Peter Lynch built his reputation managing Fidelity’s Magellan Fund, and Validea has developed a systematic approach based on his key principles. At its core, this strategy seeks companies offering growth at a reasonable price (GARP).
The foundation of this approach is the Price-to-Earnings Growth (PEG) ratio – found by comparing a company’s P/E ratio to its earnings growth rate. When this number falls below 1.0, it suggests the stock could be undervalued given its growth potential.
The strategy places significant weight on sustainable earnings growth, particularly favoring companies showing consistent 20-30% annual increases. However, it’s cautious about extremely high growth rates that might not be sustainable over time.
For analysis purposes, companies are classified into three main categories: slow growers, stalwarts, and fast growers – each requiring slightly different evaluation approaches.
Financial health is another crucial factor, with a strong preference for companies maintaining reasonable debt levels. This is measured through the debt-to-equity ratio, as high debt can make a company vulnerable during challenging times.
Lastly, while the PEG ratio is central, the strategy also considers the traditional P/E ratio. Companies trading at P/E ratios below market or industry averages may represent attractive opportunities, especially when combined with the other criteria.
Here are the top ten highest scoring stocks for November 2024 for Validea’s P/E/Growth Investor strategy based on Peter Lynch.
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