CARGURUS INC (NASDAQ:CARG) Passes Peter Lynch's GARP Investment Screen

In the search for long-term investment opportunities, many investors turn to the principles of legendary fund manager Peter Lynch. His strategy, often categorized as Growth at a Reasonable Price (GARP), focuses on identifying companies with solid, sustainable growth, strong financial health, and attractive valuations, qualities that can lead to outperformance over many years. This approach avoids chasing the fastest-growing, most speculative names in favor of businesses that are profitable, understandable, and trading at prices that do not overpay for their future prospects.

A recent screen built on Lynch's core criteria has identified Cargurus Inc (NASDAQ:CARG) as a potential candidate for more study. The online automotive marketplace, which connects car buyers and sellers through its digital platform, seems to fit several of the strategy's key filters.

Alignment with Peter Lynch Criteria

Peter Lynch emphasized a balanced method, looking for growth that is strong but not extreme, along with a sound balance sheet and fair valuation. A review of Cargurus's key numbers shows how it measures up against these specific rules.

• Sustainable Earnings Growth: Lynch preferred companies with a 5-year earnings per share (EPS) growth rate between 15% and 30%, thinking growth outside this range could be hard to maintain. Cargurus reports a notable 5-year EPS growth rate of 26.7%, putting it directly within this target band. This shows a history of steady and controlled expansion.
• Attractive Valuation via PEG Ratio: To avoid overpaying for growth, Lynch used the Price/Earnings to Growth (PEG) ratio, aiming for a figure of 1 or less. Cargurus's PEG ratio, based on its past growth, is about 0.62. This implies the stock's current price may not fully account for its historical earnings growth path, a good signal for value-minded growth investors.
• Exceptional Financial Health: A conservative balance sheet was crucial for Lynch. His screen asks for a Debt/Equity ratio below 0.6, with a liking for even lower numbers. Cargurus does very well here, with a Debt/Equity ratio of 0.0, meaning it has no interest-bearing debt. This gives important financial room and lowers risk during economic slowdowns.
• Strong Profitability: The strategy requires a Return on Equity (ROE) above 15% as a mark of good use of shareholder money. Cargurus greatly passes this level with an ROE of 40.5%, showing a high degree of profitability compared to its equity base.
• Adequate Short-Term Liquidity: Finally, Lynch wanted a Current Ratio of at least 1 to make sure a company can pay its near-term bills. Cargurus's Current Ratio of 2.87 shows a very solid liquidity position, much higher than the minimum level.

Fundamental Health Check

A wider view of the company's fundamental profile, as shown in a detailed analysis report, supports the results from the Lynch screen. The report gives Cargurus a good overall rating of 7 out of 10, noting its positive points in two key areas.

The company gets a high mark for Profitability, fueled by very good returns on equity and invested capital, as well as strong operating and gross margins. Its Financial Health score is higher, supported by the total lack of debt, a high Altman-Z score pointing to low bankruptcy risk, and the solid liquidity numbers mentioned before.

On Valuation, the report indicates Cargurus may be a bit low compared to both its industry group and the wider S&P 500, especially when growth is considered. The Growth review recognizes a very strong past EPS growth pattern, though it mentions forecasts for a slowing in revenue growth in the coming years.

Investment Thesis for the Long Term

For an investor using a GARP or Peter Lynch-style method, Cargurus makes a strong argument. It works in a big, known market—automotive sales—that is continuously moving online, a shift the company is set to benefit from. Its financial numbers describe a profitable, well-managed business with a very strong balance sheet, all bought at a price that does not appear to require flawless performance.

The Lynch idea is not about short-term trading but about finding well-managed companies you can own for years. The conditions met by Cargurus—maintainable past growth, high profitability, no debt, and a fair price—are exactly the filters meant to find such businesses. They try to locate companies that can increase in value over time through the consistent performance of their business plan, rather than through financial tactics or speculative stories.

Exploring Further Opportunities

Cargurus is one of a number of companies that currently pass the Peter Lynch strategy screen. Investors wanting to see the complete list of possible candidates can view the screen here to do their own study.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice, an endorsement, or a recommendation to buy, sell, or hold any security. Investing involves risk, including the potential loss of principal. Always conduct your own due diligence and consider consulting with a qualified financial advisor before making any investment decisions.