DR Horton Inc (NYSE:DHI) Fits the Peter Lynch GARP Investment Strategy

The investment philosophy created by Peter Lynch highlights finding companies with good growth potential that are available at fair prices, a method often called Growth at a Reasonable Price (GARP). Lynch's system, explained in his book One Up on Wall Street, concentrates on lasting earnings growth, good financial condition, and earnings power, while steering clear of overly popular or heavily indebted firms. This method aims to create a varied, long-term portfolio by putting money into businesses that are easy to comprehend and have solid foundations.

Fitting the Lynch Criteria

DR Horton Inc (NYSE:DHI) appears from a screen using Peter Lynch's method, showing it fits with its main ideas. The screen looks for companies displaying steady earnings growth, a fair price compared to that growth, good earnings power, and a solid financial position.

• Lasting Earnings Growth: A key part of Lynch's method is earnings per share (EPS) growth that is strong but not extreme, making sure it can continue. DHI's five-year EPS growth rate of 27.63% is well above the screen's 15% minimum requirement. Importantly, it is also under the 30% upper limit Lynch proposed, as very high growth rates are frequently hard to maintain. This shows a past of good, controlled expansion.
• Fair Price (PEG Ratio): Lynch was known for using the PEG ratio (Price/Earnings to Growth) to locate stocks that were inexpensive compared to their growth possibility. He liked companies with a PEG ratio of 1 or lower. DHI's PEG ratio of 0.46 is much lower than this mark, indicating the market might be pricing its past growth path too low. When paired with its P/E ratio of 12.67, which is less than the wider S&P 500 average, the stock makes a good case for its price.
• Financial Condition and Earnings Power: Lynch favored companies with solid financial positions to handle economic slowdowns.
  • The company's Debt-to-Equity ratio of 0.30 is not only below the screen's limit of 0.60 but also matches Lynch's own liking for a ratio under 0.25, showing a careful use of debt.
  • A Current Ratio of 4.91 is much higher than the minimum of 1, showing strong ability to meet near-term bills.
  • A Return on Equity (ROE) of 16.48% is better than the 15% filter, showing good use of investor money to create earnings.

Fundamental Condition Summary

A closer look into DHI's fundamental report, which gives the stock a score of 7 out of 10, supports its status as a Lynch-type candidate. The company gets high marks for both earnings power and financial condition. Its profit margins are some of the top in the household durables industry, and important debt health measures show no near-term cash flow or solvency issues. While the report points to a slowing of growth from past high points and some varying cash flow signs, the complete financial view is of an earning, capably run business. The full fundamental analysis gives a more complete look at these positives and points to consider.

A GARP Investment Argument

For investors looking for growth at a fair price, DR Horton Inc makes a good argument. The company works in the easy-to-grasp business of homebuilding, an area that can have ups and downs but is a basic piece of the economy. Its financial numbers, strong past EPS growth, a low PEG ratio suggesting a low price, high earnings power, and a good financial position with little debt, closely reflect the traits Peter Lynch looked for. This mix indicates a company that has expanded well and is set to keep doing so, without needing a high price from the market. It represents the GARP idea by providing growth possibility without the high danger often linked with extreme growth stocks.

Investors curious about finding other companies that match this structured method can locate them using our Peter Lynch Strategy stock screener.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented should not be used as the sole basis for any investment decision. Investors should conduct their own independent research and consult with a qualified financial advisor before making any investment decisions.