For long-term investors looking for a systematic method to choose stocks, the ideas from well-known fund manager Peter Lynch provide a useful structure. Lynch's method, explained in his book One Up on Wall Street, centers on finding companies with lasting growth, sound financial condition, and fair prices, a thinking frequently called Growth at a Reasonable Price (GARP). It stresses fundamental study over predicting market movements, supporting investments in businesses that are easy to comprehend and can be owned for many years. A filter using Lynch's main rules lately pointed to Mueller Water Products Inc-A (NYSE:MWA) as a possible choice deserving more study.
Fit with Peter Lynch's Main Rules
The Lynch-modeled filter selects for companies showing a particular mix of growth, value, and financial soundness. Mueller Water Products seems to satisfy these numerical measures, which are made to locate lasting businesses selling at practical prices.
- Lasting Earnings Growth: Lynch preferred companies increasing earnings per share (EPS) between 15% and 30% each year over five years, thinking growth outside this band was often not maintainable. MWA states a five-year EPS growth rate of 20.76%, putting it directly inside this desired area. This shows a record of steady, controlled increase.
- Fair Valuation (PEG Ratio): A key part of the Lynch method is the Price/Earnings to Growth (PEG) ratio, which tries to find stocks where the price shows fair value compared to their growth pace. A PEG ratio at or under 1 is usually seen as good. MWA's PEG ratio, using its past five-year growth, is 0.93, hinting the market may not be completely valuing its historical growth path.
- Sound Financial Condition: Lynch gave importance to companies with strong balance sheets to endure economic ups and downs. Two main filters in the screen are a Debt-to-Equity ratio under 0.6 and a Current Ratio over 1. MWA does well here, with a Debt-to-Equity ratio of 0.46 and a very good Current Ratio of 3.54. This points to a careful capital setup and enough cash to meet near-term needs.
- High Profitability (Return on Equity): To make sure owner capital is used well, Lynch wanted a Return on Equity (ROE) over 15%. MWA's ROE of 19.53% easily passes this mark, showing capable management and a possibly lasting edge in its activities.
Fundamental Condition and Valuation Summary
A wider view of Mueller Water Products' fundamental picture, as shown in its detailed study report, supports the image given by the Lynch filter. The company gets a good total fundamental score of 7 out of 10, with special good points in profitability and financial condition.
Its profitability numbers are excellent next to others in its field, with high scores for Return on Assets, Operating Margin, and Profit Margin. The health score is supported by very good liquidity ratios and a firm solvency standing, including a satisfactory Altman-Z score. While the company's valuation on a normal P/E basis seems fair instead of very cheap, its good points in other areas give background. The growth view, however, gives a mixed sign; while past revenue and EPS growth have been solid, analyst forecasts for future growth are clearly more limited, which long-term investors should include in their study.
A Business in a "Plain" Field
A frequently missed part of Lynch's thinking is his liking for companies in necessary, clear, and sometimes "plain" fields. Mueller Water Products matches this description. The company makes key parts for water movement, delivery, and measurement, products like valves, hydrants, and leak finding systems. This is not a trendy, advanced business, but one based on the constant need for water system upkeep, safety, and performance. Such a steady, need-driven business model fits with Lynch's thought of investing in what you know and grasp, giving a protective trait to the possible growth story.
Locating Other Possible Choices
Mueller Water Products acts as an example of the kind of company a Peter Lynch-modeled filter can find: one with a past of profitable growth, a very strong balance sheet, and a valuation that seems fair when growth is considered. For investors wanting to use this systematic GARP method to their own study, the filter that found MWA can be a helpful first step.
You can find the active Peter Lynch strategy filter and look at other possible choices here.
As usual, a filtering tool gives a list for more examination, not a suggestion to buy. Lynch himself highlighted the need to understand the business behind the figures. For MWA, this would mean a close look at the reasons for its past growth, the competitive field of the water infrastructure industry, and management's plan for handling a slower expected growth setting. For the steady, long-term investor, such fundamental work is the necessary following step.
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Disclaimer: This article is for information only and does not make up financial guidance, a suggestion, or an offer to buy or sell any securities. Investing has risk, including the chance of losing the original amount. You should do your own study and talk with a skilled financial advisor before making any investment choices.
