Beating The Street: 20 Years Later

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Every so often I like to reread my battered copy of "Beating The Street" by investing guru Peter Lynch. I was stunned to find that of the 21 companies he recommended in Barron's in 1992 only four were still independent publicly traded companies. Almost all of the banks he recommended had been bought out by larger banks like Sovereign Bancorp's purchase by Banco Santander. Copper company Phelps Dodge was purchased by Freeport McMoRan in 2007. Both were purchased at a discount to their highs as was Supercuts when it was purchased by Regis Corp.

Several of the picks declared bankruptcy or NYSE delisted, like Fannie Mae (delisted), Sunbelt Nursery (closed its 60 stores in 1998), and Sun Television & Appliances (defunct as of 1998). Researching their history was like trying to research old stock certificates what with mergers, renaming, bankruptcies etc. The losers all had warning signs like the departure of a CFO, missing on earnings, and labor unrest. In one case, General Host Corporation, formerly a food company, doubled down on Frank's Garden Centers only to close the chain a few years later.

Taking Lynch's maxim to heart, "Behind every stock is a company. Find out what it's doing," might have saved investors who were current with their company's performance.

The Survivors

Out of all the 1992 picks there are only four survivors: General Motors (NYSE: GM), Glacier Bancorp (NASDAQ: GBCI), Pier 1 Imports (NYSE: PIR), and CMS Energy (NYSE: CMS) .

Two of these survivors had some very bad, not good, horrible, terrible years like Pier 1 trading down to ten cents a share in 2009  until they finally brought in a new CEO to turn it around. General Motors was $80 a share in 2000 and fell to $1 a share in 2009. You can't really blame Lynch much as the credo ran, "What's good for GM is good for America" a saying attributed to GM CEO Charles Wilson in 1953 (though he never actually said that.)

Both these names are now in turnaround mode but stockholders would have lost huge amounts of money staying in GM or selling off their Pier 1 Holdings in 2009. With Pier 1 all the gains from 1992 to 2005 disappeared. Basically, you would have had eight years of dead money in Pier 1 to get back to 2005 highs this year.

Pier 1 is trading at a 52 week high with only a 13.88 P/E and a .90% yield. The company reported Q3 earnings on January 3 and beat on both top and bottom line. Gross and net margins contracted but operating margin expanded. Analyst sentiment is bullish with an Outperform rating. Their price target is $22.90 but Pier 1 could hit that within days.

This importer and retailer of home decor accessories and gifts has been profiting from a housing renaissance but Fool Ted Cooper likes its rival, Bed, Bath & Beyond better. He makes a strong a point as BB&B purchased Cost Plus World Market in 2012 and it's very similar in product and concept to Pier 1. Operating margins are also better at Bed Bath & Beyond.

CMS Energy, a Michigan electric and natural gas utility company, was on a roll as the share price almost touched $50 in 2000, only to drop below $5 in 2003. The share price still hasn't recovered to 2000 levels although with an average 5 year yield of 3.20% an investor made money overall from the share price of $17.00 in 1992. As Lynch wrote then, the company was in distress over a nuke plant that regulators decided not to let them run. That’s ancient history now and the company is at a 52 week high with a 3.90% yield and an 18.99 P/E.

General Motors has had a turbulent decade and is close to a 52 week high. Its stock has outperformed the S&P 500 over the last year, up 17.50%. With a 10.99 P/E the company sold 2.7 million new cars in 2012, a 13.5% improvement. Rival Ford (NYSE: F) also enjoyed a better 2012 as both signal a slow recovery from recession. Ford is the better investment, however, with a 3.20 P/E and a 2.80% yield and also close to a 52 week high. Ford goes ex-dividend on January 28.

Of all Lynch's 1992 picks Glacier Bancorp was probably the best pick to hold as it's a very solid community bank with accessible management and now profiting from the first innings of a shale and natural gas boom in Montana. It has a 3.60% yield and a 16.12 P/E. Lynch was able to chat with then Chairman Charles Mercord the day after Christmas while he researched the company and he wrote, "I'm always impressed when I find executives sitting at their desks on December 26." It is still very much that sort of bank with strong ties to its branch communities.

Glacier Bancorp may still be the best of these survivors with the highest yield and in a well performing sector this year, that of regional banks. Was Lynch just lucky with this name as he couldn't have known of this shale boom in 1992? Analysts expect a 10% five year earnings growth rate which could likely accelerate further with more shale wealth. T. Rowe Price holds a 9% stake with 6,475,299 shares.

Beating The Street in 2013

While Ford wasn't among the list of survivors it is a rival of survivor GM and a better buy. But for steady returns and a play on shale growth in an outperforming industry, regional banks, Glacier Bancorp is the name. Likely, all these survivors and Ford will be around in another 20 years.

Investors in Lynch's 1992 stocks would have gotten badly hurt if they hadn't kept up with their homework. Remember one of his 25 Golden Rules (and my personal favorite),"If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards."

leglamp has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus