Finding stocks that satisfy both Warren Buffett’s quality-focused investment approach and Peter Lynch’s growth-at-a-reasonable-price strategy can help identify exceptionally strong companies. Based on Validea’s analysis, several companies currently pass both legendary investors’ stringent criteria with high scores.
The Buffett Strategy: Focus on Quality and Predictability
Warren Buffett looks for companies with:
- Consistent and predictable earnings growth
- High returns on equity (ROE) above 15%
- Low or no debt
- Strong free cash flow
- Effective use of retained earnings
- Competitive advantages that protect profits
The Lynch Strategy: Growth Without Overpaying
Peter Lynch seeks:
- Strong earnings growth between 20-50% annually
- PEG ratio (Price/Earnings relative to Growth) below 1.0
- Reasonable P/E ratios relative to industry
- Strong balance sheets
- Solid free cash flow
- Business models that are easy to understand
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Top Stocks Meeting Both Criteria
- Axos Financial (AX) This digital financial services provider scores 100% on both strategies. With a P/E of just 8.1x and historical EPS growth of 25.6%, its PEG ratio of 0.32 is extremely attractive. The company maintains high returns on equity around 16%, has minimal debt, and shows consistent earnings growth. Free cash flow remains positive, and management has proven skilled at reinvesting earnings with a 18.9% return on retained earnings.
- LPL Financial Holdings (LPLA) This investment advisory firm earns perfect scores by combining strong growth with reasonable valuations. Its 21.5% historical earnings growth paired with an 8.6 P/E ratio creates a compelling PEG ratio of 0.40. ROE averages 15.2% and the company carries minimal debt. Management has generated a 22.7% return on retained earnings while maintaining strong free cash flow.
- Preferred Bank (PFBC) This California-based bank demonstrates both quality and value characteristics. With 21.5% historical EPS growth and an 8.6 P/E ratio, its PEG ratio stands at an attractive 0.40. The bank maintains healthy ROE around 15.2% and has effectively reinvested earnings at a 22.7% rate. Its equity-to-assets ratio of 10.3% indicates strong financial health.
- Williams-Sonoma (WSM) The home furnishings retailer combines growth with quality operations. Historical EPS growth of 30.2% against a P/E of 23.1 creates a favorable PEG ratio of 0.76. The company maintains exceptional ROE averaging 36.7%, carries no long-term debt, and generates strong free cash flow. Management has delivered a 20.2% return on retained earnings.
Key Success Factors
These companies share several important characteristics:
- Sustainable Growth: All demonstrate consistent earnings growth in the 20-30% range without showing signs of unsustainable expansion.
- Value Proposition: Despite strong growth, each trades at reasonable valuations with PEG ratios well below 1.0, satisfying Lynch’s requirement for not overpaying for growth.
- Financial Strength: Strong balance sheets with minimal debt and healthy free cash flow generation meet Buffett’s preference for financial conservatism.
- Management Effectiveness: All show strong returns on equity and efficient use of retained earnings, indicating skilled capital allocation.
- Competitive Position: Each company has established competitive advantages in their respective markets, supporting sustained profitability.
Investment Implications
These companies represent a sweet spot where quality meets value – combining Buffett’s emphasis on business quality and competitive advantages with Lynch’s focus on reasonable prices relative to growth. The financial sector is notably well-represented, with three of the four companies operating in financial services.
The dual-strategy approach helps identify companies that may offer both defensive characteristics and growth potential – particularly valuable in uncertain market environments. By combining Buffett’s quality focus with Lynch’s growth-at-a-reasonable-price methodology, investors can identify companies that may offer both protection against downside risk and meaningful upside potential.
Further Research
