What is Stalwart
Stalwart is a term popularized by legendary stock picker Peter Lynch to describe a large, well-established company that still offers long-term growth potential. Lynch used several criteria to identify stalwarts that he would include in his portfolio alongside companies he designated as slow growers, fast growers, cyclicals and turnarounds. In stalwarts, he looked for a strong balance sheet, little or no debt, solid cash flow, growing dividends and earnings growth of about 10% to 12% per year.
BREAKING DOWN Stalwart
Stalwarts are the type of investments that are not expected to generate high year-over-year (YOY) returns. Rather, they should generate steady, predictable returns that can amount to a gain of 50% over a period of four or five years.
Lynch's Stock Selection Categories
In his book, “One Up on Wall Street,” Peter Lynch discussed his approach to stock selection, which began with looking at companies that had a story behind them. It was the basis of his “buy what you know” mantra that formed the foundation of his stock selection. For Lynch, the story begins with the type of company and where it fits in the context of a diversified portfolio. Lynch created six categories for placing stocks he was considering: slow growers, stalwarts, fast growers, cyclicals, turnarounds and asset opportunities.
Finding Stalwart Companies
Stalwarts are former fast-growers that have matured into large companies with slower, but more reliable, growth. Stalwart companies produce goods that are necessary and always in demand, which ensures a strong, steady cash flow. Although they are not expected to be top market performers, if purchased at a good price, stalwarts offer an upside of around 50% over a few years. Because of their strong cash flow, stalwarts generally pay a dividend. Some examples of stalwarts are Coca-Cola, Colgate-Palmolive and Procter & Gamble. Lynch would hold his stalwarts for many years to realize their appreciation potential.
In addition to a strong balance sheet, one of Lynch’s key measures for a stalwart company is the P/E growth ratio (PEG), which is calculated by dividing the company’s price-to-earnings (PE) ratio by its earnings growth rate. Lynch determined that PEGs below 1.0 were an indication of an underpriced stock relative to its growth rate. He considered stocks with PEGs below 0.5 to be a real bargain. For dividend-paying companies, he factored in the dividend yield to arrive at a yield-adjusted PEG ratio. Wal-Mart is often cited as an example of Lynch’s stalwart methodology. A decade after its initial public offering (IPO), Wal-Mart’s PE was still above 20, which was considered high. However, Lynch determined the company was still growing at a rate of 25% to 30% with plenty of room for expansion. Wal-Mart continued that rate of growth for the next two decades.