Five Stocks That Warren Buffett and Peter Lynch Would Both Endorse
Warren Buffett and Peter Lynch are two of the most influential figures in the investment world, each known for their unique and successful approaches to investing. While they often take different paths, there are times when their philosophies align, particularly when it comes to identifying promising stocks. Recently, five companies have emerged that meet the stringent criteria of both these legendary investors. Let’s explore these stocks and see why they have captured the interest of Buffett, the Oracle of Omaha, and Lynch, the maestro of mutual funds.
Starting with Warren Buffett, his investment philosophy revolves around seeking companies that possess durable competitive advantages. He favors businesses with a track record of strong, predictable earnings growth and high returns on equity. This means he looks for companies that not only perform well consistently but also have the financial fortitude to maintain that performance over time. Strong balance sheets and the ability to reinvest earnings to create shareholder value are also key factors in his decision-making process.
On the other hand, Peter Lynch, the former manager of the Magellan Fund, is known for his approach of finding growth at a reasonable price. Lynch popularized the PEG ratio, which compares a company's price-to-earnings ratio to its earnings growth rate, helping investors identify stocks that are undervalued relative to their growth potential. He categorized stocks based on their growth rates, with a keen interest in “fast growers,” and he carefully considered aspects like debt levels and cash flow.
Now, let’s take a closer look at the five companies that stand out to both Buffett and Lynch.
First up is Axos Financial Inc (AX) , a digital banking and financial services company. Its robust fundamentals appeal to both investors: over the past decade, its earnings per share (EPS) have skyrocketed from $0.99 to $5.97. This impressive growth is complemented by an average return on equity (ROE) of 26.4% and a remarkable return on retained earnings of 18.9%. Lynch would be pleased with its historical EPS growth rate of 25.3% and a low PEG ratio of 0.31, not to mention its debt-free status.
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Next is Five Below Inc (FIVE) , a discount retailer that caters to teens and tweens. Its predictable earnings growth from $0.88 to $5.41 over the past decade and a high ROE of 20.9% are significant in Buffett's eyes. Lynch would appreciate its 19.0% historical EPS growth rate and a reasonable PEG ratio of 0.95, along with its solid free cash flow.
Moving to the tech sector, Alphabet Inc (GOOGL) , the parent company of Google and YouTube, combines both investors' preferences seamlessly. Buffett values its consistent earnings growth and high ROE of 26.4%, while Lynch is drawn to its fast historical EPS growth rate of 28.9% and attractive PEG ratio of 0.79.
Another standout is LPL Financial Holdings Inc (LPLA) , an independent broker-dealer with a strong financial position. Its EPS has grown from $1.75 to $13.69 over the last decade, showcasing exceptional earnings predictability and a stellar average ROE of 38.1%. Lynch would be impressed by its historical EPS growth rate of 27.6% and low PEG ratio of 0.69.
Finally, Williams-Sonoma, Inc. (WSM) rounds out the list, demonstrating strong financials and consistent growth. Its EPS growth from $1.62 to $7.28 over the past decade and an outstanding average ROE of 57.1% capture Buffett's attention, while Lynch would appreciate its 29.7% historical EPS growth rate and a low PEG ratio of 0.57.
These five companies exemplify the qualities that both Buffett and Lynch look for in their investments. Their impressive financial performance, growth potential, and solid balance sheets make them compelling choices for any investor. As we continue to navigate the complexities of the stock market, it’s insightful to see how the principles of these two legendary investors can guide us toward promising opportunities.
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