Investors looking for a disciplined, long-term method for choosing stocks frequently consider the ideas of famous fund manager Peter Lynch. His plan, explained in his book One Up on Wall Street, centers on finding companies with solid, lasting growth, very good financial condition, and fair prices. It is a traditional "growth at a reasonable price" (GARP) system that steers clear of speculative trends, choosing instead understandable companies with established histories. A stock filter using Lynch's rules can reveal possible choices, and one company that recently met the conditions is NetEase Inc-ADR (NASDAQ:NTES).
A Profile in the Lynch Style: Lasting Growth and Financial Strength
Peter Lynch stressed that a company's growth should be solid but not extreme, as unreasonably high growth rates frequently result in letdown. He also valued strong balance sheets and high profitability. NetEase seems to fit these central ideas well according to the filter settings.
- Earnings Per Share Growth (5-Year): 17.5%. This number falls nicely within Lynch's favored span of 15% to 30%. It shows a record of important, yet possibly maintainable, earnings increase, sidestepping the warning of extreme growth that can be hard to continue.
- PEG Ratio (Past 5 Years): 0.85. The Price/Earnings to Growth ratio is a fundamental part of Lynch's price assessment. A PEG under 1.0 indicates the stock could be priced low compared to its historical growth rate. For NTES, a PEG of 0.85 means investors are paying a lower price for each unit of past earnings growth, a main point for value-aware growth investors.
- Return on Equity: 23.2%. Lynch searched for companies that effectively produce profits from shareholder equity. An ROE much higher than 15%, as shown here, points to very good management skill and a strong competitive advantage, a feature of high-caliber businesses.
- Debt-to-Equity Ratio: 0.05. Financial condition was essential for Lynch, who preferred companies with little debt. NTES's very low D/E ratio of 0.05 shows a very strong balance sheet funded almost completely by equity, giving great stability and options.
- Current Ratio: 3.42. This measure checks a company's capacity to meet near-term liabilities. A ratio much above 1 is good, and NTES's figure of 3.42 shows strong liquidity and a very small chance of financial trouble, another positive mark for safety.
Fundamental Condition: Looking Past the Filter
While the filter gives a good first step, Lynch supported more detailed investigation. An examination of NetEase's wider fundamental analysis report shows a company that performs very well in several areas important for long-term investors.
The company receives a very good total fundamental score, led by high marks in profitability and financial health. Its profit margins are some of the best in the Entertainment field, and its returns on assets and invested capital are very high. The health score is supported by its small debt and good cash flow situation. From a price standpoint, NTES trades at levels that are usually lower than both others in its field and the wider S&P 500, particularly when looking at measures like Price/Free Cash Flow.
It is important to recognize, as the report mentions, that while past growth has been solid, projections for nearer-term EPS growth have become more cautious. This contrast of a superb past performance with more measured future outlooks is a detail long-term investors need to consider, fitting with Lynch's attention to maintainable, long-term results instead of short-term predictions.
Is NetEase a Foundational Investment?
For an investor using Peter Lynch's GARP thinking, NetEase offers a strong argument. It works in the understandable, though contested, area of online gaming and services, a field many users experience directly. The numerical filter rules taken from Lynch's guidelines point to a profile of steady historical growth, high profitability, excellent financial condition, and a fair price. The more detailed fundamental study supports this strength, describing a financially sound and very profitable company.
The stock has points to think about, mainly related to the speed of future earnings growth. However, for a plan centered on keeping quality companies for many years, NetEase's mix of a strong balance sheet, very good business measures, and a fair price could make it a choice deserving of more study for a varied, long-term portfolio.
Interested in finding other companies that fit this disciplined investment method? You can see the complete list of stocks meeting the current Peter Lynch plan filter here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the potential loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.
