There is a relatively short list of investors who are so renowned that they break into the mainstream. Names like Warren Buffett, Carl Icahn, Charlie Munger or Benjamin Graham.
One name that hasn’t yet reached those heights (although it probably should) is Peter Lynch.
Lynch managed the Fidelity Magellan Fund from 1977 to 1990. During his tenure, the fund grew from $18 million in assets under management to over $14 billion, making it the largest actively managed mutual fund in the world at that time.
He generated an average annual return of 29.2% between 1977 and 1990, outpacing the S&P 500, which generated an average annual return of 15.8% over the same period.
Those returns led to Lynch being widely regarded as one of the greatest stock pickers of all time.
Lynch is known for his ability to find and invest in companies that were undervalued by the market, and for his famous book One Up on Wall Street, which is my second favorite investment book of all time (my favorite is You Can Be a Stock Market Genius).
One of the strategies that Lynch used to find these undervalued companies was to invest in micro-cap stocks.
Micro-cap stocks are typically defined as companies with market capitalizations of between $50 million and $300 million. These are the smallest companies in the market, and as a result, they are often ignored by larger investors and financial analysts. This lack of attention can create opportunities for astute investors who aren’t afraid of illiquidity.
Here are just a few examples …
3 of Peter Lynch’s Micro-Cap Stocks
1) Toys “R” Us: Peter Lynch invested in Toys “R” Us in the early 1980s when it was still a relatively small company. At the time of his investment, the market capitalization of Toys “R” Us was around $50 million. The company was not widely followed by Wall Street analysts, but Lynch recognized its growth potential and strong market position in the toy retail industry. His investment in Toys “R” Us turned out to be highly profitable, as the company’s stock price increased significantly over the following years, contributing to the strong performance of the Fidelity Magellan Fund.
2) The Gap: The Gap is a well-known company now, but when Lynch invested in the stock, its market cap was just $75MM. Lynch first invested in The Gap in the mid-1980s, when the company was still a relatively small apparel retailer. Over the next several years, Lynch continued to hold and add to his position in The Gap as the company’s sales and earnings grew rapidly, driven by its successful marketing and merchandising strategies. By the early 1990s, The Gap had become one of the largest and most successful specialty retailers in the world, and Lynch’s investment had generated substantial profits for the Fidelity Magellan Fund. At its peak, The Gap accounted for more than 5% of the fund’s total assets, and Lynch estimated that his initial investment in the company had increased in value by more than 30 times.
3) Dunkin’ Donuts: Lynch first invested in Dunkin’ Donuts in the mid-1980s, when the company was still a regional chain of coffee and doughnut shops. He was impressed by the company’s strong brand recognition, loyal customer base, and profitable franchise model, and he believed that Dunkin’ Donuts had significant growth potential as it expanded into new markets across the United States. Over the next several years, Lynch continued to hold and add to his position in Dunkin’ Donuts as the company’s sales and earnings grew rapidly, driven by its successful franchising strategy and innovative product offerings. By the early 1990s, Dunkin’ Donuts had become one of the largest and most successful quick-service restaurant chains in the world, and Lynch’s investment had generated substantial profits for the Fidelity Magellan Fund. Overall, Lynch’s investment in Dunkin’ Donuts was a major contributor to the strong long-term performance of the fund under his management.
What is even more exciting to me is that Peter Lynch still personally invests in micro-caps, despite having an estimated $450MM net worth.
How do I know this?
Check out this Bloomberg article:
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