Finding high-quality companies that combine solid growth with a reasonable valuation is the holy grail for many long-term investors. This is the essence of the Growth at a Reasonable Price (GARP) strategy, a philosophy famously championed by legendary Fidelity fund manager Peter Lynch. In his book One Up on Wall Street, Lynch argued that the best investments are often found in growing companies that haven’t yet been bid up to excessive prices. He looked for firms with sustainable earnings growth, strong financial health, and attractive valuations, a method that delivered an average annual return of 29.2% for his Magellan Fund between 1977 and 1990.
We recently ran a stock screen based on Lynch's core criteria, which scans for companies with earnings growth between 15% and 30% per year, a PEG ratio (Price/Earnings to Growth) below 1.0, a debt-to-equity ratio under 0.6, and a return on equity above 15%. This search led us to EXLSERVICE HOLDINGS INC (NASDAQ:EXLS), a data and AI-led business process management company that appears to fit the Lynch mold quite well.
Meeting the Lynch Criteria
The screen flagged EXLS for a clear reason: it passes all of Lynch’s essential filters, making it a textbook GARP candidate. Here’s how the numbers stack up:
- Earnings Growth (EPS 5Y): 22.6% – Lynch wanted steady, sustainable growth, not hypergrowth. EXLS’s average annual EPS growth of 22.6% over the past five years sits squarely in his preferred 15% to 30% sweet spot. This suggests the company is expanding at a healthy, manageable pace.
- PEG Ratio (Past 5 Years): 0.56 – This is the critical valuation anchor. A PEG below 1.0 indicates the stock is undervalued relative to its earnings growth rate. At 0.56, EXLS is trading at a price that is quite attractive given its growth trajectory.
- Debt/Equity Ratio: 0.53 – Lynch was wary of excessive debt. With a debt-to-equity ratio of 0.53, EXLS keeps its leverage within comfortable limits (well under the 0.6 threshold), ensuring it doesn’t take on too much risk to fund its expansion.
- Return on Equity (ROE): 32.3% – Lynch demanded strong profitability. An ROE of 32.3% is far above the 15% minimum and signals that the company is highly efficient at generating profits from shareholder equity.
- Current Ratio: 2.66 – A current ratio above 1.0 ensures the company has enough short-term assets to cover its liabilities. EXLS’s ratio of 2.66 provides a solid buffer against any short-term hiccups, another hallmark of Lynch’s “healthy company” checklist.
Fundamental Health Check
Beyond the screen itself, a closer review of the company’s fundamentals reveals a business in excellent shape. According to the detailed fundamental report, EXLS earns a strong overall rating of 8 out of 10, with standout scores in profitability and health.
The profitability picture is strong, with metrics like a return on invested capital (ROIC) of 18.5% and an operating margin of 15.2%, both among the best in the IT Services industry. The company has consistently improved its margins over the past few years, a positive sign for future earnings capacity. On the health side, the Altman-Z score of 6.26 suggests the company is a low bankruptcy risk, while the debt-to-free-cash-flow ratio of just 1.41 indicates it could pay off all its debt in under a year and a half if needed. Financially, this is a very disciplined operator.
Final Thoughts and Screening Insights
For investors following the Lynch or GARP approach, EXLS checks the right boxes: it combines a proven growth record with a reasonable valuation and a fortress-like balance sheet. The market backdrop is also somewhat supportive, with the S&P 500 showing a positive short-term trend and a neutral long-term trend, which can help growth-oriented names maintain momentum.
If you want to explore more companies that fit this strategy, you can run the same Peter Lynch screen yourself.
Check out the full list of results here
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Always conduct your own due diligence before making any investment decisions.
Read full article here »
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EXLSERVICE HOLDINGS INC (NASDAQ:EXLS): A Peter Lynch GARP Stock Screen Star
Finding high-quality companies that combine solid growth with a reasonable valuation is the holy grail for many long-term investors. This is the essence of the Growth at a Reasonable Price (GARP) strategy, a philosophy famously championed by legendary Fidelity fund manager Peter Lynch. In his book One Up on Wall Street, Lynch argued that the best investments are often found in growing companies that haven’t yet been bid up to excessive prices. He looked for firms with sustainable earnings growth, strong financial health, and attractive valuations, a method that delivered an average annual return of 29.2% for his Magellan Fund between 1977 and 1990.
We recently ran a stock screen based on Lynch's core criteria, which scans for companies with earnings growth between 15% and 30% per year, a PEG ratio (Price/Earnings to Growth) below 1.0, a debt-to-equity ratio under 0.6, and a return on equity above 15%. This search led us to EXLSERVICE HOLDINGS INC (NASDAQ:EXLS), a data and AI-led business process management company that appears to fit the Lynch mold quite well.
Meeting the Lynch Criteria
The screen flagged EXLS for a clear reason: it passes all of Lynch’s essential filters, making it a textbook GARP candidate. Here’s how the numbers stack up:
Fundamental Health Check
Beyond the screen itself, a closer review of the company’s fundamentals reveals a business in excellent shape. According to the detailed fundamental report, EXLS earns a strong overall rating of 8 out of 10, with standout scores in profitability and health.
The profitability picture is strong, with metrics like a return on invested capital (ROIC) of 18.5% and an operating margin of 15.2%, both among the best in the IT Services industry. The company has consistently improved its margins over the past few years, a positive sign for future earnings capacity. On the health side, the Altman-Z score of 6.26 suggests the company is a low bankruptcy risk, while the debt-to-free-cash-flow ratio of just 1.41 indicates it could pay off all its debt in under a year and a half if needed. Financially, this is a very disciplined operator.
Final Thoughts and Screening Insights
For investors following the Lynch or GARP approach, EXLS checks the right boxes: it combines a proven growth record with a reasonable valuation and a fortress-like balance sheet. The market backdrop is also somewhat supportive, with the S&P 500 showing a positive short-term trend and a neutral long-term trend, which can help growth-oriented names maintain momentum.
If you want to explore more companies that fit this strategy, you can run the same Peter Lynch screen yourself. Check out the full list of results here
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Always conduct your own due diligence before making any investment decisions.
Read full article here »