I’ve a feeling there is a challenging period ahead for my screens that search for growth at a reasonable price, as well as those hunting down stocks with positive price momentum. This is because the lockdowns across the globe caused by Coronavirus mean both growth and momentum are currently in very short supply. This week’s screen, which attempts to mimic the approach of famed Fidelity manager Peter Lynch, is a case in point.
While finding shares that fit the screen’s criteria may be a challenge, the market reset could prove to have some longer-term advantages. For a number of years, I’ve expressed some exasperation that my Lynch screen has had a tendency to highlight many cyclical companies – companies with profits that are sensitive to the economic cycle. These are not the kind of steady-and-boring growth stalwarts Mr Lynch was famous for backing.
The problem for the screen, in my view, has been that the long bull market and economic recovery has made cyclicals look like solid growth plays based on a glib look at the numbers – screens tend to be glib by nature. This is simply because when economic conditions are improving, cyclical companies tend to be able to grow profits. This is particularly true of companies with high fixed costs, as a large proportion of any increase in sales shows up as profits. In financial jargon, this is known as a company having high operational gearing. When sales go into reverse things get painful, fast.