Forest Labs: A Peter Lynch-style market stalwart

This stock meets the investing criteria of the Fidelity Magellan Fund's legendary manager.

By TheStockAdvisors Dec 5, 2011 10:59AM
Sean Justice/CorbisBy John Reese, Validea

We select stocks by using screens that are based on the investment strategies of well-known investors. Forest Laboratories (FRX) scores 100% on our Price-Earnings-Growth Investor screen, which is modeled on the investing criteria of Peter Lynch.

Forest Laboratories develops, manufactures and sells branded forms of ethical drug products, most of which require a physician's prescription.

The company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro.

FRX is considered a True Stalwart, according to the Peter Lynch-based method, as its earnings growth of 14.50% lies within a moderate 10% to 19% range and its annual sales of $4.5 billion are greater than the multibillion-dollar level needed.

This method looks for such stalwart securities to gain 30% to 50% in value over a two-year period if they can be purchased at an attractive price based on the P/E-to-growth ratio. FRX is attractive if it can hold its own during a recession.

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 FRX was 11.16% last year, while for this year it is 10.21%. Since inventory to sales has decreased from last year by 0.94%, FRX passes this test.

The Yield-adjusted P/E/G ratio for FRX (0.49), based on the average of the 3-, 4- and 5-year historical EPS growth rates, is excellent.

The EPS for a stalwart company must be positive. FRX's EPS ($4.04) would satisfy this criterion.

A  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 this method, a high value for this ratio dramatically cuts down on the risk of the security. The net cash/price ratio for FRX (48.85%) is considered favorable.

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Tags: FRX
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