Warren Buffett and Peter Lynch stand as two of investing’s most legendary figures, each with distinct approaches to identifying exceptional companies. Through Validea’s guru-based models, four stocks currently demonstrate the fundamental characteristics that would attract both the Oracle of Omaha and the mutual fund maestro. Let’s examine why these companies align with both investors’ stringent criteria.
The Buffett Approach: Seeking Durable Competitive Advantages
Warren Buffett seeks companies with predictable earnings growth and high returns on equity – hallmarks of a durable competitive advantage. He favors businesses with consistent operating histories and strong balance sheets, focusing on companies that effectively deploy retained earnings 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. His strategy emphasizes companies with strong fundamentals, reasonable debt levels, and solid free cash flow generation.
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Let’s examine the four companies that currently satisfy both legendary investors’ criteria:
The tech giant demonstrates both Buffett’s preference for competitive moats and Lynch’s growth criteria.
Buffett criteria:
- Exceptional earnings predictability with EPS growing from $0.99 to $5.97 over the past decade
- Strong ROE averaging 26.4% over the past 3 years
- Healthy balance sheet with debt that could be paid off in less than 2 years
- Free cash flow per share of $5.46
Lynch criteria:
- Fast grower with 29.7% historical EPS growth rate
- Attractive PEG ratio of 0.72
- Low debt with Debt/Equity ratio of 4.71%
- Market leader in digital advertising and cloud services
This specialty retailer targeting the teen/tween demographic has attracted both value and growth investors.
Buffett criteria:
- Consistent EPS growth from $0.88 to $5.41 over the past decade
- Solid ROE averaging 20.9% over three years
- Strong balance sheet with no long-term debt
- Effective use of retained earnings with 18.9% return
Lynch criteria:
- Impressive 19.2% historical EPS growth rate
- Favorable PEG ratio of 0.95
- Strong free cash flow of $2.96 per share
- Leading position in value retail niche
This homebuilder demonstrates exceptional capital allocation and consistent returns.
Buffett criteria:
- Outstanding earnings predictability with EPS growing from $63.50 to $463.35
- Industry-leading ROE averaging 38.6% over three years
- Strong balance sheet with easily manageable debt levels
- Free cash flow per share of $428.85
Lynch criteria:
- Strong 22.8% historical EPS growth rate
- Attractive PEG ratio of 0.83
- Efficient capital allocation with significant share repurchases
- Market leader in key geographic regions
This financial services provider combines growth with disciplined operations.
Buffett criteria:
- Consistent earnings growth with EPS increasing from $3.26 to $15.94
- Strong ROE averaging 24.0% over three years
- Solid ROA of 4.82%, well above industry averages
- Free cash flow per share of $15.68
Lynch criteria:
- Impressive 20.4% historical EPS growth rate
- Favorable PEG ratio of 0.63
- Strong balance sheet fundamentals
- Leading position in middle-income financial services
Why These Stocks Stand Out
These four companies have successfully satisfied both Buffett and Lynch’s rigorous criteria by demonstrating consistent growth, financial strength, and reasonable valuations. Each operates with a distinct competitive advantage in their respective markets.
Alphabet continues to dominate digital advertising while expanding its cloud presence, combining growth with fortress-like financials. Five Below has carved out a unique retail niche with its focus on value merchandise for young consumers. NVR’s disciplined approach to land acquisition and capital allocation has produced industry-leading returns, while Primerica’s focus on middle-income households provides a large, underserved market opportunity.
Their ability to maintain strong returns on equity while growing earnings consistently suggests these companies possess the durable competitive advantages Buffett seeks, while their reasonable valuations relative to growth satisfy Lynch’s emphasis on value. Moreover, their strong free cash flow generation and prudent balance sheet management provide the financial stability both investors prioritize.
These companies demonstrate that despite different sectors and business models, the fundamental principles of strong business economics, consistent growth, and reasonable valuations remain timeless indicators of investment quality.
Further Research
