By John Reese, Validea

Our strategy is to select stocks based on the investing criteria of legendary investors. In this case, Ternium SA (TX) earns a 100% score based on our Peter Lynch methodology.

Ternium  is a company in Latin America that makes steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. About 57% of sales were generated in North America and 41% in South and Central America.

Under this strategy, the investor should examine the price-to-earnings ratio (9.66) relative to the growth rate (29.91%), based on the average of the three and four year historical earnings per share growth rates, for a company.

This is a quick way of determining the fairness of the price. In this particular case, the price-to-earnings-to​-growth ratio for TX (0.32) is very favorable. In addition, its price-to-earnings ratio of 9.66 is considered acceptable.

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. Since inventory-to-sales has decreased from last year by -0.77%, TX passes this test.

This methodology also 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 earnings per share growth rate for TX is 29.9%, based on the average of the three and four year historical earnings per share growth rates, which is acceptable.

A bonus for a company in the Lynch strategy is having a net cash-to-price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt.

According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The net cash-to-price ratio for TX (39.92%) is high enough to add to the attractiveness of this company.

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