YELP INC (NYSE:YELP) Fits Peter Lynch’s Growth at a Reasonable Price (GARP) Strategy

Peter Lynch’s investment strategy, described in One Up on Wall Street, centers on finding companies with steady growth at fair prices, commonly known as the Growth at a Reasonable Price (GARP) method. The approach prioritizes solid fundamentals, consistent profits, and controlled growth rates, steering clear of overly hyped or heavily indebted firms. Lynch’s filters often seek earnings growth between 15% and 30%, minimal debt, high returns on equity, and valuations that match growth (PEG ratio ≤ 1). These measures help investors prevent overpaying for growth while confirming the business is financially stable.

YELP INC (NYSE:YELP) stands out as a potential match for Lynch’s criteria. Here’s how it meets key requirements:

1. Earnings Growth: Steady, Not Extreme

• 5-Year EPS Growth: 24.97% – This surpasses Lynch’s minimum of 15% while staying under the 30% limit, indicating growth is strong but not excessive.
• Future EPS Growth (Est.): 18.17% – While slightly lower than historical growth, it remains solid, fitting Lynch’s preference for companies that sustain progress without overextending.

Why it matters: Lynch steered clear of volatile "hyper-growth" stocks. Yelp’s steady growth reflects effective operations without dependence on speculative trends.

2. Valuation: PEG Ratio Hints at Bargain

• PEG Ratio (Past 5Y): 0.56 – Significantly below Lynch’s ideal of 1, suggesting the stock is priced below its earnings growth.
• P/E Ratio: 14.10 – More affordable than 75% of its interactive media competitors and the S&P 500 (27.11), aligning with Lynch’s focus on safety.

Why it matters: A low PEG implies investors aren’t overpaying for growth—a cornerstone of GARP investing.

3. Financial Health: No Debt and Ample Cash

• Debt/Equity: 0% – Lynch preferred firms with little to no debt, Yelp’s debt-free status removes refinancing concerns.
• Current Ratio: 2.89 – Well above the 1.0 minimum, showing enough liquidity to meet short-term needs.

Why it matters: Financial strength lets a company fund growth and endure downturns—critical for long-term holdings.

4. Profitability: Strong Capital Returns

• ROE: 19.65% – Among the best in its sector, meeting Lynch’s 15%+ standard for efficient capital use.
• ROIC: 18.94% – Similarly impressive, reflecting smart reinvestment of earnings.

Why it matters: High returns point to a lasting competitive edge, another Lynch priority.

Fundamental Overview

Yelp’s fundamental report gives it a 7/10 rating, noting:

• Profitability (8/10): Outstanding margins (90.88% gross, 12.67% operating) and top-tier ROE/ROIC.
• Financial Health (9/10): Zero debt, strong liquidity, and a high Altman-Z score (5.58) indicate minimal bankruptcy risk.
• Valuation (8/10): Attractive on PEG, P/E, and EV/EBITDA compared to peers.

While revenue growth is modest (~6.84% yearly), Yelp makes up for it with earnings efficiency and careful capital use—qualities Lynch prized over sheer revenue expansion.

Next Steps

For investors looking for similar GARP options, the Peter Lynch screen provides a filtered list of stocks matching these standards.

Disclaimer: This analysis is not investment advice. Perform detailed research or consult a financial advisor before making investment choices.