Stalwart

What Is a Stalwart?

Stalwart is an investing term popularized by legendary stock picker Peter Lynch to describe a large, well-established company that actually offers long-term growth potential. Lynch used several criteria to identify stalwarts that he would include in his portfolio alongside companies he designated as sluggish growers, fast growers, cyclicals, and turnarounds. In stalwarts, he looked for a strong balance sheet, little or no debt, strong cash flow, developing dividends, and earnings growth of around 10% to 12% per year.

Understanding Stalwarts

As per the Miriam Webster word reference, "stalwart" is defined as "marked by outstanding strength and vigor of body, brain, or spirit." Stalwarts consequently tend to be large, blue-chip companies that actually have some "vigor" in terms of upside appreciation potential.

Stalwarts are the type of investments that are not expected to generate high year-over-year (YOY) returns. Rather, they ought to generate steady, predictable returns that can amount to a gain of half over a period of four or five years. Essentially, these types of stock match or somewhat improve upon the long-term performance of the S&P 500 index of generally 10% per year.

In his book, "One Up on Wall Street," Peter Lynch discussed his approach to stock selection, which begins with taking a gander at companies that have a story behind them. It is the basis of his "purchase what you know" mantra that forms the foundation of his stock selection. For Lynch, the story begins with the type of company and where it fits in the context of a diversified portfolio. Lynch created six categories for placing stocks he was considering: slow growers, stalwarts, fast growers, cyclicals, turnarounds, and asset opportunities.

Finding Stalwart Companies

Stalwarts are former fast-growers that have matured into large companies with slower, yet more reliable, growth. Stalwart companies produce goods that are necessary and consistently in demand, which ensures a strong, steady cash flow. Despite the fact that they are not expected to be top market performers, whenever purchased at a decent price, stalwarts offer an upside of around half over several years.

Because of their strong cash flow, stalwarts generally pay a dividend. Some examples of current or former stalwarts include Coca-Cola (KO), Colgate-Palmolive (CL), and Procter and Gamble (PG). Lynch would hold his stalwarts for a long time to realize their appreciation potential.

Notwithstanding a strong balance sheet, one of Lynch's key measures for a stalwart company is the P/E to growth ratio (PEG), which is calculated by separating the company's price-to-earnings (PE) ratio by its earnings growth rate.

Lynch determined that PEGs below 1.0 were an indication of an underpriced stock relative to its growth rate. He considered stocks with PEGs below 0.5 to be a real bargain. For dividend-paying companies, he factored in the dividend yield to arrive at a yield-adjusted PEG ratio.

Wal-Mart is often cited as an example of Lynch's stalwart methodology. A decade after its initial public offering (IPO), Wal-Mart's PE was still above 20, which was considered high. However, Lynch determined the company was all the while developing at a rate of 25% to 30% with plenty of room for expansion. Wal-Mart continued that rate of growth for the next two decades.

Real-World Example of a Stalwart Stock

On March 17, 2020, Intel Corp.(INTC) stock was trading near $48.50. This followed a decline from near $68 during the 2020 market sell-off.

With earnings of $4.79, the P/E ratio of the stock stood near 10.0 (i.e. 48.50/4.79). Earnings per share (EPS) had increased to 15.52%, average, over the prior five years, and were expected to continue to develop near 9% for the next five years to come.

This produced a forward PEG ratio for the stock of nearly 1.0 (i.e., 10/9). At that point, Intel stock had a historical PEG of 0.67 (10/15). The company steadily increased dividends per share from $0.42 in 2009 to $1.24 in 2019, yielding 2.5% with a share price of $48.50.

Highlights

• Stalwart companies produce goods that are necessary and consistently in demand.
• Lynch determined that a price-to-earnings growth (PEG) rate below 1.0 is an indication of an underpriced stock relative to its growth rate.
• A stalwart company is established and stable yet at the same time offers long-term growth prospects.