Peter Lynch's Advice: 'Growth Stocks Are Better Than Nongrowth Stocks'

Peter Lynch once shared his insights on identifying growth opportunities in the stock market today.

What Happened: In an interview in 2019, Lynch emphasized about the significance of growth stocks over non-growth ones. He clarified that growth stocks are those with significantly increased sales, not merely those with rising earnings. He cautioned against mistaking growth companies for turnaround or cyclical companies.

Speaking with Barron’s, Lynch pointed out the success of passive management in attracting assets, though he noted that this trend has not affected Fidelity. He mentioned several Fidelity funds, including Fidelity Low-Priced Stock (FLPSX), Fidelity Contrafund (FCNTX), and Fidelity Growth Company (FDGRX), that have consistently outperformed their benchmarks.

“After 50 years of doing this professionally, it reinforces that growth stocks are better than nongrowth stocks. Growth stocks, by definition, are where sales have really grown,” Lynch said.

Also Read: Investment Guru Peter Lynch: ‘If You Can't Explain To An 11-Year-Old In 2 Minutes Or Less Why You Own The Stock, You Shouldn't Own It'

“People confuse it with earnings going up, but [if you just look at earnings growth] you mix in turnarounds and cyclicals. A company can go from losing money to a 2% margin, to a 12% margin, and earnings are up sixfold—but that's not a growth company,” he added.

When asked about the traits of a successful company, Lynch stated that his best stocks have been those where he didn’t have to worry about the big picture. He cited examples of successful local companies like Stop & Shop and Dunkin’ Donuts.

He expressed regret for not investing in companies like Walmart and Sherwin Williams earlier.

He also emphasized the need for thorough research before making investment decisions and cautioned against drawing conclusions without a solid basis.

Why It Matters: Lynch’s advice comes at a time when the stock market is seeing a shortage of growth companies. He suggested that investors look at turnarounds, special situations, and cyclicals if they cannot find growth companies.

His concern over the current shortage of growth companies and the potential consequences if this trend continues, highlights the evolving dynamics of the stock market.

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