below shows the stock is trading below its fair value, suggesting it is undervalued.
GuruFocus rated General Mills’ financial strength 5 out of 10. While the company’s level of interest coverage, which is 8.46, meets Benjamin Graham’s standard of 5, it falls well below the industry average of 17. In addition, the Altman Z-Score of 2.80 indicates it is under minor financial pressure.
The company’s profitability and growth was rated 7 out of 10, boosted by an expanding operating margin, a moderate Piotroski F-Score of 6 and a business predictability rating of two out of five stars. GuruFocus says stocks with the two-star rating experience an average gain of 6% a year. GuruFocus also warns the rating is on watch, which means it could potentially change based on a number of factors.
With 0.55% of outstanding shares, Mairs and Power (Trades, Portfolio) is General Mills’ largest guru shareholder. Other top guru shareholders include Mario Gabelli (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Jim Simons (Trades, Portfolio).
Tyson Foods
Headquartered in Springdale, Arkansas, the company, which is known for its frozen chicken, beef and pork products, has a market cap of $25.6 billion; its shares were trading around $69.62 on Monday with a price-earnings ratio of 9.24, a price-book ratio of 2.11 and a price-sales ratio of 0.64.
According to the Peter Lynch chart below, the stock is undervalued as it is trading below its fair value.
Tyson’s financial strength was rated 6 out of 10 by GuruFocus. While the company’s interest coverage meets Graham’s threshold at 8.27, it still underperforms 60% of its industry competitors. The Altman Z-Score of 3.38, however, indicates the company is financially stable.
The company’s profitability and growth scored a 7 out of 10 rating, supported by an expanding operating margin, good returns and a moderate Piotroski F-Score of 5. The company also has a four-star business predictability rating. According to GuruFocus, stocks with this rating typically gain an average of 9.8% per year and have good earnings and revenue growth.
Of the gurus invested in Tyson, the T Rowe Price Equity Income Fund (Trades, Portfolio) has the largest position with 1.02% of outstanding shares. Other top guru shareholders include Barrow, Hanley, Mewhinney & Strauss, First Eagle Investment (Trades, Portfolio), Simons, Greenblatt, Pioneer and Richard Snow (Trades, Portfolio).
JM Smucker
Known for its jams, jellies and peanut butter, the Orville, Ohio-based company, which also produces pet food, coffee and shortening, among other goods, has a market cap of $12 billion. Its shares were trading around $107.16 on Monday with a price-earnings ratio of 8.97, a price-book ratio of 1.52 and a price-sales ratio of 1.62.
Based on the Peter Lynch chart below, the stock appears to be undervalued since it is trading below its fair value.
Smucker’s financial strength scored a 5 out of 10 rating from GuruFocus. While its interest coverage meets Graham’s minimum, the company is weighed down by an Altman Z-Score of 1.92, which indicates it is experiencing some financial stress.
The company’s profitability and growth was rated 8 out of 10, supported by an expanding operating margin, a strong Piotroski F-Score of 7 and a four-star business predictability rating. As mentioned earlier, stocks with a four-star rating typically post an average gain of 9.8% per year and have consistent earnings and revenue growth.
John Rogers (Trades, Portfolio) is Smucker’s largest shareholder among the gurus with 1.46% of outstanding shares. Other top guru investors include Snow, Pioneer, Greenblatt, Bernard Horn (Trades, Portfolio) and Robert Olstein (Trades, Portfolio).
Disclosure: No positions.
