QUALYS INC (NASDAQ:QLYS) Screened as a Peter Lynch-Style GARP Investment

QUALYS INC (NASDAQ:QLYS) has appeared as a candidate through a screen based on Peter Lynch's investment strategy, which emphasizes finding companies with sustainable growth, fair valuations, and good financial health. Lynch's approach, detailed in his book One Up on Wall Street, focuses on long-term holdings that combine parts of growth and value investing, prioritizing firms with manageable debt, strong profitability, and earnings growth that is not too slow nor too fast. This methodology aims to build a diversified portfolio of companies that can compound returns over decades, avoiding speculative trends for fundamental strength.

Alignment with Peter Lynch Criteria

QUALYS shows several characteristics that match closely with Lynch's investment rules, making it a noteworthy candidate for growth at a reasonable price (GARP) investors. The screening criteria from Lynch's philosophy emphasize sustainable growth, sound valuation metrics, and financial stability, all of which are clear in Qualys's fundamentals:

• Earnings Per Share Growth: Lynch preferred companies with EPS growth between 15% and 30% yearly to avoid unsustainable expansion. Qualys has reached an average EPS growth of 21.24% over the past five years, putting it directly within this target range and showing a balanced, maintainable path.
• PEG Ratio: The PEG ratio, which adjusts the P/E ratio for growth, is a key part of Lynch's valuation approach. A PEG below 1 suggests a stock may be undervalued relative to its growth prospects. Qualys's PEG ratio of 0.97 meets this standard, meaning its earnings growth supports its current valuation.
• Debt and Liquidity: Lynch favored companies with very little debt and good liquidity to endure economic cycles. Qualys has a debt-to-equity ratio of 0, showing no outstanding debt, and a current ratio of 1.30, showing enough short-term asset coverage for liabilities.
• Profitability Metrics: Return on equity (ROE) is used by Lynch to measure efficient use of shareholder capital. Qualys's ROE of 36.41% is much higher than the 15% threshold, indicating high profitability and effective management.

These metrics together suggest that Qualys operates with the financial discipline and growth profile that Lynch linked with successful long-term investments.

Fundamental Health and Performance

A more detailed view into Qualys's fundamental report supports its fit for a GARP strategy. The company, which provides cloud-based security and compliance solutions, has shown steady profitability and operational strength. Key points include:

• Profitability: Qualys is very good in margins and returns, with a profit margin of 29.04% and operating margin of 31.01%, both ranking in the top ten percent of the software industry. Its return on invested capital (ROIC) of 28.41% further shows efficient capital allocation.
• Financial Health: The company has a strong balance sheet, marked by no debt and an Altman-Z score of 7.17, showing low bankruptcy risk. This matches Lynch's emphasis on investing in companies with good solvency.
• Valuation and Growth: While the P/E ratio of 20.50 is a bit expensive in absolute terms, it is fair relative to industry peers and the S&P 500. However, future growth expectations are moderate, with projected EPS and revenue growth around 6-8%, which may need watching for sustainability.

For a detailed analysis, readers can see the full fundamental report here.

Investment Considerations

For investors using a Lynch-inspired strategy, Qualys represents a mix of growth, value, and quality. Its high profitability, debt-free status, and past growth meet the main principles of seeking companies that are well-managed and fairly priced. However, as with any investment, it is important to think about wider factors like competitive positioning in the cloud security sector and the possible effect of technological changes. Lynch supported understanding a company's business model completely—investors should evaluate if Qualys's solutions have a lasting market advantage and if growth rates can be kept without depending on too much risk.

Exploring Similar Opportunities

For those interested in using this strategy more, our Peter Lynch screen provides a selected list of companies that meet these standards. This tool can help find other possible candidates for a long-term, fundamentals-driven portfolio.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research and consult with a financial advisor before making any investment decisions.