In chapter 11 of "One Up on Wall Street," Peter Lynch recommended that we speak out loud a two-minute monologue, setting out the “story” that makes the case for an investment. Now, in chapter 12, the facts behind the monologue got his attention.
While Lynch had more opportunities to get the facts than most of us, he still believes amateur investors can get the same information:
“I can’t imagine anything that’s useful to know that the amateur investor can’t find out. All the pertinent facts are just waiting to be picked up. It didn’t use to be that way, but it is now. These days, companies are required to tell nearly all in their prospectuses, their quarterlies, and their annual reports.”
He laid out several paths to getting the facts. They included: (1) talking to management; (2) reading annual reports, quarterly reports and prospectuses; (3) talking to brokers; (4) contacting investor relations; (5) and checking out the company’s front line, i.e., eat Taco Bell burritos before you buy Yum Brands' (YUM, Financial) shares.
Brokerage info
Investors who still use full-service brokers (and financial advisers), rather than discount brokers, can pick up the phone or meet in person to request the facts “as information gatherers they can be the stockpicker’s best friend.”
Picking up the phone
Investor relations’ offices are not just for professionals. Lynch said that many companies would welcome callers with only 100 shares, especially if it is a small company. Indeed, it’s not even necessary to tell investor relations how many shares you own or how many you plan to buy.
Before calling, develop some intelligent questions so they won’t consider you a naïve time-waster. Avoid questions such as “Why is the stock going down?” since the company probably doesn’t know any more than you do. Instead, focus on relevant, specific and quantitative questions such as:
- Will a new or newly successful product have a “significant effect” on the company’s earnings?
- Are there any backlogs of orders?
- Do you plan to pay down your debt?
Or you can ask two general questions:
“Even if you have no script, you can learn something by asking two general questions: 'What are the positives this year?' and 'What are the negatives?' Maybe they’ll tell you about the plant in Georgia that lost $10 million last year but has now been closed, or about the unproductive division that’s being sold off for cash. Maybe some new product has come along to speed up the growth rate.”
Lynch said he learns something important and new in roughly one out of every 10 calls.
Can you believe the companies?
Yes, said Lynch, you should trust the information you get from companies. In his experience, out of thousands of contacts with corporate representatives, only a handful deliberately misled him. Structurally, there are reasons for investor relations’ honesty, including regular annual and quarterly reports in which the facts are revealed. Of course, if your questions address factual issues, then you can check when the next report is published.
Not that all companies and industries describe themselves in the same way. Speaking from his 1988 perspective, Lynch believed companies in textiles and other mature industries rarely sound overly optimistic or pessimistic. On the other hand, companies in high tech or immature industries may turn to hyperbole to describe their “awesome” and “fantastic” plans.
Heading to headquarters
Lynch liked these visits very much, saying, “One of the greatest joys of being a shareholder is visiting the headquarters of the companies you own.”
And what he was after at the various headquarters was the “feel for the place.” In the case of Taco Bell, the headquarters were behind a bowling alley, “a grim little bunker”. He was thrilled that management wasn’t wasting money on palatial offices, making more capital available to invest or reinvest in the business. At Crown, Cork and Seal (CCK, Financial), he was also impressed:
“...the president’s office had a scenic view of the can lines, the floors were faded linoleum, and the office furniture was shabbier than stuff I sat on in the Army. Now there’s a company with the right priorities—and you know what’s happened to the stock? It’s gone up 280-fold in the last thirty years. Rich earnings and a cheap headquarters is a great combination.”
Lynch also recommended attending annual meetings; not so much for the formal portion, but for informal gatherings that allowed him to collect useful contacts.
Research in tire store
As mentioned, one of Lynch’s favorite stories backing up his contention that alert consumers can find great investing ideas is that of L’eggs. His wife discovered the product, and Lynch went on to discover Hanes (HBI, Financial), the company behind the product, had some game-changing initiatives in progress.
A similar story unfolded at Pep Boys (PBY, Financial):
“When I visited a Pep Boys outlet at a new location in California, a salesman there almost sold me a set of tires. I only wanted to look the place over, but he was so enthusiastic that I almost had four new tires shipped home with me on the airplane. He could have been an aberration, but I figured with personnel like that, Pep Boys could sell anything. Sure enough, they have.”
At one point, Lynch was considering Apple (AAPL, Financial), which had fallen from $60 to $15, after its early product Lisa flopped. He had almost decided to pass up the stock when his wife and children let him know they needed a second Apple in their home.
Annual reports
Lynch laments this about annual reports:
“It’s no surprise why so many annual reports end up in the garbage can. The text on the glossy pages is the understandable part, and that’s generally useless, and the numbers in the back are incomprehensible, and that’s supposed to be important. But there’s a way to get something out of an annual report in a few minutes, which is all the time I spend with one.”
He headed immediately for the consolidated balance sheet and the list of assets and liabilities. There he totted up the assets and liabilities to find out two things: (1) whether assets were greater than liabilities and (2) whether assets were growing faster than liabilities, especially long-term debt. He ignores short-term debt, expecting it will be a wash with inventories and similar assets.
Next, he divided cash and cast assets by the number of shares outstanding, which gave him the amount of net cash per share, a topic he will explore in chapter 13 (along with other crucial ratios and data).
Conclusion
Chapter 12 of "One Up on Wall Street" provided Lynch with an opportunity to explain where he got his facts. Facts that would help prove or disprove the thesis in the two-minute monologue.
He also explained that most of the facts could be gleaned by amateurs as well as professionals. Arguably, that's even easier now in 2018. He found, and all investors can find facts at:
- Brokerage houses or financial advisors (for those with full-service accounts).
- By phoning the company's investor relations office (and yes, you can usually believe what they tell you).
- Visiting the company headquarters or annual meetings, where you may make helpful contacts.
- Do consumer research where a company sells its products.
- The consolidated balance sheet in annual reports.
If all that seems too much, Lynch boils it all down even further:
“If you don’t want to proceed with this exercise, and you’d rather read about Henry Ford, then ask your broker whether Ford is buying back shares, whether cash exceeds long-term debt, and how much cash there is per share!”
As Lynch has now taught us, we can easily get that information and data from several other sources.
Peter Lynch screen
GuruFocus provides the Peter Lynch screen tool for quickly finding companies that meet his criteria. Members can access the screener here, and non-members can get started here.
(This review is based on the Millennium Edition (2000) of “One Up on Wall Street.” More chapter-by-chapter reviews can be found here.)
