How to Find and Invest in Stalwart Companies

If you are looking for a low-risk, moderate-gain investment strategy, you might want to consider stalwart companies. These are large, well-established businesses that have a consistent track record of growth and profitability, and that can weather economic downturns and market fluctuations. In this blog post, I will explain what are the traits, examples, and valuation methods of stalwart companies, and how to find, buy, and sell them.

What are Stalwart Companies?

The term ‘stalwart’ was popularized by Peter Lynch, the legendary fund manager of Fidelity Magellan, who wrote several books on investing, such as One Up on Wall Street and Beating the Street. According to Lynch, stalwart companies have the following characteristics:

• They grow at about twice the rate of the gross national product (GNP), which is a measure of the total value of goods and services produced by a country. For example, if the GNP grows at 3% per year, stalwarts grow at 6% per year. This is faster than slow growers, which grow at the same rate as the GNP, but slower than fast growers, which grow at 20-25% per year or more.
• They are fairly large and well-known, with a market capitalization of billions of dollars and a dominant position in their industry. They have loyal customers, strong brands, and competitive advantages that allow them to maintain or increase their market share.
• They offer good protection in hard times, as they have stable earnings, strong balance sheets, and reliable dividends. They rarely have a down quarter, let alone a down year, and they can survive recessions and crises without going bankrupt or losing their value.
• They can generate moderate gains for investors, depending on the time and price of purchase. Lynch says that a 50% return in two years is a delightful result for a stalwart investment, and that investors should sell more readily than fast growers, which have the potential to multiply tenfold or more. He also says that stalwarts can be good performers in good markets, and that investors can rotate their money among different stalwarts to capture the best opportunities.

Some examples of stalwart companies are:

• Pharmaceutical companies, such as Pfizer, Merck, and Johnson & Johnson, which have a steady demand for their products, a strong pipeline of new drugs, and a high barrier to entry for competitors.
• Consumer staples companies, such as Procter & Gamble, Coca-Cola, and Nestle, which have loyal customers, strong brands, and pricing power for their everyday products, such as soap, soda, and chocolate.
• Tobacco and alcohol companies, such as Altria, Philip Morris, and Diageo, which have addictive products, loyal customers, and high margins, and which can raise prices without losing sales.
• Technology companies, such as Microsoft, Apple, and Google, which have dominant positions in their markets, innovative products and services, and loyal users and developers.

How to Value Stalwart Companies?

One of the key issues in investing in stalwart companies is the price. Since these are big and well-known companies, they are often followed by many analysts and investors, and their stock prices tend to reflect their earnings and growth prospects. Therefore, it is important to buy them at a reasonable valuation, and not overpay for them.

One of the simplest and most widely used valuation methods is the price-to-earnings ratio (PE ratio), which is the ratio of the stock price to the earnings per share (EPS). The PE ratio tells us how much we are paying for each dollar of earnings, and it can be compared to the historical average, the industry average, or the expected growth rate of the company.

Lynch says that the average PE ratio for stalwart companies is between 10 and 14, and that a PE ratio below 10 is cheap, while a PE ratio above 20 is expensive. He also says that investors can use the PEG ratio, which is the PE ratio divided by the growth rate, to account for the different growth rates of different companies. A PEG ratio below 1 is considered cheap, while a PEG ratio above 2 is considered expensive.

Another valuation method that Lynch recommends is to look for hidden assets, such as brands, patents, real estate, or cash, that are not fully reflected in the earnings or the stock price. These hidden assets can grow larger over time, or be unlocked by a spin-off, a sale, or a change in strategy, and boost the earnings and the stock price of the company. For example, Lynch says that Coca-Cola has a hidden asset in its brand name, which is worth billions of dollars, and that it can cut costs, raise prices, and capture market share in slow growth markets.

How to Find, Buy, and Sell Stalwart Companies?

To find stalwart companies, Lynch suggests looking at the companies that we know and use in our daily lives, such as the products we buy, the services we use, or the places we visit. He also suggests looking at the companies that have raised their dividends for 10 to 20 years in a row, as this indicates a consistent and growing earnings power. He also advises avoiding companies that diversify into unrelated businesses, as this can dilute their focus and reduce their future earnings.

To buy stalwart companies, Lynch says that we should look for companies that are selling at the low end of their PE range, that have not gone up much in the past two years, and that have something happening to accelerate their growth rate, such as a new product, a new market, or a new strategy. He also says that we should look for companies that have a low institutional ownership and a low Wall Street coverage, as this means that they are underappreciated and undervalued by the market.

To sell stalwart companies, Lynch says that we should sell them when they have outperformed the market and are overpriced, when they have reached a PE ratio of 15 or more, or when we find a similar quality company from the same industry at a lower PE ratio. He also says that we should sell them when their growth rate is slowing down, when their new products are not doing well, when their large division is vulnerable to an economic slump, or when their executives or directors are not buying their shares.

Conclusion

Stalwart companies are large, well-established, and consistent businesses that can offer low-risk, moderate-gain investments for investors. They can be found in various industries, such as pharmaceuticals, consumer staples, tobacco, alcohol, and technology, and they can be valued using the PE ratio, the PEG ratio, or the hidden assets method. They can be bought at a reasonable price, when they have something happening to boost their growth, and they can be sold when they are overpriced, when their growth is slowing, or when we find a better opportunity. By following these guidelines, we can hope to achieve a delightful result of 50% return in two years, or more, with stalwart companies.