For long-term investors aiming to assemble a portfolio of quality companies, few strategies are as lasting as the one made famous by legendary fund manager Peter Lynch. His method, outlined in One Up on Wall Street, centers on finding companies that are growing, have fair valuations, sound financial condition, and durable business models. It is a philosophy frequently called Growth at a Reasonable Price (GARP), which steers clear of the extremes of speculative growth investing and deep-value searching. Rather, it looks for profitable businesses that are increasing in size at a steady rate and can be owned for many years. A recent filter based on Lynch’s main ideas has identified PAYCOM SOFTWARE INC (NYSE:PAYC) as a candidate for more detailed review.
Assessing PAYC Using Lynch's Main Standards
Peter Lynch’s method stresses several numerical filters to search for quality. PAYCOM Software, a company offering cloud-based human capital management (HCM) solutions, seems to satisfy these important measures.
- Durable Earnings Increase: Lynch preferred companies with steady, but not extreme, earnings increase. He usually sought a 5-year average yearly EPS increase between 15% and 30%, as increase above that can be hard to continue. PAYC’s EPS has increased at an average yearly rate of 18.56% over the last five years, putting it directly in this desired zone and indicating a record of steady, durable expansion.
- Fair Valuation Compared to Increase: One of Lynch’s most well-known measures is the PEG ratio (Price/Earnings to Growth), which tries to show if a stock’s price is fair considering its increase rate. A PEG ratio of 1 or below is often seen as appealing. PAYC’s PEG ratio, calculated from its past five-year increase, is 0.93, showing the market may not be completely valuing its historical increase path.
- High Profitability and Sound Financial Condition: Lynch required companies that are efficient and financially strong.
- Return on Equity (ROE): PAYC has an ROE of 26.51%, well above Lynch’s usual minimum of 15%. This shows the company is very good at creating profits from shareholder equity.
- Debt Amount: A cautious balance sheet was critical for Lynch. PAYC does very well here with a Debt/Equity ratio of 0.0, meaning it functions with no interest-bearing debt. This gives notable financial room and lowers risk.
- Current Ratio: While Lynch wanted a ratio above 1 to make sure short-term bills can be paid, he knew the situation. PAYC’s Current Ratio of 1.22 meets the basic standard, and its very good solvency and profitability measures indicate the company is not dealing with cash flow problems.
A Summary Look at PAYC's Basic Business Picture
A wider view of PAYCOM’s basic business profile supports the image shown by the Lynch filter. The company’s overall financial condition is strong, marked by excellent profitability margins that place it with the top in the Professional Services field. Its increase, while good in the past, is predicted to slow in the next few years, a change investors should be aware of, though forecasted increase stays positive.
From a valuation angle, PAYC’s standard P/E ratio might seem high by itself. However, when its better profitability, clear balance sheet, and historical increase are included, as the PEG ratio tries to do, the valuation seems more fair compared to its quality and similar companies.
For a full itemization of these measures, you can see the complete fundamental analysis report for PAYC.
Is PAYC a Lynch-Method "GARP" Investment?
PAYCOM Software makes a strong case for investors who follow the GARP philosophy. It shows the signs Lynch prized: a record of reliable, durable earnings increase, high profitability from a good return on equity, and a very strong balance sheet with no debt. The PEG ratio indicates the market may not be paying too much for this mix of quality and increase. For long-term investors, these are the basic parts of a lasting business able to build value over time.
It is key to recall that a filter is a beginning for study, not a final instruction to buy. Lynch himself highlighted the need to know the business behind the figures. Investors should think about PAYC’s competitive place in the HCM software market, its future increase sources, and any field-specific difficulties.
Interested in reviewing other companies that meet this strict investment filter? You can locate the full list and conduct your own study using the Peter Lynch Strategy stock screener.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. The study uses data and a particular investment strategy model; it is not a replacement for your own research and thought of your personal financial position, risk comfort, and investment goals. You should talk with a qualified financial advisor before making any investment choices.
