For long-term investors looking for a structured method to choose stocks, the ideas from well-known fund manager Peter Lynch provide a useful structure. Lynch's method, often called Growth at a Reasonable Price (GARP), centers on finding profitable, financially sound companies that are increasing at a steady rate, not too slow, but not so quick that it cannot be maintained. The aim is to discover these companies before they are well-known by Wall Street, keep them for a long time, and gain from their increasing value. A filter using Lynch's main rules, which cover earnings increase, price, profit, and financial condition, can reveal possible choices for more study. One company that recently met this filter is Dorman Products Inc (NASDAQ:DORM).
Fit with Peter Lynch's Main Rules
Dorman Products, a provider of automotive replacement parts, seems to fit several of Peter Lynch's numerical filters. The method stresses steady increase, fair price, good profit, and a strong balance sheet. Here is how DORM compares to these specific rules:
- Steady Earnings Increase: Lynch looked for companies with a 5-year earnings per share (EPS) increase between 15% and 30%. DORM's EPS has increased at an average yearly rate of 21.83% over the past five years, putting it directly in this desired zone. This shows a record of solid, yet possibly maintainable, growth.
- Fair Price (PEG Ratio): A key part of the GARP method is the Price/Earnings to Growth (PEG) ratio, which Lynch liked to be at or under 1.0. DORM's PEG ratio, based on its past five-year increase, is about 0.68. This indicates the stock may be fairly priced compared to its historical earnings increase path.
- Good Profit (Return on Equity): Lynch wanted a high Return on Equity (ROE) to make sure management is using shareholder money well. DORM's ROE of 16.70% easily meets the 15% minimum, showing good and efficient profit.
- Financial Condition (Debt & Liquidity): A careful balance sheet was important for Lynch. He preferred a Debt-to-Equity ratio under 0.6, and best under 0.25. DORM's ratio of 0.28 shows little use of debt for funding. Also, its Current Ratio of 2.94 displays enough cash to meet short-term needs, well above the needed minimum of 1.0.
Basic Profile and Industry Position
A wider view of Dorman's basic report supports the image shown by the Lynch filter. The company has an overall basic rating of 7 out of 10, with especially high marks in Profit (9/10) and Condition (7/10).
- Profit Strength: DORM's margins are a notable point. Its operating margin of 16.71% and profit margin of 11.65% place it with the better companies in the Automobile Components industry. High marks for Return on Assets (9.70%) and Return on Invested Capital (13.16%) further prove the company's efficient use of money.
- Strong Financial Condition: The company's balance sheet is sound. An Altman-Z score of 4.76 points to a very small chance of near-term bankruptcy risk. The study also mentions a drop in debt amounts and a falling share count, both of which are good signals for shareholder value.
- Price Context: DORM sells at a P/E ratio of 14.75, which is seen as a fair price. This number is lower than the wider S&P 500 average and compares well to many industry competitors. When paired with its high profit, this price seems fair.
You can see the complete, full basic study for Dorman Products here.
The Lynch Idea and the "Simple" Business
Peter Lynch was known for supporting investment in straightforward, clear businesses, often those in "simple" industries that are missed by the wider market. Dorman Products matches this thinking. The company works in the automotive aftermarket, supplying needed replacement parts and fasteners. This is not a showy, high-tech field, but it is a required one with repeating demand from vehicle repair and upkeep. As a provider to stores and distributors, Dorman gains from a large and steady market. For a Lynch-type investor, this operational plainness and clarity are positives, as they make the business model easier to study and understand for the long term.
Points for Investors
While the Lynch filter shows several strong points, investors should think about the full situation. The company's future increase estimates, while good, are more limited than its historical speed. Revenue and EPS are expected to increase in the mid-single digits yearly, showing a reduction from the past five years. This highlights the need for Lynch's rule of detailed study: an investor must judge whether Dorman can find new paths for increase or keep its margins in a possibly competitive industry. Its lack of a dividend may also not appeal to investors focused on income, though this is not a bad point within the pure value increase focus of the Lynch method.
Finding More Investment Ideas
Dorman Products acts as an example of the kind of company a Peter Lynch-style filter can find. For investors wanting to find other companies that meet these rules for steady increase, fair price, and financial strength, the filter is open to the public. You can find more possible choices and use the filter with your own settings via this link: Peter Lynch Strategy Stock Screener.
Disclaimer: This article is for information only and does not make up financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of the main amount. You should do your own full study and think about talking with a qualified financial advisor before making any investment choices.
