Peter Lynch is well known for his role in managing Fidelity's Magellan Fund between 1977 and 1990. During this time, Lynch increased assets under management from $18 million to $14 billion, generating a 29% annual return. An investor starting with $1,000 in 1977 would have $28,000 after 13 years of investing with Peter Lynch. Known for his books Beating the Street and One Up on Wall Street, Lynch was as much of a mentor as a successful money manager.
Lynch attributes his success to following several key principles such as "invest in what you know" and "focus on companies, not on stocks." Lynch focused on growth companies with strong fundamentals with a three to five-year outlook during his tenure, which enabled Lynch to generate impressive returns over 13 years. Here are three companies Peter Lynch would purchase today.
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Royal Caribbean
The cruise industry has taken a beating during the Coronavirus pandemic, as the share price of Royal Caribbean (RCL -0.04%) has declined 75% year to date. Royal Caribbean consists of four parts which include Celebrity Cruises, Royal Caribbean International, Azamara, and Silversea Cruises. Currently, the total ship count is at 63, however, the company has an additional 13 ships on order, giving the company a forward total ship count of 76 ships.
There is an increased risk of investing in Royal Caribbean, as the company received $3.48 billion in financing from Scotiabank and Nordea Bank to remain afloat during the Coronavirus shutdown. The CDC recently announced a "no sail order" for 100 days starting March 14, but this has been softened to 80 days to allow the cruise industry a projected start date in July throughout the United States. Royal Caribbean stated on the website that "our goal is to resume operations for most of our ships on May 12, 2020." Until ships start sailing again, investor sentiment will be bearish, which gives opportunistic investors the chance to take calculated risks.
Royal Caribbean Cruises has a trailing 12-month price to earnings growth (a ratio that measures the valuation of a company using the earnings per share (EPS) and the company's expected growth rate) of 0.82. Peter Lynch used PEG to determine if a stock was overvalued (higher than one), properly valued (approximately one), or undervalued (less than one). Royal Caribbean's PEG is above the sector median of 0.63, however, Royal Caribbean's trailing 12-month price to earnings is trading at 3.5 times, which is less than the sector median of 9.82.
Royal Caribbean is the best in the sector, carrying a three-year EBITDA compound annual growth rate (CAGR) of 12% in addition to a net income margin of 17.16% -- beating Norwegian Cruise Lines' 14.39% and Carnival's 8.94%. Additionally, Royal beats the competition in revenue growth of 15.34% year over year against Norwegian and Carnival's 6.73% and 8.38% respectively.
The company pulled 2020 guidance and noted that the company is focusing on managing operating expenses during the shutdown. Royal is sitting on a significant long-term debt of $8.7 billion, however, Royal Caribbean's operating expenses averaged $749.2 million per quarter in 2019 which will be heavily reduced as the company is in limbo in the near term. As Peter Lynch approached investing with a three to five-year outlook, Royal will recover alongside the stock price -- providing shareholders an above-average return in the medium term.
Disney
One of the focal points in Lynch's investment strategy is for investors to "invest in what you know." Disney (DIS 0.31%) is a global company that was founded in 1923 and has grown substantially from a cartoon animation company. Disney now has 12 parks globally, and a substantial media library including ESPN, ABC, Marvel, Star Wars, and the newly acquired 20th Century Fox.
Utilizing the massive media library, Disney has joined the streaming revolution by creating Disney+. Now with over 50 million subscribers, Disney+ is performing above Disney's original projections of 50 million subscribers by 2023. At one-third of Netflix's (NASDAQ) global subscribers of 155 million, Disney is on track to quickly catch up to the largest streaming rival while competing for viewer attention.
The rapid success of Disney+ can be attributed to the Coronavirus pandemic that is forcing the "stay at home" requirement globally with the purpose of slowing the virus, which should continue to drive subscription growth as an increasing number of residents stay home. Similar to Royal Caribbean, there are risks buying shares of Disney at the moment, as the Coronavirus has forced Disney to close all of its parks, halt media production, and dock the Disney cruise ships -- all of which gives reason to the year to date share price decrease of 28%.
Disney's PEG of 1.60 is higher than Peter Lynch would normally like, however, the growth of Disney+ gives reason to purchase shares at a high multiple. The long-term debt of $38.13 billion is concerning, however, Disney's cash on hand of $6.83 billion and the recent $5 billion Disney secured on April 13 gives the company an entire quarter of operating expenses as the first quarter of fiscal 2020 operating expenses totaled $5 billion.
The success of Disney+ has given the company the ability to grow during an unprecedented time, which opens the doors for investors to purchase shares of Disney at a moderate valuation. As the global pandemic continues to keep people in their homes, immobile assets will continue to plague the company, however, the three to five-year outlook for Disney is positive.
Delta Air Lines
The airline industry has been severely impacted by the Coronavirus pandemic. The share price of Delta Air Lines (DAL -0.12%) is down 60% year to date, which has forced Delta to cut international capacity by 25% and domestic capacity by 15% in the near term.
The timing of the Coronavirus is directly after "one of Delta's best years in the company's history" as stated by Delta's CEO Ed Bastian. Delta closed 2019 with adjusted earnings per share (EPS) up 30% year over year in addition to generating $4.2 billion of free cash flow and $8.4 billion of operating cash flow.
Dealing with the decrease in capacity, Delta reached a deal with the U.S. Treasury for an emergency relief package totaling $5.4 billion ($1.6 billion as a low-interest loan and $3.8 billion with no payback requirements). Having less debt than direct competitors, Delta's total debt of $18 billion is small in comparison to American Airlines (AAL -0.18%) $33.44 billion and United Airlines (UAL 0.25%) $20.45 billion. In addition, Delta has zero exposure to the Boeing 737 MAX airplanes, making Delta a sector leader regarding the ability to withstand the ongoing pandemic. In addition, Delta sits in second place regarding U.S. market share in 2019 at 17.5% against American's 17.6% per the Bureau of Transportation Statistics.
Delta's trailing 12-month PEG of 0.11 is impressively low, however, uncertainty regarding the airline industry has driven the dramatic share price decrease. The recent intervention has staved off airline bankruptcies in the form of grants and low-interest loans, which will protect the airlines during the pandemic assuming the shutdown doesn't extend into the third quarter. Such a low PEG in combination with no exposure to the 737 MAX, low debt, and a high market share give reason to think Peter Lynch would be loading up on shares of Delta Air Lines. Lynch has been noted stating that investors need to look where Wall Street isn't, and this is the case for the second-largest airline in North America.
