In the world of investing, few strategies have the lasting appeal and proven history of the one popularized by Peter Lynch. The famous manager of the Fidelity Magellan Fund supported a long-term, buy-and-hold method centered on finding growing companies trading at sensible prices. His thinking, often summarized as the "growth at a reasonable price" (GARP) style, focuses on lasting earnings growth, sound financial condition, and a price that does not overpay for future potential. By using a filter built on Lynch's main ideas, investors can sort the market for companies that show these characteristics. One company that recently appeared from this filter is Otter Tail Corp (NASDAQ:OTTR).
Examining the Lynch Criteria
Peter Lynch’s strategy is constructed on a set of specific, measurable numbers intended to select for quality and value. For a company like Otter Tail Corp, the filter meets several important conditions that match Lynch's idea of investing in understandable businesses with a lasting advantage.
- Lasting Earnings Growth: Lynch preferred companies increasing at a consistent, maintainable speed, usually between 15% and 30% each year. Otter Tail's earnings per share have increased at a notable average rate of 26.89% over the last five years, putting it clearly within this wanted range. This shows a history of strong profitability without the unstable extreme growth Lynch cautioned about.
- Sensible Valuation via PEG Ratio: Maybe the central part of the GARP method is the Price/Earnings to Growth (PEG) ratio, which Lynch famously used to find stocks trading below their growth rate. A PEG ratio at or under 1.0 is seen as good. Otter Tail does well here with a PEG ratio of 0.48, indicating the market may be pricing its historical growth path too low.
- Strong Profitability (ROE): Lynch searched for companies that effectively produce profits from shareholder equity. A Return on Equity (ROE) above 15% is a positive sign. Otter Tail's ROE of 15.24% meets this standard, showing capable management and a profitable operation.
- Sound Financial Condition: To avoid companies carrying too much debt, Lynch stressed a firm balance sheet. The filter demands a Debt-to-Equity ratio below 0.6, and Otter Tail meets this with a ratio of 0.57. Also, its very good Current Ratio of 3.57 shows more than enough cash to meet near-term needs, a main sign of financial strength.
Fundamental Condition Review
Apart from the specific filter settings, a wider view of Otter Tail's fundamental picture supports its position as a Lynch-style pick. The company's total fundamental score of 7 out of 10 indicates a firm base. The details show specific strong points in profitability and financial condition, two areas Lynch thought were most important.
The company's profit margins are some of the highest in its field, and its returns on assets and invested capital are much better than similar companies. While its price is seen as generally acceptable, it seems low next to both industry norms and the wider S&P 500, which fits the value-aware part of Lynch's strategy. It is important to see, however, that analysts expect a reduction in earnings growth soon, a point long-term investors must consider next to the company's firm past performance and financial state. For a full study, you can see the complete fundamental report for OTTR.
The Lynch Investment Case for Otter Tail
Otter Tail Corp, with its varied work in electric utilities, manufacturing, and plastics, fits the Lynch example of a "simple" company in necessary fields that an investor can grasp. Its numbers tell a story of a business that has increased earnings at a high but maintainable rate, handles its money carefully with little debt and high liquidity, and stays profitable. Most significantly, its low PEG ratio implies the market has not overvalued this success, providing a possible chance to buy at a sensible price compared to its past growth.
For investors making a long-term, varied collection in the way of Peter Lynch, Otter Tail shows the kind of fundamental quality and price discipline the strategy looks for. It is a company that has shown an ability to perform and benefit shareholders, trading at a level that does not require flawless future growth.
This study of Otter Tail Corp was found using a stock filter built on Peter Lynch's investment ideas. If you want to look at other companies that currently fit these conditions for lasting growth at a sensible price, you can see the full filter and its findings 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 securities. The information given is based on supplied data and should not be the only reason for an investment choice. Investors should do their own complete research and think about their personal money situation before making any investment.
