Stalwart  and Example

Stalwart and Example

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. 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 a price-to-earnings growth (PEG) rate below 1.0 is an indication of an underpriced stock relative to its growth rate. 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.

A stalwart company is established and stable but still offers long-term growth prospects.

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.

Understanding Stalwarts

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 an 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 during the 2020 market sell-off.

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.

Related terms:

Balance Sheet : Formula & Examples

A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. read more

Blue Chip

A blue chip is a nationally recognized, well-established, and financially sound company. read more

Cash Flow

Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business. read more

Dividend Yield

The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. read more

Earnings Per Share (EPS)

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. read more

Growth Investing

Growth investing is a stock-buying strategy that aims to profit from firms that grow at above-average rates compared to their industry or the market. read more

Initial Public Offering (IPO)

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. read more

Long-Term Growth (LTG)

Long-term growth (LTG) is an investing strategy with a focus on increasing portfolio values over a time horizon of ten years or more. read more

Price/Earnings-to-Growth – PEG Ratio

The price/earnings-to-growth (PEG) ratio is a company's stock price to earnings ratio divided by the growth rate of its earnings for a specified time period. read more

Price/Earnings to Growth and Dividend Yield (PEGY Ratio)

PEGY ratio is a variation of the PEG ratio where a stock's value is evaluated by its projected earnings growth rate and dividend yield.  read more