Famous Wall Street investor Peter Lynch is the author of the book "One up on Wall Street" that encouraged everyday investors to invest for themselves, rather than relying on fee-charging investment managers.
Lynch was also legendary for delivering compound annual returns greater than 20% for more than a decade, which places him up with Warren Buffett in terms of one of the best investors of all time.
Lynch also freely shared the investment rules that helped him generate such incredible returns over an extended period.
One of his core principles on a qualitative basis was to "buy what you know". For example if you like a company's products yourself the chances are others will as well and the company could be a success.
Another of his core principles on a quantative basis was to buy growth stocks that had a forecast earnings growth rate higher than their trailing earnings multiples. For example if a company is expected to grow at 20% in FY 2017 but only trades on 10x its historical earnings its price to earnings growth (PEG) ratio would equal 10/20 or 0.5.
Generally it's believed that a PEG ratio lower than 1 may represent good value as it suggests a stock is trading cheaper than its forecast growth rate.
So let's take a look at three shares selling on the ASX today that may have impressed Peter Lynch.
BWX Limited (ASX: BWX) is the manufacturer and retailer behind the increasingly popular Sukin skin and hair care natural beauty products that are increasingly popular in Australia. Its management team is forecasting EBITDA growth of 30% in FY 2017 with a trailing price earnings ratio of 34.
That suggests this fast growing, debt free retailer is growing on a PEG ratio of just over 1.13 using trailing earnings. Although not lower than 1, this still looks good value in my opinion and the shares look a buy at $4.51.
Corporate Travel Management Ltd (ASX: CTD) is a globally-focused corporate travel company that organises bookings and other travel services for its business clients. The company is expected to grow earnings by 41% in FY 2017 and trades on trailing price to earnings ratio of 46x. This suggests its PEG ratio is 1.1, which is also potentially good value for a company growing at such rapid rates. I rate the shares as a buy at $19.50.
CSL Limited (ASX: CSL) is the emergency health products manufacturer that recently forecast it expects to deliver 18% to 20% profit growth in FY 2017 thanks to strong recent sales orders. The shares sell for $123.90 which places it on a trailing earnings multiple of 39x and a PEG ratio of 2.05. On that basis it looks the most expensive of the three companies listed above when using forecast growth rates as a proxy for relative value.
Still for investors CSL is easily the most defensive business on this list and likely to offer the best risk adjusted returns due to its wide moat and track record that speaks of a company well positioned for continued growth thanks to the unrelenting underlying demand for its products.
Of the three companies above, I think BWX looks the best bet on current valuations for growth-oriented investors.
