Cabot Corp. (NYSE:CBT) Passes Peter Lynch's GARP Investment Screen

The investment philosophy of Peter Lynch, the famous manager of Fidelity's Magellan Fund, focuses on finding well-run, growing companies trading at reasonable prices, a strategy often called Growth at a Reasonable Price (GARP). Lynch supported a long-term, buy-and-hold method, concentrating on fundamental health and lasting growth instead of market timing. His process uses specific filters to find companies with good profitability, solid financial condition, and prices that do not overpay for future growth. One stock that currently appears from such a filter is CABOT CORP (NYSE:CBT).

Meeting the Lynch Criteria

A central part of Lynch's strategy is to avoid overpaying for growth. He famously used the PEG ratio, the Price-to-Earnings ratio divided by the earnings growth rate, to measure whether a stock is fairly priced. A PEG ratio of 1 or less was his standard, implying the market price matches or is below the company's growth path. Cabot Corp. performs well here, with a PEG ratio near 0.32 based on its last five-year earnings growth. This shows the stock is trading at a notable discount to its historical growth rate, an important beginning for value-focused growth investors.

Beyond price, Lynch stressed the quality of the business. The filter uses several checks to confirm financial strength and operational quality, and Cabot passes these important tests:

• Sustainable Growth: Lynch liked companies growing steadily, not extremely fast. Cabot's five-year average annual EPS growth of 28.5% is solid, yet it stays within a lasting range that avoids the warnings of excessive expansion.
• Profitability: A high Return on Equity (ROE) shows efficient use of shareholder money. Cabot's ROE of 21.0% is above the 15% level in the Lynch filter, pointing to good and steady profitability.
• Financial Health: To limit risk, Lynch preferred companies with controlled debt. Cabot's Debt-to-Equity ratio of 0.56 is under the filter's maximum of 0.6, showing a careful balance sheet funded more by equity than debt. Also, its Current Ratio of 1.61 indicates it has enough short-term assets to meet its immediate obligations, offering protection against operational issues.

A Closer Look at the Fundamentals

A wider fundamental analysis of Cabot Corp. supports the view from the Lynch filter. The company receives a good overall fundamental rating, with specific high points in two areas important for long-term investors.

Its profitability is very good, scoring a 9 out of 10. Important measures like Return on Invested Capital (15.6%) and operating margins are some of the highest in the chemicals industry. This proves Cabot is not only increasing sales, but is doing so productively and turning revenue into earnings successfully. Financially, the company is in good condition with a score of 8. Its ability to pay debts is very good, with an Altman-Z score showing no bankruptcy concern and a low debt-to-free-cash-flow ratio. While its current and quick liquidity ratios are more average, they are considered adequate given the company's high profitability and strong position on debt.

Perhaps most interesting for value investors is Cabot's price assessment, which scores an 8. The stock trades at a P/E ratio of 9.1, which is low compared to both the wider S&P 500 and most of its industry competitors. This low earnings multiple, joined with its high profitability and the earlier mentioned low PEG ratio, forms a strong case for its price.

The main area where Cabot shows a lower score is in its growth prospects, which scores a 3. While past EPS growth has been good, revenue decreased a little last year, and future growth estimates for both sales and earnings are moderate. This matches Lynch's interest in companies that have passed a very fast growth period into a more established, lasting, and financially steady phase.

Suitability for GARP Investors

For investors looking for growth at a reasonable price, Cabot Corp. offers a detailed opportunity. It is not a rapid-growth tech stock with very high future estimates. Instead, it is a standard example of the kind of company Lynch liked: a profitable, financially sound operator in the basic, some would say "ordinary," specialty chemicals industry. Its price measures indicate it is low, especially when considered alongside its historical profitability and growth. The low PEG ratio is the strongest sign that the market may not completely recognize its quality.

The company's good dividend yield of almost 2.7%, supported by ten years of steady payments and a maintainable payout ratio, gives an extra return for shareholders while they wait for the price difference to possibly narrow. The mix of low price, high profitability, and a safe balance sheet offers a notable safety buffer, an idea very important to value-focused methods like Lynch's.

Finding Similar Opportunities

Cabot Corp. shows how using strict filters can reveal companies that might be missed otherwise. For investors wanting to review other stocks that pass similar checks for financial health, fair price, and lasting growth, the Peter Lynch strategy filter is a helpful beginning. You can see the present list of passing companies by going to the Peter Lynch Strategy screen.

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Disclaimer: This article is for information only and is not financial advice, an endorsement, or a suggestion to buy, sell, or hold any security. Investing has risk, including the possible loss of principal. You should do your own research and talk with a qualified financial advisor before making any investment choices.