It goes without question that Peter Lynch belongs in the investor hall of fame. The portfolio manager of the Fidelity Magellan Fund put up a phenomenal 29% annualized return during the 13-year stretch from 1977 to 1990, trouncing the S&P 500 index.
That elite group of capital allocators also includes Warren Buffett. The longevity of his success is impressive, as he directed capital allocation decisions that propelled Berkshire Hathaway shares to a compound annual growth rate of nearly 20% for six decades.
Average investors can lean on the principles of these two legends to find ideas for their own portfolios. The business that does a good job of checking a lot of the boxes that are important to these great investors is none other than Amazon (AMZN -2.15%). Let’s take a closer look at this “Magnificent Seven” stock through the eyes of Lynch and Buffett.
Image source: The Motley Fool.
Buy what you know
Lynch was an advocate for the individual retail investor. He believed that everyday people could beat Wall Street experts by leveraging their advantage. This means sticking to companies that you know and might be a customer of. It also means identifying businesses in your community that seem to always be busy.
This strategy focuses on first-hand experience. It shies away from fancy spreadsheets and complex financial analysis. He also urged investors to pay no attention to macroeconomic data. Lynch believed that a company worth owning should be simple enough to explain in one sentence.
Amazon is the world’s dominant online marketplace. Its website had 2.4 billion visitors in the month of July. Amazon Prime has more than 200 million members. There’s a strong likelihood that you shop on Amazon.com on numerous occasions every week or month, as it offers extremely low prices, fast and free shipping, and a massive selection.
Lynch was known for finding 10-bagger ideas. These are stocks that rose more than 10-fold during his holding period. The probability of hitting one of these home runs is higher, of course, with smaller businesses. At a market capitalization of $2.8 trillion, Amazon doesn’t pass this test.
Lynch’s valuation screen also won’t apply. He made famous the concept of growth at a reasonable price, using the price-to-earnings-to-growth (PEG) ratio. Amazon trades at a reasonable PEG multiple of 1.4. A figure under 1 would be a no-brainer opportunity. But in today’s market environment, these are rare.
While investors understand the consumer-facing parts of Amazon’s business, we can’t forget about the most lucrative segment: Amazon Web Services (AWS). The cloud platform is a critical growth and profit engine, and it positions the company in the middle of the artificial intelligence revolution.
Today’s Change
(-2.15%) $-5.73
Current Price
$260.11
Key Data Points
Market Cap
Day’s Range
$259.52 – $263.84
52wk Range
$196.00 – $287.20
Volume
102.4K
Avg Vol
49.7M
Gross Margin
50.77%
The ideal holding period is forever
Warren Buffett’s playbook, at least in recent decades, prioritized owning competitively advantaged companies that are within his circle of competence. The stock’s valuation must always be compelling.
Furthermore, the Oracle of Omaha’s favorite holding period is forever. Two of Berkshire’s largest positions, American Express and Coca-Cola, have been in the portfolio for decades.
It’s that long-term mindset that supports compounding, which can lead to monster returns if you pick the right company. In the past 20 years, Amazon’s stock has skyrocketed 17,720% (as of Aug. 18). This gain isn’t going to be repeated in the future. But these shares have plenty of upside in the coming five and 10 years.
Amazon has a wide economic moat. The online marketplace benefits from a powerful network effect, as more merchants and shoppers increase the value the ecosystem provides. AWS also has tremendous scale advantages. And once onboarded, its customers definitely face high switching costs that discourage them from changing cloud providers.
Amazon is one of the highest-quality companies on Earth. It deserves a closer look from investors who think like Lynch and Buffett.
