For long-term investors looking for a methodical way to choose stocks, the principles established by legendary fund manager Peter Lynch offer a strong framework. His method, often described as Growth at a Reasonable Price (GARP), centers on finding companies with solid, lasting earnings growth that are not priced too high by the market. It focuses on fundamental soundness, profitability, and a price that fairly reflects the growth being purchased. A filter using Lynch's main criteria, including earnings growth, the PEG ratio, return on equity, and financial strength, can identify possible candidates for more study. One such company that recently passed this filter is SPROTT PHYSICAL GOLD TRUST (NYSEARCA:PHYS).
Matching the Lynch Criteria
The Peter Lynch filter uses specific numerical rules to locate companies that fit his view of lasting growth and solid finances. SPROTT PHYSICAL GOLD TRUST presents a notable case, satisfying many of these central requirements according to the data provided.
- Lasting Earnings Growth: Lynch wanted companies increasing earnings per share (EPS) between 15% and 30% each year over five years, considering this range maintainable. PHYS reports a five-year EPS growth rate of 18.47%, fitting well inside this target range. This shows a steady and controlled rise in profit per share over a long period.
- Fair Price via PEG: A central part of the GARP method is the Price/Earnings to Growth (PEG) ratio. Lynch preferred a PEG of 1 or lower, meaning the stock's price is fair compared to its growth rate. With a PEG ratio of 0.27, PHYS seems priced very low relative to its past growth, a main indicator for investors using Lynch's ideas.
- High Profitability (ROE): Return on Equity (ROE) shows how well a company produces profit from shareholder equity. Lynch wanted a high ROE, with at least 15%. PHYS has an ROE of 26.73%, showing a high degree of profitability and effective use of investor money.
- Outstanding Financial Condition: Lynch favored companies with strong balance sheets. The filter demands a Debt/Equity ratio under 0.6 and a Current Ratio above 1. PHYS performs very well here, with a Debt/Equity of 0.0 (no debt) and a very high Current Ratio of 39,482.47. This points to a very strong balance sheet with great ability to meet obligations, well beyond the basic health requirements.
Fundamental Profile Summary
A look at the detailed fundamental analysis for PHYS gives a wider, though varied, view. The trust receives an overall fundamental score of 3 out of 10. Its main positives are clearly in financial condition and stability, backed by the no-debt structure and large liquidity mentioned above. The growth numbers are also positive, showing strong year-over-year and five-year trends in both EPS and Revenue.
However, the report points out issues with profitability, noting negative operating cash flow in recent years. Also, as a trust that holds physical gold, it does not provide a dividend, which might matter to some investors seeking income. The valuation score is weak, but this is mainly because standard price measures do not apply well to an asset-holding trust; the noted P/E ratio of 4.96 is actually seen as good compared to the wider market.
A Distinct Match for the Method
SPROTT PHYSICAL GOLD TRUST represents a distinct use of the Peter Lynch filter. While Lynch usually concentrated on operating businesses, his central ideas of buying lasting growth at a fair price from a financially very strong entity are clear here. The trust's setup, holding physical gold bullion, gives a direct investment in the commodity with the operational simplicity Lynch liked. The strong PEG ratio suggests the market may not completely acknowledge its growth path, and the total lack of debt matches Lynch's careful view on balance sheet risk. For an investor searching for GARP exposure with a difference, specifically to gold, PHYS presents a numerically interesting option that deserves more investigation.
Interested in finding other companies that pass the Peter Lynch filter? You can find the complete, current list of qualifying stocks here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The analysis is based on data provided and certain screening criteria; it is not a substitute for independent research. Investing involves risk, including the potential loss of principal. Past performance of a security or strategy is not indicative of future results. Always conduct your own due diligence and consider consulting with a qualified financial advisor before making any investment decisions.
