For investors looking for a disciplined method to build a long-term portfolio, the approach made famous by legendary fund manager Peter Lynch offers a strong framework. His strategy, outlined in his book One Up on Wall Street, centers on finding companies with good, lasting growth that are available at fair prices, a central idea of the Growth at a Reasonable Price (GARP) philosophy. Lynch supported investing in businesses that are easy to understand, have sound finances, avoid high debt, and using measures like the PEG ratio to assess price compared to growth. A recent filter using these ideas has identified one such company for more study: Simpson Manufacturing Co Inc (NYSE:SSD).
Fitting the Lynch Criteria
Simpson Manufacturing, a top provider of building construction products like connectors, fasteners, and adhesives, seems to match several important filters from the Peter Lynch screen. The company's financial numbers point to a pattern of steady growth, earnings, and financial strength.
- Lasting Earnings Growth: A key part of Lynch's strategy is finding companies with a steady, but not extreme, growth path. Simpson Manufacturing reports a 5-year average annual EPS growth of 20.59%. This is within the Lynch screen's desired range of 15% to 30%, pointing to a good and possibly maintainable speed of increase.
- Fair Price via PEG: Lynch was known for using the Price/Earnings to Growth (PEG) ratio to locate fairly priced growth stocks. A PEG ratio at or under 1.0 implies the stock's price may not fully account for its growth potential. Simpson Manufacturing's PEG ratio, calculated from its past five years of growth, is 0.99, essentially meeting Lynch's standard for fair price.
- Good Profitability (ROE): A high Return on Equity (ROE) shows efficient use of shareholder money. Lynch sought ROE above 15%. Simpson Manufacturing's ROE of 17.16% is above this level, indicating solid earnings within its field.
- Careful Financial Health: Lynch preferred companies with strong balance sheets. Two main numbers show Simpson's financial caution:
- Debt/Equity Ratio: At 0.17, the company's debt is very low, much below the screen's filter of 0.6 and even Lynch's own liking for a ratio under 0.25. This shows very little financial risk.
- Current Ratio: With a ratio of 3.35, the company has more than enough short-term assets to meet its near-term obligations, above the screen's need of 1.0 and pointing to good cash availability.
Fundamental Strength Review
A wider view of Simpson Manufacturing's fundamental picture, as shown in its detailed analysis report, supports the image from the Lynch screen. The company receives high scores for both financial strength and profitability, which are important for long-term, buy-and-hold investors who must endure economic shifts.
The report gives Simpson a strong health score, mentioning its very good solvency and liquidity ratios next to industry competitors. Its profitability is also scored highly, with top-tier gross margins and reliable returns on assets and invested capital. These points match Lynch's focus on investing in financially secure companies.
The main area for thought, as mentioned in the report, is price. While the stock's P/E ratio is similar to its industry, the report indicates it is valued "quite highly" on a basic level. This highlights the value of the PEG ratio here; the measure helps explain the P/E ratio by including the company's shown growth rate, which is where Simpson's profile becomes more interesting for GARP investors.
A Subject for More Study
For investors following the ideas of Peter Lynch, Simpson Manufacturing offers a notable example. It works in the necessary, though ordinary, building products field, precisely the kind of "simple" business Lynch liked for its clarity. The company meets many of his number-based filters centered on lasting growth, fair price related to that growth, and very strong financial base. Its high fundamental scores for health and profitability offer a solid base.
It is key to remember that a filter result is a beginning, not a final suggestion. Lynch himself emphasized the need for complete study to understand the business, its competitive edges, and the reasons for its growth before any investment.
You can review the complete list of companies currently meeting the Peter Lynch screen for more research ideas here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any securities. Investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.
