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3 Stocks Peter Lynch Would Love

Peter Lynch is widely regarded as one of the world's greatest investors with good reason. After all, Lynch achieved a stunning 29.2% average annual return during his tenure as manager of Fidelity's Magellan Fund from 1977 to 1990, trouncing the broader market in the process.

But while Lynch dispensed his wisdom in several best-selling investing books -- three of which our Foolish colleagues incidentally recommended earlier this week -- finding stocks that fit his mold isn't always easy.

So we asked three top Motley Fool contributors to each discuss a stock they think Peter Lynch would love. Read on to learn why they chose 2U (NASDAQ: TWOU), Magellan Midstream Partners (NYSE: MMP), and Momo (NASDAQ: MOMO).

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The (fast-growing) future of higher education

Steve Symington (2U): Peter Lynch had a penchant for educating fellow investors on his best practices. And he also liked to look for relatively small businesses with long runways for growth. To those ends, I think he might appreciate online education platform leader 2U.

To be fair, Lynch also liked profitable businesses that were able to reinvest in themselves to grow -- and 2U technically isn't profitable on a GAAP basis...yet. But as I learned when I interviewed 2U co-founder and CEO Chip Paucek shortly after 2U's IPO in 2014, that's largely because the company makes substantial investments in each of its graduate programs up front in exchange for the lion's share of tuition revenue over the course of their 10- to 15-year contracts.

As of today, 2U boasts 65 announced graduate programs with 34 universities, including the likes of Georgetown, Yale, Berkeley, and Harvard. But its planned launch cadence calls for that base to nearly double by 2021, to over 100 programs, while at the same time leaving plenty of room to grow into its longer-term stateside target of 250. And even then, investors can look forward to supplemental growth from international program launches and nondegree short course options via its 2017 acquisition of GetSmarter.

For investors willing to accept that 2U is forsaking profitability in the near term to instead capitalize on that longer-term growth -- and with its shares pulling back hard along with the broader market in recent months despite a lack of company-specific news -- I think 2U is one of the most attractive stocks our market has to offer.

Lynch with an income tilt

Reuben Gregg Brewer (Magellan Midstream Partners LP): So I'm an income-oriented investor, which makes it hard to do things the way Peter Lynch would. He was more focused on growth investing than I will ever be. However, you can still apply many of his broad ideas to Magellan Midstream Partners.

As a midstream partnership, Magellan is pretty easy to understand -- it collects fees for the use of its diverse portfolio of infrastructure assets. To grow, it buys or builds assets. On that score, the partnership is planning to spend roughly $1.7 billion on capital projects through 2020 to support the continuing growth in U.S. energy production. That should allow for slow and steady distribution growth of 5% to 8% a year with strong 1.2 times distribution coverage, which is basically on par with the partnership's historical trends. So Magellan appears to have built in growth where it is most important for an income investor (the distribution).

MMP data by YCharts.

Valuation wise, the units sold off with the steep decline in the price of oil even though weak oil prices should have little impact on Magellan's long-term outlook. In other words, with a hefty 6.9% yield, the midstream company looks relatively cheap today after a deep downdraft to end 2018. That's doubly true when you compare the price to the potential growth in the distribution. As for keeping tabs on Magellan, all you need to do is watch the news for updates on U.S. energy production. As long as production is still strong, Magellan should be fine.

A growth stock with a low P/E ratio

Leo Sun (Momo): One of Peter Lynch's classic lessons is to find stocks with lower P/E ratios than their earnings growth rates. Momo, which trades at just 10 times forward earnings, fits the bill. Analysts expect Momo's earnings to rise 34% this fiscal year (which ended on Dec. 31) and another 19% next year. Its revenue is expected to rise 52% this year and 22% next year.

Momo's valuation is low because it's a Chinese tech stock, so it was hammered by trade tensions and a depreciating renmibi, and a government crackdown on social networking and live video apps spooked investors. Yet Momo has survived cyclical downturns and waves of regulatory crackdowns before.

Momo is called the "Tinder of China" because its namesake social platform is often used for online dating. It also owns the Tinder clone Tantan. Momo generates most of its revenues from user-created live video broadcasts -- which it monetizes via virtual gifts. It also monetizes Momo and Tantan's dating features with premium subscriptions.

Momo's monthly active users (MAUs) rose 17% annually to 110.5 million last quarter, while total paying users of its live video and value-added services jumped 71% to 12.5 million (including an addition of 3.6 million new paid users from Tantan). Its revenue rose 51% to $536 million and its non-GAAP net income grew 21% to $114 million. Those are stellar growth rates compared with its forward P/E ratio. Momo will likely remain under pressure for the foreseeable future, but it could rally sharply on any good news about China.

The bottom line

To be clear, nobody can guarantee that these three stocks will go on to beat the broader market -- especially in today's volatile landscape for equities. But astute investors like Peter Lynch know these are the kind of conditions that lead to the very best opportunities for patient, long-term shareholders. And whether we're talking about 2U's long runway for new programs, Magellan's juicy yield and plans for growth, or the disparity between Momo's growth rates and its valuation, we think Lynch -- or any investor, for that matter -- would do well to invest accordingly.

10 stocks we like better than 2U
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*Stock Advisor returns as of November 14, 2018

Leo Sun has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends 2U. The Motley Fool recommends Magellan Midstream Partners and Momo. The Motley Fool has a disclosure policy.

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