The Optimistic Investor #5

Following on from last week’s edition focused on Warren Buffett, this week, I want to talk about Peter Lynch.

His book, One Up on Wall Street, is an essential read for any long-term investor hoping to defy the market. During his 13-year managership of the Magellan Fund, he achieved an eye-watering 29.2% annual return, growing $20 million to just over $14 billion.

Similar to Buffett, Lynch has a detailed list of quantitative characteristics to look for in a potential investment (earnings growth, low debt-to-equity ratio, insiders buying stock, etc.), but he is most well known for his simple “invest in what you know” philosophy.

Lynch famously didn’t use quantitative screeners to find stocks, instead relying on personal experience or word-of-mouth. From there, he sought to understand every detail of a business, especially how it plans to grow earnings and if it can reliably execute these plans. Lynch called this information a business’ ‘story.’

• Slow Growers: Large and aging companies expected to grow only slightly faster than the U.S. economy as a whole, but often paying large regular dividends.

• Stalwarts: Large companies that are still able to grow, with annual earnings growth rates of around 10% to 12%; examples include Coca-Cola, Procter & Gamble, and Bristol-Myers.

• Fast-Growers: Small, aggressive new firms with annual earnings growth of 20% to 25% a year. Fast-growers are among Lynch’s favorites, but they also carry considerable risk.

• Cyclicals: Companies in which sales and profits tend to rise and fall in somewhat predictable patterns based on the economic cycle; examples include companies in the auto industry, airlines, and steel.

• Turnarounds: Companies that have been battered down or depressed—Lynch calls these "no-growers."

• Asset opportunities: Companies that have assets that Wall Street analysts and others have overlooked. Examples include metals and oil, newspapers and TV stations, and patented drugs.

Once Lynch had identified a company’s story, he looked for a number of attributes that suggested its stock was primed for above-average growth. For example, he loved finding stocks the market had overlooked for superficial reasons. Boring businesses or those operating in depressing industries, spin-offs, and stocks with low institutional ownership all tend to trade at bargain prices even if their ‘story’ is rock solid. Lynch also looked for fast-growing companies in no-growth industries. These players tend to underperform due to association—it can take the market a while to realize disruption is at play.

As you can see, this research is a lot easier if you have first-hand experience with the company or sector you’re researching.

One of Lynch’s most famous investments, Dunkin’ Donuts, emerged from a simple love for their coffee. In the 1980s, when he picked up the stock, Dunkin’ was a small, regional chain, but Lynch noted their superior brand recognition in the Boston area, loyal customer base, and profitable franchise model. As Dunkin’ expanded across the U.S., it brought these attributes with it and became one of Lynch’s largest holdings.

Lynch also achieved considerable returns investing in Hanes after it introduced L’eggs Pantyhose. Lynch first heard of the product through his wife, Carolyn, who celebrated the pantyhose for their high quality despite being sold in supermarkets. In this single observation, Carolyn had articulated the entirety of L’eggs’ ‘story.’

According to Lynch:

“I did a little bit of research. I found out the average woman goes to the supermarket or a drugstore once a week. And they go to a woman’s specialty store or department store once every six weeks. And all the good hosiery, all the good pantyhose, is being sold in department stores. They were selling junk in the supermarkets. They were selling junk in the drugstores.”

By placing high-quality pantyhose in a protective, space-efficient egg and selling them at the supermarket, Hanes was about to completely disrupt the pantyhose market. A fast-growing player in a no-growth industry.

It probably also helped that L’eggs had arguably the greatest logo of all time:

So now, I want to talk about Hims & Hers—a case study on the difficulty of investing in complicated industries.

For those who don’t know, it’s a telehealth business that got its start by prescribing erectile dysfunction and hair loss medications and has since expanded into a whole range of products and services for both men's and women's health.

But where it has taken off recently is the compounding of semaglutides, which is the active ingredient in weight-loss drugs like Ozempic and Wegovy. Think of compounding as a generic-like version of the brand-name stuff. Hims is allowed to do this because those brand-name weight-loss drugs are deemed to be in shortage.

Hims & Hers sells compounded semaglutide for less than $200 per month, while Ozempic and Wegovy both cost around $1,000 per month without insurance. It’s a big loophole, essentially. And under that loophole, the company has been firing on all cylinders.

Its stock hit an all-time high last week and had tripled since Trump got elected, rising nearly 7-fold over the last 12 months. It was definitely a fast-growing stock in a fast-growing industry, the market couldn’t get enough. 

Then, Hims got hit by a perfect storm and is down about 40% in a week.

Last Friday, the FDA said the shortage of semaglutide was resolved and that it will start cracking down on compounders in the next 60 to 90 days.

The stock dropped almost 30% in a day on the news.

Hims CEO Andrew Dudum responded:

"Now that the FDA has determined the drug shortage for semaglutide has been resolved, we will continue to offer access to personalized treatments as allowed by law to meet patient needs... Novo Nordisk stated two weeks ago that it would continue to have 'capacity limitations' and 'expected continued periodic supply constraints and related drug shortage notifications.'"

So now, Hims needs to pivot and fast. So far, it has announced an oral pill that’s 70% as effective as the injectables and hopes to offer generic liraglutide, a daily GLP-1 injection, later this year.

The tough news for investors?

In its latest earnings call, management provided 2025 guidance that forecasted 59% revenue growth and included $725 million of revenue from its weight loss division. Meaning, 30% of its future revenue hinges on its weight loss division remaining successful.

There is a lot of uncertainty here:

• Will the FDA create further restrictions?

• Will Hims get its liraglutide on the market on time?

• Will it continue to offer weight loss drugs at a significant discount?

• Will consumers like the alternatives Hims is forced to offer?

• How will potential tariffs impact the cost of these generics?

And because I do not work for the FDA or a drug manufacturer and have never been to medical school, I do not know the answers to these questions. I can do the research and talk to the experts, but there is still a distance between me and this business.

That doesn’t mean I wouldn’t consider an investment in Hims, but it does come with a significant amount of risk—one that would need to be reduced via diversification. For every Hims or CRISPR, you need a Costco.