Great American investor Peter Lynch described six types of stocks in his book, "One up on the wall street".
Dividing stock into a particular category helps us to check our expectations from their performance and consequently, we can make a better decision in buying or selling those stocks.
I have tried presenting these categories in a tabular format for beginners here...
Categories
The Slow growers - Big, Aging, Growing at the rate of GDP, around 4-6%.
10-20%, too big to grow high.
The Stalwarts - Billion dollar company, Growing at 10-12%, Blue chip.
30 to 50%, Can grow at a decent pace over the period of time.
The Fast growers - Small, growing at 20-25%, Ability to scale further.
10x, 40x, 200x, can make your whole career.
The Cyclicals - Industries like metal, rubber, mineral, Profit rise and fall seasonally.
50% best case, worst can loose same, depends on cycle of industry.
The Turnarounds - Battered, Depressed, but ability to make a comeback.
10x, 20x, Life changing if turnaround successful.
The Asset plays - Has some valuable asset which market is ignoring completely
Equivalent to the value of assets when discovered by market.
Peter lynch advises that one should not waste their time in slow growers since it’s not worth investing, while Stalwarts can be invested for some handsome gain. Also, stalwarts can provide a cushion to your portfolio in times of crisis.
His favorite category is the fast growers, if a small company has efficient management and the ability to scale its operation during demand, it can be a potential multi-bagger stock.
The cyclic should be completely ignored during the downturn, since if caught in the wrong cycle it can give you sleepless nights for a complete cycle that may last for years.
Turnarounds are the risk worth taking in the stock market, these companies are not from any specific category but the common problem with them is the trouble they are facing, due to many reasons like heavy debt, corporate governance, tragedy, government regulations, etc. If the company can come out of these situations, it can reward handsomely.
Asset plays can also reward shareholders if management is able to properly utilize those assets in the future, sometimes market ignores these idle assets like cash on the balance sheet, a real state in remote areas, etc. of the company, but sooner or later it pays out when the value of those assets are realized.
It’s actually good to set your expectations from a particular stock so that the buy/sell decision can be taken without any emotional attachment. We sometimes tend to favor particular stock just because we liked it very much, or it has given us handsome gain, knowing the category of your stock, in that case, will help you to remove this kind of bias from decision-making and eventually peace of mind!
So go ahead, and set your expectations right!