Introduction

In his best-selling book “One up on Wall Street” Peter Lynch included this subtitle on his cover: “How to use what you already know to make money in the stock market.” And later in the book he talks about “the power of common knowledge.” Stating it over simplistically, Peter Lynch often talked about getting his best ideas from observing his family’s shopping habits.

Last weekend, I had a Peter Lynch “invest in what you know” experience of my own. My daughter came to visit, and she and my wife went out shopping. When they returned, they had a large bag full of makeup and cosmetics from Ulta Beauty Inc (ULTA).  So of course, in the spirit of my respect for Peter Lynch’s wisdom, I immediately turned to FAST Graphs and brought up an earnings and price correlated graph on Ulta Beauty Inc.

What I found was a very pleasant surprise. Ulta Beauty Inc. has a fabulous history of consistent historical earnings growth averaging 35% per annum since 2009. But best of all, this consistent growth stock appears to be trading at a low valuation relative to its high historical growth. On the other hand, the company appears fully valued based on future expectations for growth. Nevertheless, the company also generates consistent and strong operating and free cash flow growth, and has a pristine balance sheet with only 0% debt to capital.

Personally, I have a great deal of respect and admiration for Peter Lynch and his teachings. However, I also have too much respect for Peter Lynch to simply purchase Ulta Beauty solely because my wife and daughter like to shop there. You see, it’s true that Peter Lynch often got ideas from observing his family’s shopping habits.  On the other hand, it’s also true that Peter Lynch believed in conducting comprehensive fundamental research and due diligence.

MarketWatch published an article on Dec 28, 2015 titled: “Peter Lynch, 25 years later. It’s not just “invest in what you know.” The following excerpt validates and elaborates on Peter Lynch’s philosophy:

“Peter Lynch wants you to know that his ideas are being misquoted widely.

“I’ve never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock,’” Lynch says, some 25 years after his retirement from running Magellan Fund was front-page news.

Following the market still at age 71, he instead explains his philosophy this way:

Use your specialized knowledge to hone in on stocks you can analyze, study them and then decide if they’re worth owning. The best way to invest is to look at companies competing in the field where you work. Someone with deep restaurant-industry experience would have predicted the success of Panera Bread Co. and Chipotle Mexican Grill Inc., he says: “If you’re in the steel industry and it ever turns around, you’ll see it before I do.

What’s wrong with the popular-wisdom version of his ideology, which is usually cited as “invest in what you know”? It leaves out the role of serious fundamental stock research. “People buy a stock and they know nothing about it,” he says. “That’s gambling and it’s not good.”

In summary, just like Peter Lynch, I have often got my best growth stock ideas from observing what family and friends are buying and what they like. On the other hand, just like Peter Lynch, I believe in conducting comprehensive fundamental research and due diligence before I invest.  This is important, because often what is popular with the public is also simultaneously what is overpriced by the market.