Diary: Peter Lynch, csinvesting, HIK

Peter Lynch
Here's an article in Yahoo Finance, which was originally published on Stockopedia, which advertises their screener. They put together the following criteria to emulate Lynch growth:

• Annual EPS Growth Rate >= 15% but <= 30%.
• PEG < 1.0
• Institutional ownership <50%
• Total Debt / Total Equity < 25%
• .Market cap less than $2 billion
• Operating Margin 5-Year Average >= 50% * Current Operating Margin. This is an attempt to screen for consistency of earnings, although this is difficult to do so effectively. One should ideally study the pattern of earnings, especially how they reacted during a recession
• Price-Earnings: The price-earnings ratio is less than the industry's median price-earnings ratio and less than the five-year average price-earnings ratio. Finding a good company is only half the battle in making a successful investment. Buying at a reasonable price is the other half
• No Financials

Lynch warns against:

• Hot stocks in hot industries
• Companies (particularly small firms) with big plans that have not yet been proven
• Profitable companies engaged in diversifying acquisitions. Lynch terms these "diworseifications."
• Companies in which one customer accounts for 25% to 50% of their sales

 One micro-warning signal, particularly important for cyclicals (manufacturers & retailers) is if inventories that are building up. If they are growing faster than sales, that is seen as a red flag. On the other hand, if a company is depressed, the first evidence of a turnaround is when inventories start to be depleted.

There is also a link to a discussion of growth investing on Stockopedia.

Blog: csinvesting
I just discovered a value-investing blog, csinvesting, which has some interesting content. Check it out.

HIK: Hikma Pharmaceuticals - Pharma & Biotech - 636.3p/£1.2bn
I was on the lookout for a growth company, and came across this stock. HIK is a pharmaceuticals company, with three segements: branded, injectable, and generic. It's on a PER of 18.97, so scrapes through as a GARP. Gearing is 41%, and interest cover is 10.6. It has net debt of £196m. I was going to write that off as an "immediate fail", but I think things aren't so bad. Net profit for last year was 61m, add back exceptionals of 3m, and you get an adjusted net profit of 64m. So it could pay off its debt in 3 years (196/64). It's median PER since flotation in 2005 is 18.7 - so it's about in-line. Revenue growth has been about 30% pa over the last 5 years, whilst operating profits have grown at a rate of about 24% pa. 5-year EPS growth is about 20%. Directors own about 30m worth of shares, which is a reasonably chunky amount. Median ROE over the last 5 years was 12%, which is a bit disappointing. I'd hope for 15%. Median 5-year operating margins were 19.6%, which look uninspired against AZN (Astrazeneca), which has a margin of 31%, and GSK (Glaxosmithkline)  of 34%. Take a look at the interview with CEO Said Darwazah for a run-down on the results for 2010. Motley Fool also wrote an article about it in August 2011. I can see the attraction in it, and I wouldn't necessarily rule it out as a GARP share. It doesn't seem to get much of a following on the boards. Perhaps one to keep on a watch list. If I had a choice, I'd rather have my CTN shares (I'm taking price into consideration).

Growth opportunities
My shares in IQE have been rocketing lately. I bought at the end of September, and have seen them go up 20% in the space of a little over 2 weeks. If only they all did that! It just goes to show that you can get some good things happen to you in depressed markets if you spot some companies with good growth opportunities. Much more exciting than owning those boring go-nowhere companies! IQE currently trades on a PER of 18.8, so I wont be looking to add more at these prices. This one to look out for dips. IQE hasn't been much of a victory for me, you should understand, because it only makes up 0.7% of my portfolio. I was waiting for my CTN money to come through, and anticipating further drops in the market.

I think there are some cracking growth companies still worth buying in the current markets. One is PTEC (Playtech), that provides software to online gaming companies. It's on a PER of 7.6, has ROE of 29%, and oodles of cash. Another one is PIC (Pace), the set-top box maker. It's on a PER of 4.4, has a ROE of 29%, although admittedly the debt situation is not good. Prospects do seem good, though. I also think SBT (Sporting Bet) offers very good value at a PER of 6.5, high ROE, and plenty of cash. I think it's important not to over-concentrate in a sector - especially in online gaming, which is one with many uncertainties surrounding it. If you're willing to cough up a little more, and go where there isn't as much growth, but still above-average growth, then I think there's quite a lot of opportunities: SN. (Smith & Nephew), BATS (Brit American Tobacco), MRW (Morrisons), DNO (Domino Printing Sciences), and I'm sure many many others that you could come up with that I had never even heard about.