Argan: A Peter Lynch Play

08/10/2017 2:52 am EST

Focus: ENERGY

John Reese

Founder and CEO, Validea.com And Validea Capital Management

John Reese, editor of Validea, maintains a "Hot List" portfolio that includes stocks that meet the investing criteria of some of the market's most legendary investors.


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Argan (AGX) is a holding company involved in engineering, procurement, and construction in the power industry, renewable energy, and telecom infrastructure markets. The stock has been added to our model portfolio based on Peter Lynch's price to earnings growth strategy.

P/E/GROWTH RATIO: PASS

Under the Peter Lynch strategy, the investor should examine the P/E (12.36) relative to the growth rate (32.48%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company.

This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for AGX (0.38) is very favorable.

SALES AND P/E RATIO: NEUTRAL

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold.

AGX, whose sales are $775.2 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.

INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for AGX was 0.99% last year, while for this year it is 0.47%. Since inventory to sales has decreased from last year by -0.51%, AGX passes this test.

EPS GROWTH RATE: PASS

The Lynch growth methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years.

This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for AGX is 32.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.

TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for AGX (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.

NET CASH POSITION: PASS

Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt.

According to the peter Lynch methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for AGX (52.64%) is considered very favorable.

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