How to pick stocks like the pros – Part 2: Peter Lynch, rock star fund manager

Peter Lynch’s down-to-earth stock picking methods would have found great stocks like Domino’s Pizza Enterprises Ltd (ASX: DMP) and Greencross Limited (ASX: GXL)

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Wouldn’t it be great to make around 29.9% in annual returns? Investing great Peter Lynch achieved that average over thirteen years during his career as a fund manager at US-based Fidelity Investments.

When many other fund managers had a hard enough time just matching the index returns, Lynch stood out way above them.

How was his investing strategy different? Below is one of the ways he found great stock picks.

First, he told investors to “own what you know“. Apart from reading business reports, he would go down to his local shopping mall or look around his community for new businesses. Before some stocks became big hits on Wall St., they may already be big hits on Main St. in cities across the country. When the companies are small, professional investors don’t pay them much attention.

He particularly liked franchise chains because it was easy to follow the company growth across the country. Lynch could see the companies were getting a lot of business and expanding into new regions. That usually meant years and years of solid growth and share price gains.

Some of the best stock picks could be right in front of you – even the very stores and businesses you currently visit every day.

Here are two ASX stocks that Lynch probably would have liked.

Domino’s Pizza Enterprises Ltd (ASX: DMP), the world’s largest franchisee company of the Domino’s Pizza brand has stores in Australia, NZ, Belgium, France and now Japan. Pizza’s a recession-proof business and people keep ordering it endlessly. The company has developed an online ordering system that speeds up business and cuts down on costs. Soon, the majority of orders will likely be made online, in my opinion.

Domino’s Pizza Enterprises innovates its menu and even uses social media like Facebook to interact with customers and grow the brand. High store growth is forecast over the next five years, so now may be a good time to start a position.

If you had a sick pet or needed to buy some pet food, you may have been to a Greencross veterinarian or a Petbarn pet supplies shop recently. Greencross Limited (ASX: GXL) has a large network of veterinary practices and is buying up small competitors as it expands across Australia. Through two recent acquisitions, it now also operates the Petbarn and City Farmers pet supplies store chains.

Lynch would have liked Greencross for its growth potential. It has a strong pet supplies brand name and can cross-sell its veterinary services in retail stores. Earnings are forecast to grow as much as 19% annually over the next few years. As such, a shareholding in Greencross could boost your portfolio returns.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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