For investors looking for a disciplined, long-term way to build wealth, few strategies are as respected as Peter Lynch’s method. The famous former manager of Fidelity’s Magellan Fund supported investing in what you understand, concentrating on companies with clear operations, consistent growth, and good finances. His central idea was to discover "growth at a reasonable price" (GARP), companies increasing earnings steadily but not selling for very high prices. This method mixes parts of growth and value investing, focusing on basic financial soundness and earnings over trying to predict the market.
A recent filter using Lynch's main conditions identified Yelp Inc (NYSE:YELP) as a possible choice. The local business review platform is a known digital destination for millions, matching Lynch’s rule of investing in clear, common businesses. We can look at how Yelp's financial picture matches the particular points of a Lynch-modeled filter.
Match with Peter Lynch's Main Conditions
The filter uses a number of numerical rules meant to find companies with steady growth, fair prices, and good financial condition. Yelp's present measurements show a strong match:
- Steady Earnings Growth: Lynch wanted companies increasing earnings per share (EPS) between 15% and 30% each year over five years, calling this range maintainable. Yelp's five-year EPS growth rate is 24.97%, fitting well inside this preferred zone. This shows a record of solid, but not excessive, earnings increase.
- Fair Price (PEG Ratio): A key part of Lynch's strategy is the Price/Earnings to Growth (PEG) ratio, which tries to find stocks that might be priced low compared to their growth path. Lynch preferred a PEG ratio of 1 or lower. Yelp's PEG ratio, using its past five-year growth, is about 0.52, implying the market could be pricing its historical growth too low.
- Very Good Financial Condition: Lynch gave importance to companies with good balance sheets.
- Debt/Equity: The filter asks for a ratio under 0.6, with Lynch himself liking under 0.25. Yelp does very well here with a Debt/Equity ratio of 0.0, meaning it functions with no debt that charges interest.
- Current Ratio: To make sure short-term bills can be paid, a minimum Current Ratio of 1 is needed. Yelp's ratio is a solid 2.99, showing more than enough cash availability.
- High Earnings Power (Return on Equity): A minimum Return on Equity (ROE) of 15% was used to select for effective and profitable companies. Yelp's ROE of 20.46% is well above this level, showing good management skill in creating earnings from shareholder investment.
A Detailed View of Yelp's Basic Financial Picture
Outside the specific filter points, a wider basic study supports the view. According to ChartMill's full fundamental report, Yelp gets a total score of 7 out of 10, with specific high points in earnings power and financial condition.
- Earnings Power & Margins: The company scores an 8 for earnings power, having high margins that are better than its industry. Its gross margin is over 90%, and both operating and profit margins have shown good movement. Important earnings ratios like Return on Assets (15.16%) and Return on Invested Capital (20.29%) also place in the better part of its interactive media industry.
- Very Strong Balance Sheet: The condition score is a high 9, caused by the total lack of debt and good cash measurements. The company has been steadily lowering its share count through buybacks, another point Lynch saw as good. An Altman-Z score of 5.13 points to a very small chance of near-term bankruptcy.
- Price Context: With a P/E ratio of 12.92 and a forward P/E of 10.85, Yelp is priced lower than about 75-80% of its industry group and much under the present S&P 500 average. This price seems low when looked at next to its high earnings power and clear balance sheet.
Points for the Long-Term Investor
While the Lynch filter shows strong points, a complete investor must also think about the whole situation. Yelp's revenue growth has been limited in recent years, and future revenue growth guesses are now in the low single digits. This implies the notable EPS growth has come more from wider margins and share buybacks than from faster sales increase. For a GARP investor, the main question is if the company can keep growing earnings through better operations and planned actions, even in a possibly slower-growth setting for its main advertising business.
The company’s area, connecting consumers with local services, stays important, and its lack of debt gives it notable room to handle economic changes and put money into new possibilities.
Finding More Investment Ideas
Yelp shows one case of a company that meets a strict set of conditions drawn from a tested long-term strategy. For investors wanting to find other companies that fit similar rules for steady growth, fair price, and financial soundness, you can see the full Peter Lynch Strategy filter.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of the original amount invested. You should do your own study and talk with a qualified financial advisor before making any investment choices.
