StoneCo Ltd. (NASDAQ:STNE) presents an interesting case for investors looking to apply the principles of GARP (Growth at a Reasonable Price) investing. One well-known framework for identifying such opportunities is the strategy popularized by legendary Fidelity fund manager Peter Lynch. His approach, detailed in his classic book One Up on Wall Street, focuses on finding growing companies that trade at reasonable valuations, while also ensuring financial health. Unlike pure growth or value strategies, Peter Lynch’s method blends both, insisting on sustainable earnings growth, typically between 15% and 30% per year, coupled with a low price-to-earnings-to-growth (PEG) ratio, low debt, and strong profitability. This makes the strategy a natural fit for GARP investors.
To illustrate this, we ran a Peter Lynch stock screen, and StoneCo (STNE) emerged as a candidate. The screen checks for specific financial criteria that align with Lynch’s long-term buy-and-hold philosophy.
Meeting the Peter Lynch Criteria
StoneCo’s fundamentals align with several of Lynch’s key filters, which are designed to identify sustainable growers without excessive risk.
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Earnings Per Share (EPS) Growth: The screen requires a 5-year average EPS growth between 15% and 30%. StoneCo’s EPS growth over the past five years stands at 24.39% , sitting comfortably within this target range. This is a critical filter for Lynch because it suggests the company is growing at a pace that is likely sustainable, avoiding the volatility of hyper-growth stories that can fizzle out.
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PEG Ratio (5-Year): To ensure the stock isn’t overvalued for its growth, the screen requires a PEG ratio of 1.0 or lower. StoneCo’s PEG is 0.23, which is exceptionally low. This metric is central to the GARP approach, as it directly compares the P/E ratio to the earnings growth rate, indicating that the market may be undervaluing the company’s growth prospects.
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Debt/Equity Ratio: Lynch was wary of high debt levels, typically preferring a ratio below 0.6. StoneCo’s Debt/Equity ratio is 0.57, which passes this filter. It also aligns with the more stringent Peter Lynch preference of below 0.25, though the current level signals a manageable reliance on debt financing.
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Return on Equity (ROE): The screen demands an ROE above 15% to confirm healthy profitability. StoneCo’s ROE is 28.69% , substantially exceeding this threshold. For Lynch, a high ROE signals that the company can generate strong returns from its equity base, a hallmark of a well-run business.
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Current Ratio: A current ratio of at least 1.0 is required to ensure short-term financial health. StoneCo’s current ratio is 1.33, comfortably above the minimum, indicating the company has enough current assets to cover its near-term obligations.
Fundamental Report Summary
Looking deeper into the company’s overall health, our fundamental analysis report assigns StoneCo a rating of 7 out of 10, based on a comparison with 99 peers in the Financial Services industry. Here is a high-level breakdown:
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Profitability (Score: 8/10): StoneCo is a standout in its industry here. Key profitability ratios are excellent, including an ROE of 28.69% , a Return on Invested Capital (ROIC) of 29.42% , and a profit margin of 24.44% . These metrics indicate highly efficient operations and strong earnings power.
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Valuation (Score: 9/10): The stock is rated as very cheap. Its Price/Earnings ratio is 5.58, which is significantly lower than the industry average (24.74) and the S&P 500 average (26.77). The low PEG ratio, as noted, further confirms this cheap valuation relative to its growth, a key factor for a GARP investment.
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Growth (Score: 6/10): While the past EPS growth of 24.39% is robust, future estimates point to a slowdown, with projected EPS growth of 9.28% per year. Revenue growth has also moderated, although the company still shows strong long-term revenue growth of 33.74% annually over the past five years.
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Financial Health (Score: 5/10): This area presents a mixed picture. While the current ratio is adequate, the Altman-Z score of 1.39 places the company in a distress zone, suggesting some bankruptcy risk. The Debt to Free Cash Flow ratio of 7.17 is also on the high side, meaning it would take over seven years of free cash flow to pay off all debt. This is a point of caution for long-term investors.
Analyst Views and Market Context
The broader market environment currently supports well-positioned companies. The S&P 500’s long-term and short-term trends are both positive, which can provide a tailwind for stocks that are already showing strong fundamentals. However, for a buy-and-hold strategy like Lynch’s, short-term market noise is less relevant than the company’s underlying value and growth trajectory.
Finding More Opportunities
StoneCo (STNE) appears to be a stock that aligns with the GARP philosophy as defined by Peter Lynch. It combines solid historical growth with a cheap valuation, while maintaining decent profitability. However, the moderate financial health scores serve as a reminder that deeper research into balance sheet items is always necessary.
Do you wish to explore other companies that might fit a similar growth-at-a-reasonable-price profile? You can find our full Peter Lynch stock screen here to run the screen yourself and view more results.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Always conduct your own research and consider your financial situation before making any investment decisions.
Read full article here »
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Analysis of StoneCo Ltd (NASDAQ:STNE) as a GARP Investment Opportunity
StoneCo Ltd. (NASDAQ:STNE) presents an interesting case for investors looking to apply the principles of GARP (Growth at a Reasonable Price) investing. One well-known framework for identifying such opportunities is the strategy popularized by legendary Fidelity fund manager Peter Lynch. His approach, detailed in his classic book One Up on Wall Street, focuses on finding growing companies that trade at reasonable valuations, while also ensuring financial health. Unlike pure growth or value strategies, Peter Lynch’s method blends both, insisting on sustainable earnings growth, typically between 15% and 30% per year, coupled with a low price-to-earnings-to-growth (PEG) ratio, low debt, and strong profitability. This makes the strategy a natural fit for GARP investors.
To illustrate this, we ran a Peter Lynch stock screen, and StoneCo (STNE) emerged as a candidate. The screen checks for specific financial criteria that align with Lynch’s long-term buy-and-hold philosophy.
Meeting the Peter Lynch Criteria
StoneCo’s fundamentals align with several of Lynch’s key filters, which are designed to identify sustainable growers without excessive risk.
Earnings Per Share (EPS) Growth: The screen requires a 5-year average EPS growth between 15% and 30%. StoneCo’s EPS growth over the past five years stands at 24.39% , sitting comfortably within this target range. This is a critical filter for Lynch because it suggests the company is growing at a pace that is likely sustainable, avoiding the volatility of hyper-growth stories that can fizzle out.
PEG Ratio (5-Year): To ensure the stock isn’t overvalued for its growth, the screen requires a PEG ratio of 1.0 or lower. StoneCo’s PEG is 0.23, which is exceptionally low. This metric is central to the GARP approach, as it directly compares the P/E ratio to the earnings growth rate, indicating that the market may be undervaluing the company’s growth prospects.
Debt/Equity Ratio: Lynch was wary of high debt levels, typically preferring a ratio below 0.6. StoneCo’s Debt/Equity ratio is 0.57, which passes this filter. It also aligns with the more stringent Peter Lynch preference of below 0.25, though the current level signals a manageable reliance on debt financing.
Return on Equity (ROE): The screen demands an ROE above 15% to confirm healthy profitability. StoneCo’s ROE is 28.69% , substantially exceeding this threshold. For Lynch, a high ROE signals that the company can generate strong returns from its equity base, a hallmark of a well-run business.
Current Ratio: A current ratio of at least 1.0 is required to ensure short-term financial health. StoneCo’s current ratio is 1.33, comfortably above the minimum, indicating the company has enough current assets to cover its near-term obligations.
Fundamental Report Summary
Looking deeper into the company’s overall health, our fundamental analysis report assigns StoneCo a rating of 7 out of 10, based on a comparison with 99 peers in the Financial Services industry. Here is a high-level breakdown:
Profitability (Score: 8/10): StoneCo is a standout in its industry here. Key profitability ratios are excellent, including an ROE of 28.69% , a Return on Invested Capital (ROIC) of 29.42% , and a profit margin of 24.44% . These metrics indicate highly efficient operations and strong earnings power.
Valuation (Score: 9/10): The stock is rated as very cheap. Its Price/Earnings ratio is 5.58, which is significantly lower than the industry average (24.74) and the S&P 500 average (26.77). The low PEG ratio, as noted, further confirms this cheap valuation relative to its growth, a key factor for a GARP investment.
Growth (Score: 6/10): While the past EPS growth of 24.39% is robust, future estimates point to a slowdown, with projected EPS growth of 9.28% per year. Revenue growth has also moderated, although the company still shows strong long-term revenue growth of 33.74% annually over the past five years.
Financial Health (Score: 5/10): This area presents a mixed picture. While the current ratio is adequate, the Altman-Z score of 1.39 places the company in a distress zone, suggesting some bankruptcy risk. The Debt to Free Cash Flow ratio of 7.17 is also on the high side, meaning it would take over seven years of free cash flow to pay off all debt. This is a point of caution for long-term investors.
Analyst Views and Market Context
The broader market environment currently supports well-positioned companies. The S&P 500’s long-term and short-term trends are both positive, which can provide a tailwind for stocks that are already showing strong fundamentals. However, for a buy-and-hold strategy like Lynch’s, short-term market noise is less relevant than the company’s underlying value and growth trajectory.
Finding More Opportunities
StoneCo (STNE) appears to be a stock that aligns with the GARP philosophy as defined by Peter Lynch. It combines solid historical growth with a cheap valuation, while maintaining decent profitability. However, the moderate financial health scores serve as a reminder that deeper research into balance sheet items is always necessary.
Do you wish to explore other companies that might fit a similar growth-at-a-reasonable-price profile? You can find our full Peter Lynch stock screen here to run the screen yourself and view more results.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Always conduct your own research and consider your financial situation before making any investment decisions.
Read full article here »