For investors wanting a systematic method to find good companies available at fair prices, the ideas established by famous fund manager Peter Lynch offer a useful framework. Lynch's method, often called Growth at a Reasonable Price (GARP), centers on locating profitable, financially sound companies with lasting growth, while also not paying too much for their stock. The approach stresses fundamental soundness instead of market prediction, supporting a long-term, buy-and-hold mindset. A stock filter using Lynch's main conditions, such as strong earnings growth, a low price-to-earnings growth (PEG) ratio, good profitability, and a firm balance sheet, can reveal possible choices for more study.
One stock that recently appeared from this filter is Qualys Inc (NASDAQ:QLYS), a company offering cloud-based security and compliance tools. Its presence on the list implies its financial numbers fit the Lynch model, deserving more attention from investors focused on lasting growth without high valuation danger.
Fit with Lynch's Main Conditions
The Peter Lynch filter uses particular checks to find companies with a balanced mix of growth, value, and financial soundness. Qualys seems to satisfy these important measures:
- Lasting Earnings Growth: Lynch preferred companies with steady, but not extremely fast, earnings increase. Qualys states a 5-year average yearly EPS growth rate of 21.2%. This number falls within the filter's goal of 15% to 30%, pointing to a good and possibly maintainable growth path that steers clear of the risks of growing too fast.
- Fair Valuation Using PEG Ratio: A central part of the Lynch method is the PEG ratio, which changes the standard P/E ratio for growth. A PEG ratio of 1 or below is usually seen as a mark of fair value. Qualys's PEG ratio, calculated from its last five years of growth, is 0.99. This very close score shows the market is valuing the stock almost precisely aligned with its historical earnings growth, an important sign for value-aware growth investors.
- Outstanding Profitability (ROE): Lynch searched for companies that effectively create profits from shareholder equity. Qualys does very well here, reporting a Return on Equity (ROE) of 35.7%, well above the filter's 15% requirement. This high ROE indicates management is very good at using capital to produce earnings, a sign of a well-run business.
- Careful Financial Soundness: The method stresses a firm balance sheet to handle economic ups and downs. Qualys displays outstanding soundness here, with a Debt/Equity ratio of 0.0, meaning it has no interest-bearing debt. Also, its Current Ratio of 1.38 shows enough short-term assets to meet its near-term obligations, passing the filter's liquidity test.
A More Detailed View of the Fundamental Situation
Beyond the filter's checks, a wider fundamental review of Qualys supports its position as a good GARP candidate. According to a detailed fundamental report, Qualys receives an overall score of 7 out of 10, with especially high marks in profitability (9/10) and financial soundness (9/10).
The company's advantages are clear. Its profit margins lead its industry, with an operating margin above 32% and a net profit margin close to 29%. The quality of these earnings is backed by excellent returns on invested capital (ROIC of 29.7%) and assets (ROA of 18.3%). The clean balance sheet, noted by zero debt and a strong Altman-Z score, indicates low financial danger. While valuation numbers are varied, seeming high on a basic P/E view but fair compared to industry competitors and when growth is considered via the PEG, the mix of high profitability and firm soundness offers a reliable base that can support its valuation for long-term investors.
The Lynch Idea in Perspective
Qualys's profile connects to several detailed parts of Lynch's thinking. The company works in the cybersecurity field, a modern requirement that may appear complicated but supplies a "simple" need: protecting digital property. Its cloud-based, subscription software-as-a-service (SaaS) model creates repeating revenue, matching Lynch's liking for clear business models with steady cash flows. The absence of debt and high cash creation also fit with Lynch's choice for companies that fund themselves and are durable.
While the filter gives a good beginning, Lynch always highlighted the need for more careful investigation. Investors should study Qualys's competitive environment, the durability of its growth rates in a developing market, and its strategies for using capital, including any share repurchase plans.
Finding More Investment Options
Qualys shows the kind of company a Peter Lynch-inspired filter can find. For investors looking to create a varied collection of similar fundamentally good growth stocks, using the filter often can supply a selected list for study.
You can see the present results of the Peter Lynch method filter and find other stocks that qualify by visiting this link.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any securities. Investing has risk, including the possible loss of the original investment. Readers should do their own complete research and think about their personal money situation before making any investment choices.
