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when should you sell? Well, you got to find out why you bought a stock. If you're saying it's a cyclical company and they're doing poorly and they're doing awful, you wait till things are getting better, they're doing terrific, and then you sell it. But with a growth company, you have to say Walmart's case, 10 years after it went public, you could have bought the stock and made 500 times your money.
Cuz they still are only in 15% of the United States. And you they could say, "Why can't they go to 17? Why can't they go to 19? Why can't they go to 23?" So, for the next four decades, they're all around the country. So, you have to say to yourself, "In this stock, I have a 10-year story, a 20-year story." I'll be able to write that down and follow that.
That's what I do with the company. And that's your decision. That's how you sell it. That's a clip of Peter Lynch answering a question about when to sell a stock. That clip doesn't tell the whole story. In Peter Lynch's great book, One Up On Wall Street, he classifies stocks into six distinct categories.
And in that book, he explained that the rules that he uses to make sell decisions change depending on which of those six categories the stock is currently in. Well, I did some digging and I find out exactly what his selling rules are by each category of stock. And in this video, I'll lay out all of his selling rules that he has for each of them in plain English.
Hi, my name is Brian Feroldi. I'm a financial educator with 20 years of stock investing experience. Now, the first thing to understand about Lynch's six categories of stocks is that they all exist on a different part of the business growth cycle. When Lynch was managing money, he focused his portfolio exclusively on companies in phases three through phase six.
These companies were all profitable, but their profit profile changed drastically depending on which of the six phases they were in at the time that Lynch owned them. Let's start with the first category, which Lynch called fast growers. These are companies growing 20% per year, often reinvesting heavily in themselves to expand rapidly.
Now, fast growers live in phase four of the business growth cycle. All of management's efforts are focused on the top line growth. Think of companies like Shopify, CrowdStrike, or Chipotle when they were in their rapid expansion phase. Now, Lynch says that there are two reasons to sell fast growers.
First, when the growth rate slows dramatically. These companies often trade at very high valuation multiples. So, when the market senses a slowdown in the company's growth rate, the stock can often be hugely punished. The time to sell these is when the company's year-over-year growth rate in sales falls dramatically due to fundamental changes in the market or the competitive landscape.
This is exactly what happened to Zoom Video Communications during COVID. In 2020 and 2021, the company's growth rate skyrocketed, but the company's growth rate immediately plunged soon thereafter, and the stock followed suit. Now, the second time to sell a fast grower is when the stock becomes too expensive relative to its growth rate.
Lynch suggested that you sell these companies when their PE ratio became two times above their projected growth rate number. Now, Lynch tracked this by looking at something called a company's PEG ratio. The PE in PEG stood for price to earnings ratio, and G stood for the company's sustainable growth rate.
A good PE ratio was around one, and when this number went above two, it indicated that the company was overvalued. To give you an example of the PEG ratio in action, Google in 2025 traded at about 19 times trailing earnings, and its growth rate was projected to be about 15%. That gives Google a PEG ratio of 1.3, which is good.
By contrast, Apple is trading around 28 times earnings in 2025, and its earning growth rate is just 11%. That gives it a PEG ratio of 2.6, which would indicate to Lynch that it might be time to sell. The next category is called slow growers. These are mature, stable companies growing their profits between 2% and 10% per year.
Now, slow growers live in phase five of the business growth cycle. Management teams at these companies are focused on returning cash to shareholders in the form of dividends and buybacks. Think of companies like Coca-Cola, Pepsi, or Procter & Gamble. Now, these stocks are often owned for their dividends.
Now, Lynch says there are two reasons to sell slow-growing stocks. First, if they stop returning capital to shareholders, this could be them stopping a buyback program or cutting their dividend. For example, if Pepsi suddenly cut its dividend, a large portion of investor base would run from the stock causing a huge decline.
Now, the second reason to sell a slow grower is if it runs into major trouble. For example, if they start to lose market share to a disruptive company, then it would be worth reevaluating whether you want to own the stock. If your analysis shows the business could be in secular decline, it's time to sell that stock and move on to something else.
Now, if you're a fan of Peter Lynch like I am, I made a visual summary of Peter Lynch's investing checklist. If you want a free copy of it, just visit longterm mindset.co/lynch or click the link in the video description. Now, the next category of stocks is called stalwarts. These are steady, established brands that offer recession-resistant products.
Now, stalwarts also live in phase five of the business growth cycle. Management teams these companies are focused on operational stability and returns on capital. Think of Costco, McDonald's, or Johnson & Johnson. Investors own these stocks because they offer resiliency. These are the kind of stocks you want to hold during uncertain times because demand for their products or services is recession-resistant.
Now, Lynch suggests selling these type of stocks for two reasons. First, if they become significantly overvalued. For example, Costco, which is a fabulous company, trades at a price-to-earnings ratio that is approaching 60. That's an extremely high price for even a solid business like Costco. I have a feeling that if Lynch owned Costco in 2025, he would quickly be hitting the sell button.
Second time to sell a stalwart is if the fundamentals of the company start to weaken. Now, Lynch watches this by watching revenue growth and the company's margin profile, specifically gross margin. If you get the sense that a company's gross margin is declining, that hints that the company could be going through really tough times ahead.
The next category of stocks is called cyclicals. These are companies whose performance and profits swing alongside with the economy. Now, cyclicals swing back and forth between phases two and phase five of the business growth cycle depending on if the economy is growing or contracting. Think of companies like Ford, Delta Airlines, or Caterpillars.
Lynch says that cyclicals can be big winners for your portfolio, but only if you get the timing absolutely right. Now, a mistake that people make with cyclicals is they sell when things are looking bad. That's exactly wrong. Lynch suggests that you sell when everything looks great and the company's profits are actually booming.
That means that the time to sell these stocks is when they are fully in phase five and the future looks bright. Now, ironically, this is when a company's valuation can look the cheapest because its profits are simply elevated. Now, Lynch points out that the time to take profits on these stocks are when everything looks great and analysts are very optimistic.
Lynch says that selling when things look good is all about anticipation of a downturn that will eventually come, not being forced to react to it when it finally does. Now, the next category of stocks is called turnaround stocks. Turnarounds are temporarily troubled companies that have fallen on hard times and they're trying to get back on their feet.
Now, turnarounds are found six of the business growth cycle, but importantly, management has a realistic plan to get them back to phase five of the business growth cycle. Think of a company like Best Buy prior to its big revival. Now, the time to sell a turnaround stock is when the market finally believes in the company's recovery.
So, the share price has fully reflected the company's business improvements and management is starting to paint a rosy picture of times ahead. Lynch says it's important to never fall in love with a turnaround story. It's not a long-term romance. Once the turnaround finally turns, take the win and move on.
Now, the final category is called asset plays. These are companies that are in a permanent state of decline, but are sitting on hidden valuable assets. Think real estate, patents, or a cash-rich balance sheet. Now, asset plays are also in phase six of the business growth cycle, but there's no realistic way for them to get back to phase five on their own.
Management teams at these companies have focused their attention on monetizing the assets that it already has, not returning the the to its former glory. A great example of this would be Berkshire Hathaway back in the 1950s when Warren Buffett took it over. Berkshire Hathaway the business was essentially heading towards bankruptcy, but Buffett skillfully sold off the asset that it has and used those to acquire other businesses.
The reason that Berkshire Hathaway was successful wasn't because of Berkshire Hathaway's core business, it's because Buffett refocused the company around better businesses like insurance. Now, the time to sell asset plays is when the market has caught on and the stock re-rates to reflect the company's value.
If the price goes from discounted to fair value, Lynch says it's time to take profits. The opportunity in asset plays are in the mispricing of assets, not in their long-term growth. Now, after studying all of Lynch's selling rules, the key takeaway for me is clear. The reason for selling must be matched with the type of stock that you own.
Lynch didn't sell because of arbitrary rules like a stock doubled or it got cut in half. He sold because the reason he bought it in the first place no longer applied. Lynch used his understanding of the business growth cycle and the six categories of stocks and trained himself to watch for the warning signs. When they appeared, he made the sell decision from a rational, calm mind.
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