What Is a Stalwart?
Stalwart is an investing 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.
- A stalwart company is established and stable but still offers long-term growth prospects.
- Stalwart companies produce goods that are necessary and always in demand.
- Lynch determined that a price-to-earnings growth (PEG) rate below 1.0 is an indication of an underpriced stock relative to its growth rate.
According to the Miriam Webster dictionary, the word "stalwart" is defined as "marked by outstanding strength and vigor of body, mind, or spirit". Stalwarts thus tend to be large, blue chip companies that still have some "vigor" in terms of upside appreciation potential.
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. Essentially, these types of stock match or slightly improve upon the long-term performance of the S&P 500 index of roughly 10% per year.
In his book, “One Up on Wall Street,” Peter Lynch discussed his approach to stock selection, which begins with looking at companies that have a story behind them. It is the basis of his “buy what you know” mantra that forms 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 upside of around 50% over several years. Because of their strong cash flow, stalwarts generally pay a dividend. Some examples of current or former stalwarts include Coca-Cola (KO), Colgate-Palmolive (CL), and Procter & Gamble (PG). 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 to 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.
Real World Example of a Stalwart Stock
On March 17 2020, Intel Corp.(INTC) stock was trading near $48.50. This followed a decline from near $68 when almost all stocks were swept up in a market selloff related to initial COVID19 fears.
With earnings of $4.79, the P/E ratio of the stock stood near 10.0 (i.e. 48.50/4.79). Earnings per share (EPS) had increased to 15.52%, average, over the prior five years, and were expected to continue to grow near 9% for the next five years to come.
This produced a forward PEG ratio for the stock of nearly 1.0 (i.e. 10/9). At the time, Intel stock had a historical PEG of 0.67 (10/15). The company steadily increased dividends per share from $0.42 in 2009 to $1.24 in 2019, yielding 2.5% with a share price of $48.50.