For investors looking for a disciplined, long-term way to build wealth, few strategies are as respected as Peter Lynch's method. The famous manager of the Fidelity Magellan Fund supported a "growth at a reasonable price" (GARP) idea, concentrating on companies that show solid, lasting growth, sound financial condition, and, crucially, a price that does not overvalue that future promise. His strategy, explained in One Up on Wall Street, stresses fundamental study and a buy-and-hold attitude, avoiding attempts to time the market and instead finding well-managed businesses that an investor can know and own for years.
A recent filter using Lynch's main standards has identified NetEase Inc-ADR (NASDAQ:NTES) as a possible choice. The Chinese technology and entertainment company, recognized for its online games and services, seems to fit several of the strategy's important parts, justifying a more detailed examination by GARP-focused investors.
Fit with Peter Lynch Standards
Peter Lynch's filter looks for companies with a particular set of traits: profitable growth that is not too sluggish nor too quick to last, a solid financial position, and a good price when growth is considered. NetEase's basic numbers indicate it clears these bars.
- Lasting Earnings Growth: Lynch preferred companies with a steady history of earnings growth, usually from 15% to 30% each year, as growth faster than that is hard to keep up. NetEase's Earnings Per Share (EPS) has increased at an average yearly rate of 21.3% over the last five years, putting it directly within this wanted band. This shows a past of controlled, real increase.
- Price Matched to Growth: A central part of the Lynch method is the PEG ratio (Price/Earnings to Growth), which tries to find stocks that are fairly priced compared to their growth speed. A PEG ratio at or under 1.0 is seen as good. NetEase's PEG ratio, using its past five-year growth, is about 0.67, hinting the market may not completely value its historical growth path.
- Outstanding Financial Condition: Lynch gave great importance to a company's financial strength to survive economic slumps. Two key tests are a Debt-to-Equity ratio below 0.6 (with a liking for under 0.25) and a Current Ratio above 1.0. NetEase does very well here, having a very small Debt-to-Equity ratio of 0.05 and a strong Current Ratio of 3.42, showing it has more than enough cash to meet near-term needs.
- High Profitability: The need for a Return on Equity (ROE) above 15% makes sure owner money is used effectively. NetEase's ROE of 23.2% is much higher than this level, indicating a very profitable business that creates good gains from its equity.
Basic Condition and Price Summary
Outside the specific filter settings, a wider view of NetEase's basic picture supports its status as a financially stable company. According to ChartMill's complete fundamental analysis report, NetEase gets a total score of 6 out of 10, with high marks in profitability (8/10) and financial condition (7/10).
The company's advantages are clear:
- Profitability Leader: NetEase shows top-tier margins and returns. Its Profit Margin of 32.5% and Return on Invested Capital (ROIC) of 17.6% are in the highest group of its field, indicating very good operational performance.
- Very Strong Financial Position: The condition score confirms the filter's results. With almost no debt and good cash measures, the company has very little risk of failure. The report states that its Debt-to-Free-Cash-Flow ratio of 0.16 is "excellent," meaning it could pay off all debt with less than two months of cash flow.
- Fair Price: The price score of 7/10 points out that the stock sells at a lower price compared to both others in its field and the wider S&P 500. Its P/E ratio of 14.4 and Forward P/E of 12.6 are less expensive than about 90% of companies in the Entertainment field.
The main warning in the report focuses on growth. While past growth has been good, analyst forecasts suggest a possible drop in EPS in the next few years. This is a key point for any potential investor to study more, as it directly affects the future part of the GARP argument.
Is NetEase a Lynch-Type "GARP" Stock?
Bringing the data together, NetEase makes a strong argument for investors who agree with Peter Lynch's thinking. It meets the needed checks of historical growth in a lasting band, high profitability, and a very strong financial position, all available at a price that seems fair, if not low, based on common measures. The low PEG ratio is especially interesting, as it was a main number for Lynch to find growth stocks priced low.
However, the Lynch strategy is not a simple filter to use without thought. It needs thorough knowledge. The expected decrease in earnings growth is a major signal that requires study. A long-term investor must decide for themselves if this is a short-term challenge or a more lasting change in the company's growth path, and if the current price properly accounts for this uncertainty.
For investors wanting to review other companies that pass this strict set of filters, the complete Peter Lynch Strategy screen can be found here. It works as a solid first step for discovering companies that mix growth, quality, and value.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of the original amount invested. You should do your own complete research and talk with a qualified financial advisor before making any investment choices.
