Categorizing Your Portfolio

Categorizing Your Portfolio

By Jae Jun

www.oldschoolvalue.com

What You Will Learn

● The 6 categories according to Lynch● How to classify your picks● Examples in each category

Foreword

Peter Lynch’s book, One Up On Wall Street, refers to the 6 categories assigned to companies in his portfolio.

Reading the book…

I had never thought about classifying my positions in terms of growth and return potential.

The Companies I Picked

I have 1 stalwart, 3 fast growers, 3 turnarounds and 1 cyclical.

I always looked at the different industries that made

up my portfolio

And it was refreshing to see it another way

Here are the 6 categoriesAccording to Lynch

1. The Slow Growers

These are the large (although not always), saturated or aging

companies that are not expected to grow any faster

than your fingernails.

They generate more cash than they can spend

They generate more cash than they can spend

I’m sure every wife dreams of a husband like this

Examples

Electric utility and waste companies

Examples

Electric utility and waste companies

AW, NU & CPK.

Examples

Even Coca Cola (KO) could be considered as a slow

grower.

2. The Stalwarts

Examples

Not slow growers but not fast enough to give 100% gains within two years.

Examples

Not slow growers but not fast enough to give 100% gains within two years.

• Adobe, • Home Depot,

and • American

Express

They can provide15% - 20% per year

Anything beyond those rough numbers is a bonus

They provide outstanding

opportunities when it is cheap enough

These companies Are already established

yet they still got growth potential

What are stalwarts good for

• good protection during recessions and corrections

What are stalwarts good for

• good protection during recessions and corrections

• they are also one of the first to be sold when a new idea comes up

What are stalwarts good for

• good protection during recessions and corrections

• they are also one of the first to be sold when a new idea comes up

3. The Fast Growers

Companies that grow aggressively, often have growing pains, yet provide the best opportunities for individual investors before Wall Street comes along.

Examples

• Wal-Mart

Examples

• Wal-Mart• Hansen Natural

Examples

• Wal-Mart• Monster Energy Drink

What’s the catch?

Growing quickly adds the risk of bankruptcy…

or the company may grow tired & out of ideas and turn into a slow grower.

4. The Cyclicals

Up and down, up and down.

Photo credit: xhowardlee / Foter / CC BY-NC-SA

Examples

Fashion, oil, auto industries are a few examples of cyclical industries.

Photo credit: Jaeger-Meister / Foter / CC BY

Lynch informs the reader that too many people label cyclicals

incorrectly.

Photo credit: Nick J Webb / Foter / CC BY

An example is Ford and GM.

Photo credit: myhsu / Foter / CC BY-ND

Just because these are established “blue chip” companies, many people expect it to act like a JNJ.

5. The Turnarounds

A majority of what value investors would invest in.

Photo credit: Olivia Alcock / Foter / CC BY

Depressed, beaten and oversold companies

Photo credit: onohoku / Foter / CC BY

They can rebound to its intrinsic value and beyond very quickly

Photo credit: onohoku / Foter / CC BY

once people realize that the company has been successful in turning itself around.

Photo credit: HikingArtist.com / Foter / CC BY-ND

BUT turnarounds don’t always happen

Photo credit: renaissancechambara / Foter / CC BY

Companies end up using all of their cash and they are either back to where they started or worse.

Many companies try to turn itself around

They diversify into other unrelated fields of business just for the sake of trying

something.

BEWARE OF THESE COMPANIES

Photo credit: RichardAtUCT / Foter / CC BY-NC-SA

On the flip side

On the flip side

Photo credit: euthman / Foter / CC BY-SA

Apple has transformed itself from a successful turnaround to a

FAST GROWER.

6. The Asset Plays

Asset play, what?

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An asset play is where the company owns something much more valuable than just its business.

Photo credit: i-r-paulus / Foter / CC BY-SA

● The company may own land where oil lies just beneath.

● or huge real estate that has been depreciated in the books for so many years it doesn’t reflect the true value of the company, like Sears

● It could also be a huge pile of cash sitting around, like Berkshire.

● Telecommunication and media business are expensive and desired assets...

They can give growth potential, monopolies and can also be resold for millions of dollars.

Photo credit: Emilie Ogez / Foter / CC BY-NC-ND

For asset plays to work out,

a great deal of PATIENCE is required before the market

wakes up.

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Portfolio Management

I’ve only assigned one category to one company but there are companies

that could be a combination.

Photo credit: StockMonkeys.com / Foter / CC BY

You could even go further and create your own

categories.

Overall, I’m happy with how my portfolio falls into the criterias.

It’s a good reflection of my investing style

and strategy.

So there is a brief outline of the 6 categories, but for additional topics in an entertaining and good read, you can read it for yourself by purchasing it here.

Jae Jun ([email protected])http://www.oldschoolvalue.com

Old School Value improves your investment decisions and performs deep fundamental analysis

and valuation for you. Just like a personal stock analyst.