The investment philosophy of Peter Lynch, the legendary manager of Fidelity's Magellan Fund, is a foundation of modern fundamental analysis. His method, often called Growth at a Reasonable Price (GARP), centers on finding companies with solid, lasting growth potential that are not too expensive. The tactic highlights financial soundness, earnings power, and a price that fairly reflects the company's growth path. Using a filter built on Lynch's main standards, investors can sort the market for stocks that fit this structured, long-term view.
One firm that recently came from such a filter is YETI HOLDINGS INC (NYSE:YETI). The Austin-based designer and seller of high-end outdoor and recreation products seems to meet many of the conditions Lynch viewed as needed for a good long-term investment. We can look at how YETI's financial picture matches the GARP method.
Match with Lynch's Main Standards
Peter Lynch preferred companies expanding at a consistent, maintainable speed, with good balance sheets and appealing prices compared to their growth. The filter used to find YETI applies particular conditions to find these qualities.
- Maintainable Earnings Growth: Lynch looked for companies with a clear history of growth, but was cautious of extreme growth that might not last. The filter needs a 5-year earnings per share (EPS) growth rate between 15% and 30%. YETI's EPS has increased at an average yearly rate of 18.24% over the past five years, putting it clearly inside this target range. This shows a record of good, above-average increase without entering possibly unstable areas.
- Fair Price (The PEG Ratio): Maybe the most important Lynch measure is the Price/Earnings to Growth (PEG) ratio. A PEG of 1 or less indicates the stock's price is fair relative to its earnings growth. YETI's PEG ratio, based on its past five-year growth, is 0.96. This is a positive sign for GARP investors, as it suggests the market may not completely account for the company's past growth performance.
- Financial Soundness and Earnings Power: Lynch required financially strong companies. The filter sets a Debt/Equity ratio below 0.6, a Current Ratio above 1, and a Return on Equity (ROE) over 15%.
- YETI's Debt/Equity ratio of 0.10 shows a careful capital structure funded mainly by equity, not debt, matching Lynch's liking for low borrowing.
- A Current Ratio of 2.16 indicates more than enough short-term assets to pay short-term debts, pointing to good cash availability.
- An ROE of 22.82% shows very effective use of shareholder money and is a sign of a profitable business, well above the filter's 15% limit.
Fundamental Soundness Summary
A wider view of YETI's fundamental report supports the image shown by the Lynch filter. The company gets a total score of 6 out of 10, with specific strong points in earnings power and financial soundness.
- Earnings Power is a Main Strength: YETI scores a 9 out of 10 for earnings power. It has top-tier margins, with a Gross Margin of 57.79% and an Operating Margin of 12.23%. Its Return on Invested Capital (ROIC) of 17.99% also sits at the high end of its industry group, indicating very good use of capital.
- A Strong Balance Sheet: The soundness score of 8 out of 10 is backed by a very low Debt-to-Free-Cash-Flow ratio (0.28) and a high Altman-Z score (6.97), which implies very low failure risk. The decrease in shares outstanding over time is another good point, fitting with Lynch's positive view of share repurchases.
- Price in Perspective: With a P/E ratio of 17.47, YETI is priced lower than the wider S&P 500 (P/E of 26.61) and most of its industry peers. When looking at its forward P/E of 15.70 and its solid earnings power, the price seems fair, especially given its PEG ratio.
- Growth Path: This is the area with some detail. While the past 5-year growth in revenue and EPS has been solid, analysts expect a slower growth rate in the future. This moderating growth profile is mentioned in the report and is a key point for investors to study more, as Lynch stressed knowing why growth happens and if it can persist.
For a complete look at these measures, you can see the full fundamental analysis report for YETI.
Is YETI a Lynch-Type "Story" Stock?
Beyond the figures, Lynch thought in investing in what you know and grasp, companies with straightforward, enduring business models. YETI has created a strong brand in the outdoor lifestyle area, changing from a specialty cooler maker to a wider lifestyle brand including drinkware, bags, and clothing. Its products are well known for their longevity and high-quality image. For an investor who sees and grasps the strength of this brand loyalty in the market, YETI could be the kind of "story" Lynch liked, a well-managed company in a simple industry, performing its model well.
Finding Other Options
YETI is one instance of a stock that passes a filter constructed on Peter Lynch's ideas. For investors wanting to use this tactic to find other possible choices, the filter used in this study is open to the public. You can view the present results of the Peter Lynch Strategy filter here to see which other firms currently meet these conditions for maintainable growth, financial soundness, and fair price.
Disclaimer: This article is for information only and does not make up financial advice, a support, or a suggestion to buy, sell, or hold any security. The study is based on public data and a specific investment tactic filter. Investors should do their own complete research and think about their personal financial situation and risk comfort before making any investment choices.
