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How to invest like Peter Lynch with ASX shares

He may not be as well-known as Warren Buffett, but Peter Lynch is often referred to as a legendary investor for good reason.

The Fidelity Magellan Fund which he managed from 1977 to 1990 averaged an annual return of 29% during his tenure thanks largely to his investing strategy. Rather than focus on blue-chip shares like Woolworths Group Ltd (ASX: WOW), Lynch would focus on relatively undiscovered small-cap shares with explosive growth prospects.

Whilst we can only dream of making an average annual return of that level, I do believe that there are many small cap shares on the Australian share market that would suit Mr Lynch’s criteria.

I’ve picked out three small caps which I feel could have bright futures:

Alcidion Group Ltd (ASX: ALC)

The first small cap to look at is Alcidion. It is a fast-growing informatics solutions company looking to take advantage of the technological changes that are taking place in the healthcare sector. It provides high quality software which aims to improve the efficacy and cost of delivering services to patients and reduce hospital-acquired complications. I believe the company is well placed for growth over the next decade thanks to the growing trend for healthcare organisations to shift to a paperless environment.

Bubs Australia Ltd (ASX: BUB)

Bubs is a goats milk focused infant formula and baby food company. It has been growing at a very strong rate in recent years thanks to increasing demand from the China market. And while its operations have been making a loss for some time, they finally appear to have reached the scale required to become profitable. In the third quarter of FY 2020 Bubs posted a 67% jump in quarterly revenue to $19.7 million and positive operating cashflow of $2.3 million. If it can build on this in the fourth quarter and into FY 2021, then Bubs could be destined for big things.

Serko Ltd (ASX: SKO)

Serko is a technology company focused on innovative solutions that address the challenges of corporate travel and expense management. It has been growing at a very strong rate over the last couple of years thanks to the increasing popularity of its Zeno product. Being in the travel industry the company is of course being negatively impacted by lockdowns and travel restrictions and its growth has come to a grinding halt. However, I remain confident it will bounce back strongly once conditions ease. So with its shares down almost 60% from their 52-week highs, now could be an opportune time to invest. 

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Alcidion Group Ltd, BUBS AUST FPO, and Serko Ltd. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool Australia has recommended Alcidion Group Ltd, BUBS AUST FPO, and Serko Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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