Warren Buffett and Peter Lynch are two of the most renowned investors of all time, each with their own distinct approaches to finding great companies. While their strategies differ in many ways, there are currently five stocks that manage to satisfy the criteria of both investing legends, according to Validea’s guru-based models. Let’s examine why these companies have caught the attention of both the Oracle of Omaha and the mutual fund maestro.
The Buffett Approach: Seeking Durable Competitive Advantages
Warren Buffett looks for companies with strong, predictable earnings growth and high returns on equity – signs of a durable competitive advantage. He favors businesses that can be easily understood and have consistent operating histories. Buffett also seeks companies with strong balance sheets and the ability to use retained earnings effectively to generate shareholder value.
The Lynch Strategy: Finding Growth at a Reasonable Price
Peter Lynch popularized the PEG ratio (Price/Earnings to Growth), seeking companies where the P/E ratio is low relative to the earnings growth rate. He categorized stocks into different groups based on their growth rates, with “fast growers” being his favorite. Lynch also paid attention to factors like debt levels, inventory turnover, and free cash flow.
Now let’s look at the five companies that currently satisfy both of these legendary investors’ criteria:
Axos Financial, a digital banking and financial services company, impresses both Buffett and Lynch with its strong fundamentals.
Buffett criteria:
- Consistent earnings growth: EPS has grown from $0.99 to $5.97 over the past decade
- High ROE: 26.4% average over the past 3 years
- Effective use of retained earnings: 18.9% return on retained earnings
Lynch criteria:
- Fast grower: 25.3% historical EPS growth rate
- Low PEG ratio: 0.31
- Strong balance sheet: Debt/Equity ratio of 0%
This discount retailer targeting teens and tweens has caught the attention of both value and growth investors.
Buffett criteria:
- Predictable earnings: EPS growth from $0.88 to $5.41 over 10 years
- High ROE: 20.9% average over the past 3 years
- Strong balance sheet: No long-term debt
Lynch criteria:
- Fast grower: 19.0% historical EPS growth rate
- Reasonable PEG ratio: 0.95
- Positive free cash flow: $2.96 per share
The tech giant behind Google and YouTube satisfies both Buffett’s preference for competitive moats and Lynch’s growth criteria.
Buffett criteria:
- Consistent earnings growth: EPS increased from $0.99 to $5.97 over a decade
- High ROE: 26.4% average over the past 3 years
- Strong balance sheet: Debt could be paid off in less than 2 years with current earnings
Lynch criteria:
- Fast grower: 28.9% historical EPS growth rate
- Attractive PEG ratio: 0.79
- Low debt: Debt/Equity ratio of 4.71%
4. LPL Financial Holdings Inc (LPLA)
This independent broker-dealer impresses with its financial strength and growth characteristics.
Buffett criteria:
- Earnings predictability: EPS growth from $1.75 to $13.69 over 10 years
- Exceptional ROE: 38.1% average over the past 3 years
- Effective use of retained earnings: 26.4% return on retained earnings
Lynch criteria:
- Fast grower: 27.6% historical EPS growth rate
- Low PEG ratio: 0.69
- Strong financial position: Equity/Assets ratio of 22%
5. Williams-Sonoma, Inc. (WSM)
The home goods retailer satisfies both value and growth criteria with its solid financials and expansion.
Buffett criteria:
- Consistent earnings growth: EPS increased from $1.62 to $7.28 over the past decade
- High ROE: 57.1% average over the past 3 years
- No long-term debt
Lynch criteria:
- Fast grower: 29.7% historical EPS growth rate
- Low PEG ratio: 0.57
- Strong balance sheet: 0% debt-to-equity ratio
Why These Stocks Stand Out
These five companies have managed to satisfy the stringent criteria of both Buffett and Lynch by demonstrating a combination of consistent growth, financial strength, and reasonable valuations.
Axos Financial and LPL Financial showcase the potential of the financial services sector, with their high returns on equity and strong earnings growth impressing both guru models. Their ability to generate high returns while maintaining solid balance sheets is particularly noteworthy.
Five Below represents the retail sector’s ability to thrive in the face of e-commerce competition. Its focus on value-oriented products for a specific demographic has allowed it to grow consistently while maintaining financial discipline.
Alphabet, despite its massive size, continues to exhibit growth characteristics that appeal to the Lynch model while also possessing the durable competitive advantage and financial strength that Buffett seeks.
Williams-Sonoma demonstrates how a traditional retailer can successfully adapt to changing consumer preferences, maintaining strong financials while growing its e-commerce presence.
Further Research
