In the search for long-term investment opportunities, many investors turn to the principles of legendary fund manager Peter Lynch. His strategy, often categorized as Growth at a Reasonable Price (GARP), focuses on finding profitable companies with sustainable growth, strong financial health, and valuations that do not overpay for that growth. The central idea is to find businesses that can be held for years, building value as their earnings increase, without taking on high risk from over-leveraged balance sheets or speculative prices. A stock screener built on Lynch’s criteria, focusing on a good earnings growth rate, a low price-to-earnings growth (PEG) ratio, little debt, and high returns on equity, can find companies worthy of more study.
One name that recently appeared from such a screen is INMODE LTD (NASDAQ:INMD), a designer and maker of minimally-invasive aesthetic medical technology. Let's review how InMode fits the Lynch philosophy and why it may deserve more attention from investors looking for growth at a reasonable price.
Fit with Peter Lynch's Main Criteria
Peter Lynch’s method avoids following the most popular, fastest-growing stocks in favor of companies with lasting, clear business models and fair valuations. InMode seems to meet several of his important conditions:
- Sustainable Earnings Growth: Lynch preferred companies with a steady earnings growth history, usually between 15% and 30%, as growth outside this range was seen as possibly not lasting. InMode’s earnings per share (EPS) have grown at an average yearly rate of about 23% over the past five years, putting it directly within this target range. This indicates a history of increasing profitability.
- Appealing Valuation via PEG Ratio: Maybe the most important Lynch measure is the PEG ratio, which changes the common price-to-earnings (P/E) ratio for growth. A PEG of 1 or less suggests the market may not be fully valuing the company's growth path. InMode’s PEG ratio, based on its past five-year growth, is a very low 0.41. This shows that, compared to its historical growth, the stock is trading at a notable discount.
- Very Strong Financial Health: Lynch was cautious about high debt. His screens often asked for a debt-to-equity ratio below 0.6, with a liking for even lower numbers. InMode does very well here, having no debt on its balance sheet. This gives great financial options and lowers risk during economic slowdowns.
- Strong Profitability (ROE): A high return on equity (ROE) shows a company is effectively creating profits from shareholder investments. Lynch looked for ROE above 15%. InMode’s ROE of 22.9% not only passes this level but also places it well within its industry, showing a fundamentally profitable business.
- Strong Liquidity (Current Ratio): To make sure a company can meet its short-term needs, Lynch stressed liquidity. A current ratio above 1 is the minimum. InMode’s current ratio of 9.75 shows an extremely strong liquidity position, well above needs and giving a large safety margin.
A Broad Fundamental Review
A detailed fundamental analysis of InMode supports the view shown by the Lynch screen. The company gets a good overall fundamental rating of 7 out of 10, with specific strong points in profitability and financial health.
- Strong Profitability: InMode’s profitability score is a high 9/10. It has industry-best margins, including a net profit margin over 41% and a return on assets above 20%. These numbers point to a very effective business model with good pricing ability.
- Outstanding Financial Health: With a health score of 8/10, the company’s no-debt status and large liquidity reserves (shown by its current and quick ratios) make it notable. It creates value, as its return on invested capital is well above its cost of capital.
- Attractive Valuation: The valuation score of 8/10 confirms the screen's result. InMode trades at a P/E ratio near 9.4, which is low compared to both the wider S&P 500 and its own industry group. Its price-to-free-cash-flow and enterprise-value-to-EBITDA ratios also suggest a lower value position relative to the sector.
- The Growth Question: The main area for investor review is the growth score, which is a moderate 4/10. While the company has a very good long-term growth record, recent years have shown a deceleration. Revenue and EPS fell over the past year, and short-term growth outlooks are quiet. For a Lynch-style investor, this is the key research point: are these recent issues a temporary pause or a sign of a settling market?
Is InMode a Lynch-Style Find?
For the patient, long-term investor, InMode presents an interesting case. It represents the kind of company Lynch might have liked: it works in a specific, clear area (aesthetic medical devices), has a shown history of profitable growth, and keeps a very strong balance sheet. Most importantly, the market currently values the stock as if its growth period is finished, as shown by the very low PEG and P/E ratios. This creates a possible safety buffer.
The investment case depends on whether the company can get back to a lasting growth track. If the recent deceleration is temporary or linked to broader economic pressures on consumer spending, and InMode can use its no-debt position to create new products or take market share, today's price could mark a fair starting point for GARP investors. The Lynch strategy is not about guessing the next quarter, but about finding good companies trading at fair prices for the long term.
Interested in finding other companies that fit this disciplined investment method? You can review the full Peter Lynch strategy screen and its current results here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, an endorsement, or a recommendation to buy, sell, or hold any security. Investing involves risk, including the potential loss of principal. You should conduct your own thorough research and consider consulting with a qualified financial advisor before making any investment decisions.
