CAVCO Industries Inc (NASDAQ:CVCO) Fits Peter Lynch’s Growth at a Reasonable Price (GARP) Strategy

Peter Lynch’s investment strategy, described in One Up on Wall Street, emphasizes finding companies with steady growth, fair valuations, and solid financials, often called the "Growth at a Reasonable Price" (GARP) method. This approach skips highly speculative stocks in favor of businesses with reliable profits, low debt, and clear long-term potential. By looking for firms with earnings growth of 15% to 30%, a PEG ratio under 1, and strong financial statements, Lynch’s strategy seeks out undervalued but fundamentally strong investments.

One company that matches this profile is CAVCO INDUSTRIES INC (NASDAQ:CVCO), a producer of factory-built homes and modular structures. Here, we explore why CVCO fits Lynch’s criteria and why it could interest GARP-focused investors.

Why CVCO Matches Peter Lynch’s Investment Standards

1. Consistent Earnings Growth

   • Lynch preferred firms with stable, moderate growth, usually between 15% and 30%. CVCO’s 5-year EPS growth of 21.77% fits this range, showing steady progress without excessive risk.
   • Expected future EPS growth of 12.86% is slightly lower but still aligns with Lynch’s focus on sustainable, not extreme, growth.

2. Fair Valuation (PEG Ratio ≤ 1)

   • A critical measure in Lynch’s approach is the PEG ratio, which balances the P/E ratio with growth. CVCO’s PEG ratio of 0.88 indicates the stock is priced fairly relative to its earnings growth, a key trait of GARP investing.
   • Its P/E of 19.25 is a bit higher than the industry average, but the PEG ratio accounts for growth, making the stock attractive for long-term holders.

3. Solid Financial Position (Low Debt, High Cash Reserves)

   • Lynch liked companies with little debt to avoid financial trouble. CVCO’s Debt/Equity ratio of 0.01 is very low, far under Lynch’s preferred limit of 0.25.
   • The firm’s Current Ratio of 3.00 and Quick Ratio of 2.17 show it has enough liquidity to cover short-term needs, lowering financial risk.

4. Strong Profitability (ROE > 15%)

   • Return on Equity (ROE) of 16.07% beats Lynch’s 15% target, showing effective use of investor capital.
   • Other profit measures, like Return on Invested Capital (ROIC) of 14.55%, confirm CVCO’s ability to deliver good returns.

Fundamental Analysis Overview

Our fundamental report gives CVCO a score of 7 out of 10, noting its strengths in profitability and financial stability. Key points include:

• Profitability: Reliable earnings and cash flow, with margins getting better over time.
• Financial Strength: Almost no debt and a high Altman-Z score (9.39) mean very low bankruptcy risk.
• Valuation: Not extremely cheap, but the PEG ratio supports the current price given growth expectations.

Industry Role and Long-Term Potential

CVCO works in the factory-built housing industry, a sector gaining from affordability needs and housing shortages. Its mix of brands (Cavco, Palm Harbor, Fleetwood) and financial services (consumer loans and insurance) add extra income sources. Lynch often liked "unexciting" industries with steady demand—precisely what CVCO offers.

More Peter Lynch Screen Results

For investors looking for other stocks that meet Lynch’s standards, our pre-built screen provides a filtered list of options.

Conclusion

CVCO is the kind of company Peter Lynch might have included in his Magellan Fund: growing steadily, financially sound, and fairly valued. While all investments carry risk, its fit with GARP principles makes it a strong option for long-term investors.

Disclaimer: This article is not investment advice. Do your own research or consult a financial advisor before making investment decisions.