On Dec. 15, the “Peter Lynch Checklist Screener” listed four companies with good growth and value potential: NIC Inc. (EGOV, Financial), Gentex Corp. (GNTX, Financial), InterDigital Inc. (IDCC, Financial) and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial).
Background
Legendary investor Peter Lynch classified companies into one of six types, including stalwarts and fast growers. According to Investopedia, Lynch defined a stalwart as a company with a solid balance sheet and earnings growth between 10% and 12% per year.
The Peter Lynch Checklist Screener is derived from GuruFocus’ “The Stalwarts” screen and the “Peter Lynch Stalwarts” Checklist. Table 1 lists the filters for the Peter Lynch Checklist Screener.
| Financial strength: at least 7 | Interest coverage: at least 10 |
| Predictability rank: at least two stars | 10-year median return on capital: at least 14% |
| Price-earnings to growth ratio: less than 1.5 | Operating margin: at least 10% |
| Net margin: at least 10% | Positive operating margin growth rate |
| Positive gross margin growth rate | 10-year revenue growth rate between 8% and 20% |
| 10-year EPS without nonrecurring items growth rate between 10% and 20% | |
Table 1: Peter Lynch Checklist Filters
E-government company offers strong growth potential
NIC, a provider of digital government services, has eight positive investing signs according to Figure 1.
Figure 1
The Kansas-based company’s financial strength ranks 9 out of 10, driven primarily by strong Altman Z-scores and Beneish M-scores. Additionally, NIC has a debt-free balance sheet. Figure 2 shows the company’s historical trend of Z-scores.
Figure 2
NIC also has strong profitability as the company has expanding operating margins and consistent revenue growth. The company’s margins and returns are outperforming approximately 90% of global competitors. Figure 3 shows the company’s predictability chart, which graphs the company’s historical revenue per share and EBITDA per share over the past 10 years. Figures 4 and 5 show NIC’s margins chart and returns chart.
Figure 3
Figure 4
Figure 5
Brief discussion of the other three companies
Although the company offers strong growth potential, NIC has a relatively high price-earnings to growth ratio of 1.47. Gentex, another company with a strong balance sheet and predictable earnings, trades at a lower PEG ratio of 0.89. Gentex has a predictability rank of five stars based on its predictability chart, shown in Figure 6.
Figure 6
Figure 7 shows the Peter Lynch charts for the four companies. Not only does InterDigital have the lowest PEG ratio among the companies, the Delaware-based mobile tech company is the only one whose price-earnings ratio is less than 15. Figure 8 shows the screener results after I add the “P/E (TTM) less than 15” filter.
Figure 7
Figure 8
InterDigital and Taiwan Semiconductor Group have a profitability rank of 9, suggesting slightly higher growth potential than the other two companies, with a rank of just 8.
See also
A previous article discussed five good stock picks from a Forum post. The article also discusses our GuruFocus Checklist feature: how to create a checklist and grade a company based on the checklist. Figure 9 shows the predefined “Peter Lynch Stalwarts” checklist.
Figure 9
Premium members can view the charts on the Checklist page and the Peter Lynch Charts for the Screener results.
Disclosure: The author has no positions in the stocks mentioned.
