An Unlikely Growth Stock Sitting Right Under your Nose

One of the things I love about using Peter Lynch’s method for picking stocks is it gives amateur’s like me a chance to use my everyday experience to spot investments.

That’s exactly the story with Microsoft (NASDAQ:MSFT).

You’d never guess it to look at it but Microsoft is growing. It’s transition into cloud computing and IAAS / SAAS is generating revenue results. In Q1, year-over-year revenue from Azure was up 90%.

The cloud contributes substantially to Microsoft’s free cash flow, $32 billion last year, which is a theme I’m using for stock picks in my portfolio. Another area of growth for Microsoft comes from gaming.

The XBOX isn’t usually thought of as a driver for Microsoft’s revenue. What’s changing is the trend towards distributing content via the internet. You saw the transformation of the movie and TV industry turn Netflix into a company with a market cap of $86 billion and Blockbuster’s into zero.

Gaming hardware manufacturers like Microsoft are syphoning off customers from GameStop (NYSE:GME). The subscription-based model for gaming is becoming more popular with gamers and Microsoft is positioned to take advantage. Year-over-year, XBOX SAAS revenues are up 20%. Sorry GameStop, your days are numbered.

All this growth has turned this Stalwart into a Fast Grower. It still carries a 1.8% dividend and it’s PEG ratio sits at a tantalizing 0.864. This year alone the stock is up 35%.

Not bad for a dinosaur like Microsoft.

Microsoft

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A Peter Lynch spin-off stock you’ll want to consider for your portfolio

As Peter Lynch mentions in his book One Up on Wall Street, spinoff’s can be a great investment for several reasons.

Often the spin-off is well capitalized by its parent company and has a strong balance sheet.

It’s value isn’t being recognized under the parent company. The parent spins it off so it can grow unencumbered.

The spin-off flies “under the radar” of Wall Street and doesn’t attract a lot of attention allowing investors to buy a good company at a discount.

A spin-off that I’m liking right now is Conduent (NYSE: CNDT). Conduent is a spin-off from Xerox (NYSE:XRX).

As of January 2017, Conduent operates in the “business processing outsourcing” industry. That’s business jargon for handling things like payments for government organizations. In places like New York, New Jersey, Georgia and California, it handles ETC (Electronic Toll Collection) on state highways.

Business processing qualifies as boring. Another checkmark on Peter Lynch’s investment criteria.

Despite being in a boring space, Conduent makes the most of new technology. You can see how they have improved highway traffic by allowing single-person drivers to use multi-person carpool lanes at a premium.

I’ve come to this company because I have been doing work for one of Conduent’s competitors. I’m using my amateur’s edge. I have first-hand knowledge and can see the profits that are being made.

New technology and data analytics is changing the industry. Augmenting existing infrastructure to improve efficiencies in business processing will drive demand for Conduent’s services.

I wouldn’t classify Conduent as a fast-grower considering the business processing industry is growing at 5%/year. However, if it continues to leverage technology, earnings could outperform that benchmark.

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NetEase up over 14% after strong earnings

NetEase the video game maker beat on earnings and the stock price is climbing.

It was expected $3.04/share in earnings but earned $3.43/share.

It has a couple of popular titles like, Onmyogi and Crusaders of Light both whose sales were strong.

They also recently announced plans to expand into e-commerce.

As Peter Lynch suggests, this could be a “diworseification” move. Hard to say for sure right now… some companies have made it work, like Amazon (AMZN:NASDAQ).

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Net Ease surprises on Earnings

Net Ease has a PEG Ratio of 0.6085 making this Chinese video game maker an affordable growth company.

I like video game space in general. I’ve been a holder of Activision (ATVI:NASDAQ) for three years and in that time it’s appreciated over 300%.

I bought it when everyone was saying traditional video game makers were going to lose out to mobile games. Glad I ignored everyone’s negative sentiment and bought it.

I feel the same with Net Ease (NTES:NSDAQ). This company has a lot of negative sentiment around it. It’s got good titles that people are buying. I’m a long term investor so I don’t mind the negative sentiment.

 

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