The premise of Peter Lynch’s investment philosophy, detailed in his book One Up on Wall Street, is deceptively simple: look for companies that offer sustainable growth at a reasonable price, while ignoring short-term market noise. Lynch, who famously averaged a 29.2% annual return running the Magellan Fund, favored a long-term buy-and-hold approach that blends elements of growth and value investing. The strategy prioritizes companies with steady earnings growth—neither too slow to be exciting nor too fast to be unsustainable—that trade at valuations supported by their fundamentals. To find such candidates, we run a screen based on Lynch’s core criteria: a 5-year EPS growth rate between 15% and 30%, a PEG ratio below 1.0, a debt-to-equity ratio under 0.6, a current ratio above 1.0, and a return on equity exceeding 15%. Cavco Industries (NASDAQ:CVCO) appears to fit this framework neatly, making it a potential candidate for growth-at-a-reasonable-price (GARP) investors.
Since its IPO in June 2003, Cavco Industries has carved out a niche as a leading manufacturer of factory-built housing, including residential modular homes, park model RVs, vacation cabins, and commercial structures. The company also provides financial services through its consumer finance and insurance operations. Headquartered in Phoenix, Arizona, Cavco operates over 20 production lines across North America and employs 7,000 people. Its focus on affordable, durable housing gives it a tangible, understandable business model—exactly the kind Lynch advised investors to look for in their daily lives.
Meeting the Lynch Criteria
The Peter Lynch screen filters for companies with a specific blend of growth, value, and financial health. Cavco clears each hurdle with room to spare, as shown by the following metrics drawn directly from the screen’s parameters:
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EPS Growth (5-Year): 23.78% – Lynch required earnings growth between 15% and 30%, arguing that growth above 30% is often unsustainable. Cavco’s 23.78% average annual EPS growth over the past five years sits comfortably in this sweet spot, indicating consistent, manageable expansion without the speculative risk of hyper-growth companies.
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PEG Ratio (Past 5 Years): 0.98 – A PEG ratio below 1.0 is central to Lynch’s value discipline, as it means the stock’s price-to-earnings ratio is justified by its growth rate. Cavco’s PEG of 0.98 suggests the market hasn’t fully priced in its earnings trajectory, aligning with the strategy’s goal of buying growing companies at reasonable valuations.
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Debt-to-Equity Ratio: 0.0064 – Lynch had a strong preference for low debt, often targeting a D/E ratio below 0.25. Cavco’s nearly negligible 0.0064 ratio indicates the company is funded almost entirely by equity, not debt, which reduces financial risk and provides a cushion during economic downturns.
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Current Ratio: 2.46 – A current ratio above 1.0 ensures the company can cover short-term obligations. Cavco’s 2.46 puts it well above this threshold, signaling strong liquidity and a healthy balance sheet—key for weathering industry cycles in the housing sector.
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Return on Equity: 17.27% – Lynch demanded ROE above 15% as a mark of efficient profitability. Cavco’s 17.27% return shows the company is generating solid profits from its shareholders’ equity, a sign that management is using capital effectively.
These criteria aren’t arbitrary; they are designed to identify companies with durable competitive advantages. By capping EPS growth at 30%, Lynch forces investors to avoid unsustainable “story” stocks. By demanding a PEG under 1.0, he ensures you aren’t overpaying for that growth. And by enforcing low debt and high liquidity, the screen weeds out fragile balance sheets that can collapse when the economy slows. Cavco passes each test, offering a rare combination: a growing, profitable business that isn’t leveraged to the hilt.
A Closer Look at the Fundamentals
Our detailed fundamental analysis gives Cavco a rating of 6 out of 10, based on an evaluation of 49 data points across profitability, health, growth, valuation, and dividends. The full report is available here. Here’s what stands out:
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Profitability (Score: 9/10): Cavco ranks among the top of the Household Durables industry. Its Return on Assets (12.78%), Return on Equity (17.27%), and Return on Invested Capital (15.95%) all beat over 87% of peers. Operating and profit margins have also been improving in recent years, reinforcing efficient operations.
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Health (Score: 8/10): The company’s Altman-Z score of 10.33 signals very low bankruptcy risk, outperforming nearly 95% of its industry. Its debt-to-FCF ratio of 0.03 means it could pay off all debt in just a few weeks using free cash flow. Shares outstanding have also decreased over the past one and five years, suggesting share buybacks—a Lynch-positive move.
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Growth (Score: 6/10): While past EPS growth of 23.78% and revenue growth of 15.16% are strong, forward estimates show a deceleration. EPS is expected to grow at 12.71% annually, and revenue at 7.30%. This slowdown is not alarming—Lynch would argue it brings growth to a more sustainable long-term pace—but it tempers the growth score.
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Valuation (Score: 2/10): This is the weakest point. With a P/E of 23.21, the stock trades above the industry median and is similar to the S&P 500’s 26.68. The PEG ratio based on forward growth is elevated, indicating that current earnings multiples are not fully compensated by expected future growth. However, the high profitability scores can justify a premium to some extent.
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Dividends (Score: 0/10): Cavco does not pay a dividend, which is common for growth-oriented companies that reinvest earnings. Lynch did not require dividends, but income-focused investors will find no yield here.
Valuation Metrics in Context
Cavco’s P/E of 23.21 is higher than the industry average of 25.59 but lower than the S&P 500’s 26.68. The forward P/E of 22.62 is slightly above the S&P 500 forward multiple of 21.17. The enterprise value-to-EBITDA ratio is also above industry medians. These multiples suggest the market is pricing in a premium for Cavco’s quality—something Lynch would accept only if the growth outlook remains solid. Given the expected 12.71% annual EPS growth and the company’s strong financial health, the valuation appears reasonable for a long-term hold, though not a bargain-bin entry point.
The Bottom Line for GARP Investors
Cavco Industries stands out as a disciplined operator in the cyclical but essential housing market. Its low leverage, strong profitability, and steady earnings growth align well with a GARP or Lynch-inspired strategy. The screen identified it as a candidate worth researching further—and the fundamental report confirms that while the stock isn’t dirt cheap, its financial strength and growth profile provide a solid foundation for patient investors.
For more companies that meet the Peter Lynch criteria, you can run the screen yourself and explore additional results here:
Discover More Peter Lynch Screen Results
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Always conduct your own research or consult with a qualified financial advisor before making investment decisions.
Read full article here »
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Cavco Industries (NASDAQ:CVCO) Passes Peter Lynch Growth-at-a-Reasonable-Price Screen
The premise of Peter Lynch’s investment philosophy, detailed in his book One Up on Wall Street, is deceptively simple: look for companies that offer sustainable growth at a reasonable price, while ignoring short-term market noise. Lynch, who famously averaged a 29.2% annual return running the Magellan Fund, favored a long-term buy-and-hold approach that blends elements of growth and value investing. The strategy prioritizes companies with steady earnings growth—neither too slow to be exciting nor too fast to be unsustainable—that trade at valuations supported by their fundamentals. To find such candidates, we run a screen based on Lynch’s core criteria: a 5-year EPS growth rate between 15% and 30%, a PEG ratio below 1.0, a debt-to-equity ratio under 0.6, a current ratio above 1.0, and a return on equity exceeding 15%. Cavco Industries (NASDAQ:CVCO) appears to fit this framework neatly, making it a potential candidate for growth-at-a-reasonable-price (GARP) investors.
Since its IPO in June 2003, Cavco Industries has carved out a niche as a leading manufacturer of factory-built housing, including residential modular homes, park model RVs, vacation cabins, and commercial structures. The company also provides financial services through its consumer finance and insurance operations. Headquartered in Phoenix, Arizona, Cavco operates over 20 production lines across North America and employs 7,000 people. Its focus on affordable, durable housing gives it a tangible, understandable business model—exactly the kind Lynch advised investors to look for in their daily lives.
Meeting the Lynch Criteria
The Peter Lynch screen filters for companies with a specific blend of growth, value, and financial health. Cavco clears each hurdle with room to spare, as shown by the following metrics drawn directly from the screen’s parameters:
EPS Growth (5-Year): 23.78% – Lynch required earnings growth between 15% and 30%, arguing that growth above 30% is often unsustainable. Cavco’s 23.78% average annual EPS growth over the past five years sits comfortably in this sweet spot, indicating consistent, manageable expansion without the speculative risk of hyper-growth companies.
PEG Ratio (Past 5 Years): 0.98 – A PEG ratio below 1.0 is central to Lynch’s value discipline, as it means the stock’s price-to-earnings ratio is justified by its growth rate. Cavco’s PEG of 0.98 suggests the market hasn’t fully priced in its earnings trajectory, aligning with the strategy’s goal of buying growing companies at reasonable valuations.
Debt-to-Equity Ratio: 0.0064 – Lynch had a strong preference for low debt, often targeting a D/E ratio below 0.25. Cavco’s nearly negligible 0.0064 ratio indicates the company is funded almost entirely by equity, not debt, which reduces financial risk and provides a cushion during economic downturns.
Current Ratio: 2.46 – A current ratio above 1.0 ensures the company can cover short-term obligations. Cavco’s 2.46 puts it well above this threshold, signaling strong liquidity and a healthy balance sheet—key for weathering industry cycles in the housing sector.
Return on Equity: 17.27% – Lynch demanded ROE above 15% as a mark of efficient profitability. Cavco’s 17.27% return shows the company is generating solid profits from its shareholders’ equity, a sign that management is using capital effectively.
These criteria aren’t arbitrary; they are designed to identify companies with durable competitive advantages. By capping EPS growth at 30%, Lynch forces investors to avoid unsustainable “story” stocks. By demanding a PEG under 1.0, he ensures you aren’t overpaying for that growth. And by enforcing low debt and high liquidity, the screen weeds out fragile balance sheets that can collapse when the economy slows. Cavco passes each test, offering a rare combination: a growing, profitable business that isn’t leveraged to the hilt.
A Closer Look at the Fundamentals
Our detailed fundamental analysis gives Cavco a rating of 6 out of 10, based on an evaluation of 49 data points across profitability, health, growth, valuation, and dividends. The full report is available here. Here’s what stands out:
Profitability (Score: 9/10): Cavco ranks among the top of the Household Durables industry. Its Return on Assets (12.78%), Return on Equity (17.27%), and Return on Invested Capital (15.95%) all beat over 87% of peers. Operating and profit margins have also been improving in recent years, reinforcing efficient operations.
Health (Score: 8/10): The company’s Altman-Z score of 10.33 signals very low bankruptcy risk, outperforming nearly 95% of its industry. Its debt-to-FCF ratio of 0.03 means it could pay off all debt in just a few weeks using free cash flow. Shares outstanding have also decreased over the past one and five years, suggesting share buybacks—a Lynch-positive move.
Growth (Score: 6/10): While past EPS growth of 23.78% and revenue growth of 15.16% are strong, forward estimates show a deceleration. EPS is expected to grow at 12.71% annually, and revenue at 7.30%. This slowdown is not alarming—Lynch would argue it brings growth to a more sustainable long-term pace—but it tempers the growth score.
Valuation (Score: 2/10): This is the weakest point. With a P/E of 23.21, the stock trades above the industry median and is similar to the S&P 500’s 26.68. The PEG ratio based on forward growth is elevated, indicating that current earnings multiples are not fully compensated by expected future growth. However, the high profitability scores can justify a premium to some extent.
Dividends (Score: 0/10): Cavco does not pay a dividend, which is common for growth-oriented companies that reinvest earnings. Lynch did not require dividends, but income-focused investors will find no yield here.
Valuation Metrics in Context
Cavco’s P/E of 23.21 is higher than the industry average of 25.59 but lower than the S&P 500’s 26.68. The forward P/E of 22.62 is slightly above the S&P 500 forward multiple of 21.17. The enterprise value-to-EBITDA ratio is also above industry medians. These multiples suggest the market is pricing in a premium for Cavco’s quality—something Lynch would accept only if the growth outlook remains solid. Given the expected 12.71% annual EPS growth and the company’s strong financial health, the valuation appears reasonable for a long-term hold, though not a bargain-bin entry point.
The Bottom Line for GARP Investors
Cavco Industries stands out as a disciplined operator in the cyclical but essential housing market. Its low leverage, strong profitability, and steady earnings growth align well with a GARP or Lynch-inspired strategy. The screen identified it as a candidate worth researching further—and the fundamental report confirms that while the stock isn’t dirt cheap, its financial strength and growth profile provide a solid foundation for patient investors.
For more companies that meet the Peter Lynch criteria, you can run the screen yourself and explore additional results here:
Discover More Peter Lynch Screen Results
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Always conduct your own research or consult with a qualified financial advisor before making investment decisions.
Read full article here »