For investors looking for a disciplined, long-term market method, few strategies have the substance of Peter Lynch's approach. As famously described in One Up on Wall Street, Lynch's thinking focuses on finding well-run, expanding companies trading at sensible prices, a concept often called Growth at a Reasonable Price (GARP). His method sidesteps speculative market timing, concentrating instead on fundamental business strength, maintainable expansion, and good valuation. By using a particular group of filters, investors can search for companies that represent these ideas, trying to construct a durable portfolio for the future.
One company that recently appeared from such a search is X Financial ADR (NYSE:XYF), an online personal finance platform located in China. Working under the "Xiaoying" brand, the company offers loan products and wealth management services, using its own WinSAFE risk control system. A detailed look shows that XYF fits with several important parts of the Lynch investment model.
Fit with Peter Lynch Standards
The center of Lynch's search involves weighing expansion, earnings, financial strength, and valuation. X Financial seems to satisfy these measures according to the given data:
- Maintainable Earnings Expansion: Lynch preferred companies with steady, but not extreme, expansion that could be continued. XYF states a 5-year average EPS expansion rate of 16.75%. This number rests well within the Lynch-preferred span of 15% to 30%, proposing a speed of growth that is strong yet possibly maintainable, sidestepping the warning of very fast expansion that often comes before a decline.
- Excellent Earnings: A high Return on Equity (ROE) shows management's skill in creating earnings from shareholder money. Lynch usually searched for an ROE above 15%. XYF's ROE of 22.61% is much higher than this level, indicating good operational performance and a basic trait of a sound business.
- Cautious Financial Strength: To sidestep high risk, Lynch stressed companies with firm balance sheets. Two important measures here are the Debt/Equity ratio and the Current Ratio.
- XYF's Debt/Equity ratio of 0.50 is under the search's maximum of 0.6, showing the company is financed more by equity than debt. Lynch himself liked an even smaller ratio, but this amount still suggests a workable capital structure.
- The Current Ratio of 1.47 is above the needed minimum of 1.0, showing that XYF has enough short-term assets to meet its near-term obligations, a simple test for financial steadiness.
- Attractive Valuation using PEG: Maybe the most important Lynch measure is the Price/Earnings to Growth (PEG) ratio, which tries to find stocks that may be priced low compared to their expansion rate. A PEG ratio at or under 1.0 was Lynch's standard for a sensible price. With a PEG ratio figured at 0.064, XYF trades at a large discount to its past expansion, making it notable from a pure valuation view within this method.
Fundamental Strength Review
Beyond the particular search filters, a look at the wider fundamental analysis report for XYF gives a more detailed picture. The company gets a total fundamental rating of 6 out of 10, which puts it in a firm spot compared to its industry group in Consumer Finance.
The report points out several positive points:
- Superior Earnings: XYF gets an 8 out of 10 in earnings. Its margins lead the industry, with an Operating Margin of 58.72% that beats all peers. Returns on assets and invested capital are also very high.
- Large Dividend Yield: The company now provides a big dividend yield of 9.18%, which is much higher than both industry and S&P 500 averages. However, the report states the yield has been increased by a recent steep fall in the stock price, which may deserve investor examination.
- Low Valuation: The valuation score of 4 out of 10 mirrors a very small Price/Earnings ratio of 1.08, making the stock seem low-cost on an absolute and industry-comparative basis.
The report also notes areas for thought:
- Financial Strength is Satisfactory: With a score of 5 out of 10, the company's financial strength is considered middling. While liquidity ratios are acceptable, the Altman Z-Score of 2.36 sits in a "grey area," showing contained but existing bankruptcy risk that investors should watch.
- Expansion View is Uncertain: The expansion score of 4 out of 10 is limited by a shortage of available analyst projections for future earnings and income, making it hard to judge the maintainability of its recent firm expansion path.
You can review the full, itemized fundamental analysis for X Financial (XYF) here.
Is XYF a Lynch-Method Chance?
Combining the search outcomes and the fundamental report, X Financial offers a strong case for investors using a GARP method. It meets the main points Lynch supported: firm past expansion, excellent earnings, sensible financial leverage, and, most noticeably, a very appealing valuation as measured by the PEG ratio. The large dividend yield includes an extra part of possible return.
However, the Lynch method needs more than just clearing a search; it requires knowing the business. Potential investors must study the forces of China's online finance field, regulatory setting, and XYF's particular competitive strengths and dangers. The absence of analyst coverage, which Lynch might have viewed as a possible chance for an undiscovered find, also means less outside examination of its future outlook.
For investors who complete their own study and are at ease with the linked risks, XYF stands for the kind of fundamentally solid, sensibly priced expansion company that Peter Lynch constructed his famous history on.
Find More Possible Choices The Peter Lynch method search is made to find companies with a particular profile for long-term investment. X Financial is one of the stocks that presently clears this filter. To see the whole, current list of companies matching these conditions, you can open the search straight through this Peter Lynch Strategy Screen.
