Peter Lynch's GARP Strategy Highlights DHT HOLDINGS INC (NYSE:DHT)

The investment philosophy created by Peter Lynch has long been a foundation for investors looking for growing companies at sensible prices. His method, explained in his book One Up on Wall Street, focuses on finding businesses with lasting earnings growth, good financial health, and prices that do not overvalue future potential. This method, often called Growth at a Reasonable Price (GARP), steers clear of the extremes of speculative growth investing and deep value pitfalls by concentrating on fundamental quality and careful valuation measures. A recent filter based on Lynch's standards has found DHT HOLDINGS INC (NYSE:DHT) as a company deserving a closer look.

Following Lynch's Main Ideas

The filter uses several quantitative measures taken straight from Lynch's strategy, and DHT Holdings passes these important tests. The standards are made to find companies with established, but not extreme, growth, sound financial standing, and a good price when growth is considered.

• Sustainable Earnings Growth: Lynch liked companies with a steady history. DHT's earnings per share have increased at an average yearly rate of 16.14% over the last five years. This number fits well within the filter's goal range of 15% to 30%, showing a speed of growth that is good and possibly maintainable, sidestepping the warning sign of very fast growth that can be hard to keep up.
• Sensible Valuation via PEG Ratio: A key part of the Lynch method is the Price/Earnings to Growth (PEG) ratio. A PEG ratio at or under 1 implies the stock may be priced fairly compared to its earnings growth. DHT's PEG ratio of 0.78 passes this important check, showing that investors are not paying too much for the company's past growth path.
• Good Financial Health: Lynch valued companies with strong balance sheets to handle economic slowdowns.
  • Debt-to-Equity: DHT's ratio of 0.23 is not only much lower than the filter's limit of 0.6 but also matches Lynch's own liking for a ratio under 0.25, indicating little dependence on debt funding.
  • Current Ratio: DHT's ratio of 2.33 is much higher than the needed minimum of 1, showing a good ability to pay short-term debts with available assets.
• Profitability and Efficiency: A high Return on Equity (ROE) was important for Lynch, as it indicates how well a company creates profits from shareholder money. DHT's ROE of 17.48% is better than the filter's 15% mark, putting it in the high group of its industry competitors for profitability.

Fundamental Analysis Summary

A more detailed examination of the company's basics supports the initial filter findings. The full fundamental report for DHT Holdings, found here, gives the company a good score of 7 out of 10. The examination points out notable strength in two main areas: health and profitability. The company's balance sheet is viewed as excellent, with high solvency and liquidity grades that offer a large safety buffer. Profitability measures are also solid, with profit margins that are some of the highest in the industry.

The valuation is considered "correct," with a Price-to-Earnings ratio that seems inexpensive compared to the wider S&P 500. While past sales growth has been low, analysts forecast a pickup in both sales and earnings per share in the next few years. One point for investors to watch is the dividend, which, while appealing with a yield above 6%, has a payout ratio that might not be completely maintainable at current levels without ongoing earnings growth.

Investment Points for the Long Term

For investors who follow the Lynch philosophy, DHT Holdings offers an interesting example. It works in the necessary, though sometimes unstable, global crude oil tanker business, a field that can be grasped without having to forecast the "next major trend." The company's meeting of the filter's standards suggests it has the sort of fundamental traits Lynch looked for: established growth, a good balance sheet, high profitability, and a sensible price. The expected pickup in future earnings growth further fits with the GARP goal of finding companies where the top performance may still be to come.

For investors wanting to do their own research, the Peter Lynch strategy filter is accessible here, where you can locate other companies that currently pass these tests.

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 opinions expressed are based on data believed to be reliable, but no warranty is made as to its accuracy or completeness. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.