In the world of long-term investing, few strategies carry the weight and proven record of the one popularized by Peter Lynch. The legendary manager of the Fidelity Magellan Fund advocated for a disciplined method focused on finding companies with strong, lasting growth that are trading at sensible prices, a philosophy often called Growth at a Reasonable Price, or GARP. His system, detailed in his book One Up on Wall Street, looks for businesses with good profitability, sound financials, and a valuation that does not overpay for future potential. It is a structure made to find lasting companies that can build wealth over years, not months, by concentrating on basic business strength instead of short-term market movements.
One company that recently appeared from a filter using Lynch's main standards is ExlService Holdings Inc (NASDAQ:EXLS), a provider of operations management and analytics services. For investors looking for a GARP candidate, EXLS presents an interesting example of how a business can fit a proven investment philosophy.
Meeting the Lynch Criteria
Peter Lynch's strategy depends on specific, measurable filters made to separate solid growth companies from risky or expensive ones. ExlService Holdings seems to meet these important measures, which are vital for spotting a business with a lasting advantage and a fair price.
- Sustainable Earnings Growth: Lynch wanted companies growing earnings per share (EPS) between 15% and 30% each year over five years. Growth above 30% was seen as possibly not lasting. EXLS reports a five-year EPS growth rate of 21.93%, putting it directly in Lynch's target area of good, maintainable increase.
- Sensible Valuation via PEG: Maybe the central part of the GARP method is the Price/Earnings to Growth (PEG) ratio, which Lynch liked to be at or below 1.0. This measure changes the standard P/E ratio for a company's growth rate, helping to find stocks that may be priced low compared to their growth path. EXLS has a PEG ratio of 0.73, showing the market may not be completely valuing its past growth, a good signal for investors mindful of value.
- Strong Profitability (ROE): Lynch required a high return on equity (ROE) to make sure management was using shareholder money well. He set a lowest point of 15%. EXLS goes beyond this with an ROE of 25.35%, pointing to a very profitable operation that creates significant earnings from its equity.
- Financial Health (Debt/Equity & Current Ratio): A careful balance sheet was essential for Lynch, who favored companies funded more by equity than debt. EXLS shows a Debt/Equity ratio of 0.37, much lower than the filter's limit of 0.6 and even under Lynch's stricter personal choice of 0.25. Also, its Current Ratio of 2.91 shows enough cash to cover near-term needs, passing Lynch's test for financial soundness.
A High-Level Fundamental View
A wider look at ExlService's basic profile supports the image shown by the Lynch filter. The company's overall financial condition is solid, marked by good solvency and cash metrics. Its profitability is a notable feature, with top industry margins and returns on assets and invested capital. Growth is clear both in its past results and future analyst projections, suggesting speed is likely to keep going.
While the company does not pay a dividend, a neutral point for a method centered on price increase, its valuation measures are mostly positive compared to both its IT Services industry group and the wider S&P 500. This mix of good growth, high profitability, and a fair valuation forms a profile that fits well with long-term, basics-focused investing. For a complete breakdown, you can see the full fundamental analysis report for EXLS.
Business Model and Context
ExlService's business model, centered on data, AI-led analytics, and digital operations, serves essential but often ordinary back-office functions for major industries like insurance, healthcare, and banking. This fits another Lynch principle: investing in what you know and understand. Companies working in such important, repeating income areas can often provide steady, predictable growth without the excitement of the "next big thing." EXLS's role in helping clients better efficiency and choices places it as a possible wealth builder in the increasing business process improvement field.
Finding More Candidates
ExlService Holdings acts as a real example of how systematic filtering can reveal possible GARP investments. For investors wanting to use this process to find other companies that match Peter Lynch's careful standards, the filter used to find EXLS is open to the public. You can examine the settings and see more results by going to the 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 includes risk, including the possible loss of principal. Readers should do their own study and talk with a qualified financial advisor before making any investment choices.
