The investment philosophy of legendary fund manager Peter Lynch depends on finding companies with lasting growth, good financial condition, and fair prices, a strategy often called Growth at a Reasonable Price (GARP). Lynch supported putting money into businesses that are easy to grasp, show steady, but not extreme, earnings growth, are profitable, have minimal debt, and trade at prices that are not too high for their future potential. This method aims to create a varied, lasting portfolio by concentrating on basic corporate soundness instead of temporary market distractions.
Yelp Inc (NYSE:YELP) runs a popular community-based platform that links consumers with nearby businesses. The company makes money mainly from advertising products and services sold to those businesses, using its big collection of user reviews.
Connection with Lynch's Main Standards
A filter based on Peter Lynch's ideas points to Yelp as a company deserving more study. The company's financial picture matches many of his important checks for finding good growth at a fair price.
- Lasting Earnings Growth: Lynch looked for companies with a clear history of earnings growth, preferably between 15% and 30% each year, to stay away from unstable high-flying stocks. Yelp's earnings per share (EPS) has increased at an average yearly rate of about 25% over the last five years, putting it directly within this preferred zone and showing a record of firm, controlled growth.
- Fair Valuation (PEG Ratio): Maybe the central part of Lynch's way to value a stock is the Price/Earnings to Growth (PEG) ratio. A PEG of 1 or less implies the stock's price may not completely account for its growth path. Yelp's PEG ratio, calculated from its past five-year growth, is a low 0.42. This shows the market is pricing the company's earnings at a large reduction compared to its historical growth rate, a main sign for investors looking for value in growth stocks.
- Good Financial Condition: Lynch stressed investing in companies with sound balance sheets to handle economic slowdowns.
- Debt/Equity: Yelp has a balance sheet with no debt, showing a Debt/Equity ratio of 0.0, much better than Lynch's preference for a ratio under 0.6 and even his more exact goal of 0.25. This gives great operational freedom and lowers risk.
- Current Ratio: The company's good cash position is shown by a Current Ratio of 2.99, much higher than the filter's need of 1, proving strong ability to meet near-term bills.
- High Profit Level (Return on Equity): A high Return on Equity (ROE) shows good use of shareholder money. Yelp's ROE of 20.5% easily beats the 15% limit set in the filter, meaning management is good at creating profits from its equity.
Basic Analysis Summary
A full basic report on Yelp gives the company a firm score of 7 out of 10, with special good marks in profit level and financial condition. The report points out several good points that fit with a lasting, Lynch-style view:
- Profit Level Strength: Yelp gets high marks on profit measurements, with very good Return on Assets (15.16%) and Return on Invested Capital (20.29%), both placed in the best group of its Interactive Media & Services industry. Its profit and operating margins have shown good increase in recent years.
- Notable Valuation: The report often mentions Yelp's low price compared to both its industry friends and the wider S&P 500. Its Price/Earnings ratio of 10.53 and Price/Forward Earnings ratio of 8.18 are pointed out as being much lower than industry and market norms.
- Growth Picture: While past EPS growth has been firm, experts predict a small slowing in sales growth ahead. Still, earnings per share are expected to increase at a good rate above 26% each year. This mix of firm past results with continued, though more measured, earnings growth possibility is typical of a settling but still-growing business.
Points for the Lasting Investor
For an investor using Peter Lynch's ideas, Yelp offers an interesting example. It runs a simple business model, connecting consumers and local businesses, that many people use daily. Financially, it joins the features Lynch liked: a clear balance sheet with no debt, high profit level, a history of lasting earnings growth, and a current price that seems to provide some safety. The company's continuing share repurchase plan, as seen in the extra Lynch checks, is another good match with his thinking.
The Peter Lynch filter is made to find companies with this particular mix of qualities. You can review the present results of this filter and find other possible companies here.
As with any investment plan, filtering is only the beginning. Peter Lynch himself noted the need for complete study to understand the business, its competitive edges, and the reasons for its financial results before making a lasting investment.
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Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any securities. Investors should do their own study and talk with a qualified financial advisor before making any investment choices.
