Suddenly, a burst of optimism has come over world stock markets…

The ASX is set to cap a fourth consecutive week of gains, the longest stretch of increases since January, and only the second time in the past 20 months.

Global stocks have risen more than 8% since the start of June, and are up 3.5% in the past five sessions alone.

Over in the UK, as well as cleaning up on gold medals, the UK's index of leading shares is on a tear, with the FTSE 100 index closing in on its peak for 2012.

Charlie Aitken of Bell Potter has taken this optimism one step further, confidently and boldly predicting the end of the ASX's 5-year bear market.

Glenn Mumford in The Australian Financial Review joined in the party, recently saying "…equity markets could be heading a whole lot higher over coming months."

Bear or bull…we're here for you

Bear market or bull market, here at The Motley Fool we just keep looking for good companies trading at attractive prices.

And the thing is…whatever the market, whatever the economy and wherever Australia finishes on the Olympic medal table, there will always be buying opportunities.

Sometimes you just have to look a little harder.

As we mentioned recently, we thought the dash for dividend stocks, particularly the likes of Commonwealth Bank of Australia (ASX: CBA), ANZ (ASX: ANZ) and Telstra (ASX: TLS), was getting a little over-heated.

Not that we're against dividends — quite the contrary in fact — more that resource stocks were being left behind.

We've largely avoided the resources sector for 2 reasons…

1) We find it hard to predict the future prices of commodities like iron ore, nickel, copper and coal. Supply and demand are constantly changing, and that's before you add commodity speculators into the mix.

2) We were seeing better opportunities elsewhere, as witnessed by our picks in the technology, retail, insurance, biotechnology and telecommunication space.

Stocks we love

As investors, nothing gets us excited as low prices on unloved stocks. We recently recommended a stock which had fallen to a seven-year low. But where others saw a business in permanent decline, Motley Fool Investment Analyst Scott Phillips saw value.

It's only early days, and Scott thinks the stock could have much further to run, but the shares are already up almost 8% since our recommendation. The fully franked grossed-up dividend yield of around 12% is the icing on the cake.

For a change, however, we're also seeing value in the resources sector.

It seems we're not the only ones to have spotted their relative attractiveness, especially when compared to the gold price… U.S. Global Investors has also highlighted the gap between the price of gold and that of gold miners' share prices.

Mind the gap. But probably not for long…

Panning for gold stocks

We're actively researching the gold sector. As usual, we're looking for unloved, undervalued stocks with minimal downside but exciting upside potential.

One we mentioned recently was Fool Analyst Mike King's favourite, Silver Lake Resources (ASX: SLR) — stick it on your radar.

We won't necessarily win any points for originality, but if you're looking for gold stock exposure, another one worth considering is Newcrest Mining (ASX: NCM).

Top fund manager Perennial like the stock, recently saying…

"We continue to like the investment thesis for Newcrest, with around 25% valuation upside to the stock price based on our valuation estimates. We expect a stabilisation of operational performance to the end of calendar year 2012 before we see substantial growth into calendar year 2013 from both the Cadia Valley and Lihir operations as a result of the investment the company is currently undertaking."

Who are we to argue? We'll take a winning pick over originality any day.

A basket of gold stocks

We're currently down in the dirt researching a couple of other very interesting smaller emerging gold mining stocks.

Much can and will go wrong with gold miners – flood, ore quality, mine-life, rising costs, strikes, exploration-risk, injury/death — so we'd be wanting a particularly large margin of safety before recommending such stocks.

Another way to mitigate the risk is to buy a basket of such stocks — 2 or 3 emerging gold miners which added together, might make up a 5% position in your portfolio.

As ever, we'll keep you posted on our shopping expedition.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

Motley Fool General Manager Bruce Jackson has an interest in Commonwealth Bank, ANZ and Telstra. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).

The post Two ASX gold stocks on our radar appeared first on The Motley Fool Australia.

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So far we've looked at value pioneer Ben Graham, growth guru Phil Fisher, and living legend Warren Buffett. Today, it's the turn of Peter Lynch, a growth investor with a distinctive style, who coined the term "ten-bagger" to describe a share that rises ten-fold.

Reading what you know

Peter Lynch detailed his investing philosophy in two books: One Up on Wall Street and Beating the Street, published in 1989 and 1993, respectively. The titles give a big clue to his approach.

He said 20 years in the fund management business had convinced him "any normal person using the customary 3% of the brain can pick stocks just as well, if not better, than the average Wall Street expert".

How so?

"If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighbourhood shopping mall, and long before Wall Street discovers them."

Lynch looked in the everyday world around him for investment ideas among products and services he could easily understand; for instance, "pantyhose rather than communications satellites", and "motel chains rather than fibre optics".

He warned: "Never invest in any idea you can't illustrate with a crayon", and "go for a business that any idiot can run — because sooner or later, any idiot is probably going to run it".

Once a product or service had piqued Lynch's interest, he did thorough research on the company — checking, for example, that the product or service represented a significant percentage of the company's total sales. In fact, Lynch had a phenomenal work ethic that left few stones unturned.

Buying and selling

A key feature, for anyone following Lynch's approach, is to focus on companies that are under-researched by analysts and under-owned by institutional investors. These companies, relatively undiscovered by the pros, are the stuff of ten-baggers if they grow their businesses successfully and the big institutional money starts to flow into the shares.

Companies that sound dull or even ridiculous and that do something disagreeable or depressing are ideal, according to Lynch. If they're in a no-growth industry, all the better:

"In a no-growth industry, especially one that's boring and upsets people, there's no problem with competition … This gives you leeway to continue to grow, to gain market."

While Lynch likes to see annual earnings growth of 15%+, he cautions against companies growing at faster than 30%. Not only is that level of growth extremely difficult to sustain over the long term, but also companies growing at breakneck speed have usually already attracted the attention of analysts.

Lynch offers a disarmingly simple valuation method:

"Find the long-term growth rate, add the dividend yield, and divide by the P/E [price-to-earnings] ratio. Less than 1 is poor, and 1.5 is okay, but what you're really looking for is a 2 or better. A company with a 15 % growth rate, a 3% dividend, and a P/E of 6 would have a fabulous 3."

If a stock met Lynch's earnings requirements and had net cash or modest debt, he would hold for the long term if the story didn't change: No selling out after a 50% or 100% rise for Mr Ten-bagger!

A Lynch screen

I screened for companies with a market cap of less than $1bn; eliminating those that are likely to have the most analyst and institutional interest.

Lynch may like earnings growth of between 15% and 30% a year, but judging what the long-term growth rate of any particular company might be is problematic. I took an average of the last four-year's earnings growth; I eliminated cases where one single year had a disproportionate influence by insisting on growth of between 5% and 40% in all four years.

Finally, I calculated the "Lynch ratio" and screened out companies whose ratio was less than 1.5.

Source: Capital IQ and Google Finance

What is surprising is that only six stocks made it through the filter. Perhaps no real surprise though, that three of the six (Bradken, Fleetwood and Mermaid Marine) are companies servicing the resources and energy sectors, given the performance of those sectors over the last four years. Whether that will continue is a different story.

Embelton is an interesting company, providing flooring, wood and rubber products, metal fabrication and noise and vibration isolation, and with a market cap of just $17.5m, a P/E ratio of 12.1, could be one for the watchlist. Collection House and Thorn Group also look worthy of further research, with Lynch ratios of over 3.

If I include stocks with a market cap of over $1b, what was also surprising was that just two companies, Commonwealth Bank of Australia (ASX: CBA) and Australia & New Zealand Banking Group Limited (ASX: ANZ) made it through the filter.

Foolish bottom line

When it comes to the 'invest-in-what-you-know' approach, forget stock screens and start from where Peter Lynch starts: open your investors' eyes and ears when you're out and about in the world.

If you find a promising company, you may have to allow for the fact that even the best consumer-facing businesses are currently struggling to do Lynch's high earnings-growth numbers in this era of austerity — and to consider what kind of growth your hidden gem might be capable of producing when more benign economic times return.

Look out for the final article in this series, when I'll be leaving the US investors' Hall of Fame and looking at one of the UK's great practitioners.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by G A Chester, originally appeared on fool.co.uk.

The post Great Investors: the Peter Lynch approach appeared first on The Motley Fool Australia.

More reading

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• Why I'd buy BHP and DroneShield shares next week
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