Argan: A Peter Lynch Play
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.
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.