The investment philosophy of Peter Lynch, the legendary manager of the Fidelity Magellan Fund, has long been a cornerstone for investors seeking to combine growth with value. His approach, often called Growth at a Reasonable Price (GARP), focuses on finding companies with solid, lasting earnings growth that are not overpriced by the market. The method looks for financial soundness, profitability, and fair valuation, intending to create a varied, long-term portfolio. A recent filter based on Lynch's main ideas has found one significant apparel retailer as a possible choice for these investors.
A Lynch-Style Fit: Lululemon Athletica
Lululemon Athletica Inc (NASDAQ:LULU) appears from the filter as a company that matches several of Peter Lynch's important investment rules. The filter concentrates on lasting growth, fair valuation compared to that growth, and a sound financial base, all key parts of Lynch's method of investing in what you know and understand before investing for the long term.
Meeting the Core Criteria
The filter uses specific number-based rules taken from Lynch's philosophy. Lululemon's present financial profile shows a solid match with these measures:
- Lasting Earnings Growth: Lynch preferred companies increasing steadily, not suddenly. The filter seeks a 5-year earnings per share (EPS) growth rate between 15% and 30%. Lululemon's EPS has increased at an average yearly rate of 24.37% over this time, well inside the target range and pointing to a strong, yet possibly maintainable, growth path.
- Fair Valuation (PEG Ratio): Maybe the most important Lynch measure is the Price/Earnings to Growth (PEG) ratio, which tries to find stocks that may be priced low given their growth rate. A PEG ratio at or under 1.0 is usually seen as good. Lululemon's PEG ratio, based on its last 5-year growth, is 0.49, hinting the market may not be completely valuing its past earnings growth.
- Financial Soundness and Profitability: Lynch required companies with good balance sheets and high returns on capital.
- Debt/Equity: The filter demands a ratio below 0.6, with Lynch himself liking even lower numbers. Lululemon does very well here with a Debt/Equity ratio of 0.0, showing no interest-bearing debt, a mark of very good financial strength and options.
- Current Ratio: To make sure short-term cash needs are met, a Current Ratio of at least 1 is needed. Lululemon's ratio of 2.13 shows more than enough ability to pay its near-term bills.
- Return on Equity (ROE): High profitability is required with an ROE above 15%. Lululemon's ROE of 38.67% is very high, showing very good use of shareholder equity.
Fundamental Health Check
A wider view of Lululemon's fundamental analysis report supports the image shown by the Lynch filter. The company gets a high total score of 7 out of 10, with special good points in profitability and financial soundness. Its margins, including an operating margin over 22%, are some of the best in its field. The company's very clean balance sheet, shown by no debt and good cash position, leads to an almost perfect health score. While future growth predictions are more measured than its past fast growth, analysts still expect steady rises in both sales and earnings. From a valuation view, its P/E ratio of 11.89 seems fair both compared to the wider market and to many field competitors. You can see the complete, itemized fundamental analysis for LULU here.
Conclusion and Further Research
For investors following the ideas of Peter Lynch, Lululemon Athletica offers a strong example. It shows the traits Lynch valued: a good brand in a familiar industry, a record of strong earnings growth done at a maintainable speed, first-class profitability, and a very firm balance sheet, all while being traded at a valuation that seems fair when growth is considered. It represents the "growth at a reasonable price" idea, where the investor pays a suitable price for a high-quality, growing company.
It is key to recall that a filter result is a beginning for more study, not a final buy sign. Lynch himself stressed knowing the business, its competitive edges, and its chance for long-term success. The filter that found Lululemon can be used to find other companies that match this careful structure. You can see the present results of the Peter Lynch strategy filter here.
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 original investment. You should do your own complete research and think about talking with a qualified financial advisor before making any investment choices.
