CarGurus Inc (NASDAQ:CARG) Passes Key Peter Lynch GARP Screen

Investors looking for a disciplined, long-term method for choosing stocks frequently consider the principles of legendary fund manager Peter Lynch. His strategy, detailed in his book One Up on Wall Street, focuses on finding companies with strong, lasting growth that are available at sensible prices, a philosophy often called Growth at a Reasonable Price (GARP). Lynch supported investing in understandable businesses with sound financial condition, good profitability, and valuations that do not overpay for future expectations. A key instrument for using this method is a stock screener that filters for specific measures, such as steady earnings growth, a low price-to-earnings to growth (PEG) ratio, acceptable debt, and high returns on equity.

One company that recently appeared from such a Peter Lynch-inspired screen is CARGURUS INC (NASDAQ:CARG), the operator of a well-known online automotive marketplace. The platform connects car buyers and sellers, providing digital retail and wholesale solutions. For investors following Lynch's philosophy, CarGurus presents an interesting case study in how a modern, technology-enabled service in a recognizable sector can fit with established investment rules.

Alignment with Peter Lynch Criteria

The center of Lynch's strategy is to find companies expanding at a maintainable rate, funded carefully, and valued appealingly relative to that expansion. CarGurus seems to meet several of these numerical checkpoints based on the provided screening data.

• Maintainable Earnings Growth: Lynch preferred companies with a confirmed history of growth, but was cautious of extreme growth that could not continue. The screen calls for a 5-year earnings per share (EPS) growth rate between 15% and 30%. CarGurus reports an EPS growth rate of 26.7% over this period, placing it securely within Lynch's target range for solid, yet potentially maintainable, increase.
• Sensible Valuation via PEG Ratio: To avoid overpaying for growth, Lynch stressed the PEG ratio, which compares a stock's Price-to-Earnings (P/E) ratio to its growth rate. A PEG ratio at or below 1 implies the market may not be completely valuing the company's growth path. CarGurus has a PEG ratio of 0.66, signaling its shares could be undervalued relative to its past earnings growth, a good sign for value-aware growth investors.
• Outstanding Profitability and Financial Condition: Lynch required companies that are efficient and financially stable.
  • Return on Equity (ROE): With an ROE of 40.5%, CarGurus greatly passes the screen's 15% minimum. This shows management is very good at creating profits from shareholder equity.
  • Debt/Equity Ratio: The company has a Debt/Equity ratio of 0.0, meaning it functions with no interest-bearing debt. This passes Lynch's careful preference for a ratio below 0.6 and indicates a very strong balance sheet, lowering financial risk.
  • Current Ratio: At 2.87, the company's good liquidity easily meets the screen's requirement (>=1), showing sufficient ability to meet short-term responsibilities.

Fundamental Condition Summary

A closer examination of the company's wider fundamental profile supports the initial screening results. According to a detailed fundamental analysis, CarGurus receives an overall rating of 7 out of 10, with specific strong points in profitability and financial condition.

The analysis notes that CarGurus functions with sector-leading margins and returns, including a Gross Margin of 88.2% and a Return on Invested Capital (ROIC) of 23.5%. Its clean balance sheet, noted by no debt and a high Altman-Z score, indicates very low bankruptcy risk. While revenue growth is presently moderate, the company's earnings growth remains solid, and its valuation measures like the Price/Forward Earnings ratio are viewed as sensible compared to both its industry group and the wider S&P 500.

A Candidate for the Long-Term Investor

For the GARP investor using a Lynch-like method, CarGurus represents a noteworthy possibility. It functions in a large, understandable market, automotive sales, using technology to make transactions easier. The numerical screening measures point out its mix of past growth, high profitability, and a careful capital structure. Most significantly, its low PEG ratio implies the market may not be completely valuing this mix, providing a potential "sensible price" entry point.

Peter Lynch supported the idea of detailed research after a screen finds a candidate. The measures shown here give a solid foundational thesis, suggesting CarGurus justifies more examination for a place in a diversified, long-term portfolio.

Interested in finding other companies that match the Peter Lynch investment profile? You can run the screen yourself and see the latest 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 securities. The analysis is based on data provided and certain investment methodologies. Investors should conduct their own independent research and consider their individual financial circumstances before making any investment decisions.