The grass-roots way to multi-bagger returns

Reported by Motley Fool Staff
Monday, April 9, 2012
Topics in this article:
Asx,Consolidated Media Holdings.,News Corporation,Telstra Corporation.,Domino'S Pizza Enterprises Limited,Greencross Limited

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It was just another routine visit to the vets for Sadie, my six-year-old Cocker Spaniel. Or so I thought.

This time there was a small commotion in the waiting room, and it wasn’t a badly behaved dog barking uncontrollably at a cat in a carry cage.

How much?!” the dog owner exclaimed: “I wish I owned shares in this place… I’d be rich!

During the next twenty minutes or so, I heard the receptionist ring up takings of $400, $500, $600 — and more! — from other pet owners waiting patiently in line to pay their consultation bills.

The man with the dog certainly had a point. The veterinary business does look lucrative from the outside. What’s more, his off-the-cuff comments engaged a style of investment research popularised by legendary investor Peter Lynch. I have no idea whether the man with the dog was an investor, but he was certainly thinking like one.

Time for a walkie

As you may already know, Peter Lynch managed Fidelity’s Magellan Fund between 1977 and 1990, and became one of the world’s most successful fund managers. In fact, he actually started out with US$20m in the fund and finished with US$13bn some 13 years later… and delivered loyal clients an amazing average return of 29% a year.

Recounting his stock picks in the book One Up On Wall Street, Mr Lynch reckoned many of his best-ever investments came from straightforward, grass-roots research.

Indeed, something as simple as a walk through a shopping centre, so Mr Lynch reckoned, could tell you a lot more about the stores than their annual reports. Staying at hotels, visiting sandwich shops and noting what clothes his children were buying were among the other methods of everyday research that helped Mr Lynch pick multi-baggers — a term he coined to describe shares that multiplied twice or more in value.

Looking for the next Great Dane

Now I’m all for simple ways to invest — and the style advocated by Mr Lynch suits me down to the ground.

So thinking back to the commotion at the vet — and my own bill — I’m now considering the merits of Greencross Limited (ASX: GXL), a $7om ASX-listed business that operates over 50 veterinary surgeries across the country.

A quick look at this group’s financials shows a solid if unspectacular growth record, with revenue and earnings before interest, tax and depreciation both almost doubling in 4 years, although the balance sheet does carry a hefty amount of debt. So Greencross has some immediate pros and cons, but its line of work — customers such as me will always pay to keep their pets healthy! — could imply a dependable performer.

Does Greencross have the potential to become a really great company — or a really great multi-bagger investment? I’ll need to look closer at the business first, and hopefully visit one of the firm’s surgeries.

Fully vet-ted great companies

Thinking further, Sadie’s visit to the vet encouraged me to consider other companies I happily use — without that much consideration for what I’m paying. You see, these businesses could be ideal Peter Lynch-type investments, where loyal, high-spending customers could earn shareholders handsome profits. I came up with three well-known names I should look into:

1. Foxtel – Telstra/News Corp/Consolidated Media Holdings

I’m a long-time subscriber to Foxtel. Now I know its a bit of an extravagance, but it has the best sports coverage available in Australia, as well as great news and business coverage and old-school series re-runs.

I’m on a bundle deal and it’s unlikely I’ll ever cancel – unless the sport and news goes elsewhere. So I’m happy to admit I’m a captive Foxtel customer and with my Peter Lynch hat on, while I own Telstra Corporation (ASX: TLS) shares already, I really ought to look at News Corporation (ASX: NWS) and Consolidated Media Holdings (ASX: CMJ) shares to see if there’s value there – and to help me enjoy some sort of payback.

2. Apple

I must confess that I’ve become a devoted iPhone and iPad owner. Were I to need a new mobile, I doubt I’d even look beyond Apple (Nasdaq: AAPL), even though alternative handsets may be technically superior and much cheaper (and they could well .

Few companies enjoy Apple’s level of loyalty from me, so there’s a Peter Lynch-type trigger for some more research. I’ll start with these Fool articles.

3. Domino’s Pizza

A Saturday night pizza always goes down well with my family and for us it is Domino’s Pizza (ASX: DMP) every time. We love the pizzas of course, but the ease of online ordering and the speedy delivery continue to keep me as a loyal customer.

I actually already own shares in Domino’s, but given the good pizzas, ease of buying and the sales growth they’ve been experiencing, maybe I should look at buying more.

Multibagger up in smoke

Now I know what you’re thinking — News, CMH, Apple and Domino’s Pizza are not exactly stock-market secrets. These three companies have many dedicated customers and their profits — and their share prices — have been rising for years. Sure, they are great businesses — most people know that — but I think you could still make handsome money from them… as they continue to make handsome money from loyal customers like me!

Don’t believe me? I’ll round off with this investing anecdote, which I hope will get you thinking.

For years one of our UK Fools, David Kuo,  was a loyal customer of British American Tobacco (LSE: BATS), and had always kept on paying ever-higher prices for his cigarettes. Then in 2004 he managed to quit smoking (we’re proud of you, David!), and decided to invest the money he’d now be saving.

He considered all sorts of share possibilities, but then remembered Peter Lynch’s everyday style of research. Surely if he had been a long-time customer of BAT — and had been willing to pay generously for cigarettes week in, week out — then BAT might actually be the best home for that extra cash.

Now BAT at the time was no stock-market secret. Its shares had more than doubled in the previous four years and everyone was raving about the ‘defensive’ nature of tobacco earnings. However, he believed the company would continue to prosper from its loyal customer base — indeed, he knew first-hand how difficult it was to kick the habit!

In the end, he bought BAT shares at £8.25 a pop during 2004 and today they trade at £32. What’s more, he has since received his initial stake almost entirely back through dividends! That is the simple potential of backing great companies and the grass-roots Peter Lynch approach.

And it can help to pay for the vet bills, too.

If you are looking for ASX investing ideas, look no further than “The Motley Fool’s Top Stock for 2012.” In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

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This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article was originally published on fool.co.uk

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