In the search for long-term investment opportunities, many investors turn to the principles of legendary fund manager Peter Lynch. His strategy, famously outlined in One Up on Wall Street, focuses on finding growing companies that are trading at sensible prices, a philosophy often described as Growth at a Reasonable Price (GARP). Lynch supported a disciplined, fundamental method, searching for firms with good profitability, sound financial health, and lasting growth that is not yet fully seen by the wider market. By using a particular set of filters to search for these traits, investors can create a list of possible candidates for more study. One company that recently appeared from a Peter Lynch-inspired screen is ACI Worldwide Inc (NASDAQ:ACIW).
A Closer Look at the Lynch Criteria
The Peter Lynch screen uses several key financial measures to find companies that fit the GARP model. For a stock to pass, it must show a history of good but lasting earnings growth, trade at a price that accounts for that growth, and display sound financial health. ACI Worldwide seems to meet these main needs based on the given data.
- Lasting Earnings Growth: Lynch preferred companies increasing earnings per share (EPS) between 15% and 30% each year over a five-year span. Growth above 30% was seen as possibly not lasting. ACIW's five-year EPS growth rate of 27.49% sits within this preferred range, showing a good and steady history of profit increase.
- Sensible Valuation via PEG: Maybe the central part of Lynch's price approach is the Price/Earnings to Growth (PEG) ratio. A PEG ratio at or below 1 suggests a stock may be fairly priced compared to its growth path. ACIW's PEG ratio, based on past growth, is 0.62, indicating the market may be pricing its historical growth performance too low.
- Good Profitability (ROE): Lynch searched for companies that efficiently produce profits from shareholder equity. A return on equity (ROE) above 15% is a common mark of high quality. ACIW's ROE of 17.64% exceeds this level, showing management is using capital well to create value for shareholders.
- Financial Health and Stability: To limit high risk, the screen selects for companies with a firm balance sheet. This includes a Debt/Equity ratio below 0.6 (with Lynch himself favoring below 0.25) and a Current Ratio of at least 1.0 to make sure short-term bills can be paid. ACIW's Debt/Equity ratio of 0.56 and Current Ratio of 1.58 meet these health tests, showing a company with acceptable debt and enough cash available.
Fundamental Health Check
A wider review of ACI Worldwide's fundamental profile, as detailed in its full analysis report, gives a more detailed view that mainly supports the Lynch idea. The company gets an overall fundamental score of 6 out of 10, placing it as a mixed but notable candidate within the competitive software industry.
The clear positive for ACIW is its profitability. The company scores an 8 out of 10 in this group, with high scores for its return on equity, return on invested capital, and operating margins, all of which are in the top group of its industry peers. Profit margins have also shown upward movement in recent years.
The valuation view is positive, scoring a 7. While the standard Price-to-Earnings (P/E) ratio of 17.05 may seem fair, more detailed measures tell a more interesting story. The company looks clearly less expensive than the wider market and most of its industry when seen through Price/Forward Earnings, Enterprise Value/EBITDA, and the key PEG ratio. This matches the Lynch idea of finding growth available at a low price.
Points to note fall under financial health and growth. The health score is a neutral 5, supported by a firm Altman-Z score and debt-to-free-cash-flow ratio, but affected by a Debt/Equity ratio that is higher than many industry peers. The growth score is also a 5, reflecting a very good past EPS growth rate that is expected to slow to a still-good level in the future, while revenue growth has been steady but not high.
Investment Thesis for the GARP Investor
For an investor following Peter Lynch's philosophy, ACI Worldwide presents an interesting case. The company passes the number-based screen by showing the needed Lynch signs: a confirmed history of sizable earnings growth, a price that seems to not fully include that growth, and good basic profitability. The high ROE and better margins suggest a quality business.
The fundamental analysis confirms that ACIW is not a perfect story, with some debt and a prediction for slower (though still good) earnings growth ahead. However, for the GARP investor, this is part of the assessment. Lynch wanted companies growing at a "reasonable" and lasting speed, not very fast, unchecked growth. The modest future expectations, paired with a low price multiple, may create the safety buffer and long-term potential that Lynch liked. It represents the idea of a company performing well in its area—here, providing electronic payment software—without being a risky, attention-seeking name.
Exploring Further Opportunities
ACI Worldwide acts as an example of the kind of company a disciplined search process can find. Investors wanting to use the Peter Lynch method to find other possible GARP candidates can examine the screen themselves.
You can view the complete Peter Lynch strategy screen and its current results here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. The analysis is based on data and a specific investment strategy framework; it is not a substitute for personal, in-depth research. Investing in stocks involves risk, including the potential loss of principal. You should consider your own financial situation, investment objectives, and risk tolerance before making any investment decision.
