The Six Categories of Stocks
- Slow Growers:
- Usually, these large and aging companies are expected to grow slightly faster than the gross national product.
- A sure sign of a slow grower is that it pays a generous and regular dividend.
- Examples: Coca-Cola, Bristol-Myers, Procter and Gamble, Hershey’s, Ralston Purina, and Colgate-Palmolive.
- 10%-12% annual growth in earnings.
- If you own a stalwart and it goes up 50% in a year or two, you have to wonder if maybe that’s enough and think about selling. How much can you expect to squeeze out of a stalwart?
- Always good to keep some stalwarts in your portfolio because they offer good protection during recessions and hard times.
- The Fast Growers:
- Small, aggressive new enterprises that grow at 20% – 25% a year.
- If you choose wisely, this is the land of the 10 – 40 baggers, and even the 200 – baggers.
- A fast growing company doesn’t necessarily have to belong to a fast growing industry.
- The trick is figuring out when they’ll stop growing.
4. The Cyclicals
- A company whose sales and profits in a regular if not completely predictable fashion.
- Coming out of a recession and into a vigorous economy, the cyclicals flourish.
- You can lose more than 50% of your investment very quickly if you buy cyclicals in the wrong part of the cycle.
- Because the major cyclicals are large and well-known companies, they are naturally lumped together with the well-known stalwarts.
- Potential fatalities.
- Turnaround stocks make up lost ground very quickly.
- The best thing about investing in successful turnarounds is that of all the categories of stocks, their ups and downs are least related to the general market.
- The Asset Plays
- Any company sitting on something valuable that you know about, but the Wall Street crowd has overlooked.
- The asset may be as simple as a pile of cash. Sometimes it’s real estate.
This post was inspired by Peter Lynch’s book, One Up On Wall Street. Purchase it here.
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