Peter Lynch, the famous stock market investor, classifies all stocks held by different investors into following categories:
Slow Growers
This category mostly has stocks of large established companies whose earnings are growing in line with the economy of the country @5-7%. These stocks are known for providing good dividends. Example – Utility company stocks.
Stalwarts
Again, this category has large company stock but their earnings growth is faster @ 10-15%. They normally maintain their earnings even during tough times. Though not star performers, they can generate healthy returns when bought at the right price. Example – Stocks of FMCG, Pharma, IT companies
Fast Growers
Here we basically have stocks of mid cap companies that are growing aggressively @ 20-25%. Risk to reward ratio is quite high in these types of stocks. Picking this kind of stock is a challenging task, but if one succeeds the returns are multi fold.
Cyclical Stocks
The prices of such stocks are based on the stage of the economic cycle that the company is passing through. The earnings growth can vary from 5-6% during downturns to 18-20% during upturns. Example – Metals, Auto, Construction, etc.
Turnaround Stocks
In this category, we have stocks that have been considerably beaten in recent times but can rebound quickly with some good strategic investments. They can generate big return in a short span of time.
Asset Plays
Such companies have lots of assets in their Balance Sheet. The market values of these assets are not fairly incorporated in their share prices. Unlocking these values can generate hefty returns to the investor.
It is important to note that a company can switch categories several times during its lifetime. When a company starts, it is a fast grower. Then it sinks to stalwart, then slow grower. When competitors join in or new technology appear, they can become cyclical, then turnaround. If the price sinks far enough, then it can become asset play. A prudent investor adopts different investment strategy for each of the above category of stocks – depending