Peter Lynch made a name for himself running the Magellan Fund, serving as its investment manager from 1977 to 1990. By 1983, he ran the world's largest equity fund and outperformed all his peers for the next seven years.
Lynch built his success on investigating businesses, evaluating their growth potential, and buying when the stocks traded at a lower valuation relative to that growth. Although Lynch no longer manages funds, today's investors can still apply his principles, and the investment strategies based on his philosophy could still drive market-beating returns.
One stock that could fit those principles is Chewy (CHWY 1.92%). Let's see why.
Investing in what you know
On the surface, Lynch telling investors to invest in what they know may not seem profound. As an investment manager, he was responsible for understanding the investments that drove his clients' returns.
However, knowing a company brings familiarity with its products and experiences. Chewy customers would know that it offers competitive pricing. They are also more likely to report positive outcomes when dealing with its customer service.
For example, Chewy will handwrite cards to commemorate occasions such as a pet's birthday and send flowers when a pet passes away. Such goodwill often leads to customers choosing Chewy over more transactional businesses such as Amazon, giving the company a competitive advantage investors can appreciate.
How the financials fare
Admittedly, internet and direct marketing retail stocks, Chewy included, saw growth slow in 2022 after the front-loaded sales increases at the height of the pandemic. Lynch liked to consider a company's potential, which looks past temporary spikes or dips in a company's revenue.
That potential is evident in Chewy's financials. In fiscal 2022 (ended Jan. 29), Chewy reported revenue of $10 billion, a 14% increase from 2021. That marks a slowdown from fiscal 2021, when yearly revenue growth reached 24%. Nonetheless, the company managed to keep costs and expenses growing at a slower pace than revenue. That resulted in a $49 million profit for the year, up from the loss of $74 million in 2021.
Additionally, valuation and growth appear more favorable. The deep sell-off that began two years ago seems to have stopped. And since a bull run in the stock has not yet started in earnest, Chewy sells at a 70% discount to its 2021 high.
Admittedly, it may take time to properly evaluate Chewy with Lynch's favorite valuation metric, the PEG ratio. Since Chewy is newly profitable, the "earnings" portion of the PEG, or the P/E ratio, will not yet reflect its valuation accurately.
However, its price-to-sales (P/S) ratio is approximately 1.5. This is near record lows and well under the peak P/S ratio of 7 in early 2021. Hence, Chewy has turned profitable and maintained double-digit revenue growth in a variety of business environments, and that resilience bodes well for its future.
Consider Chewy stock
Peter Lynch is no longer serving as an investment manager, but you can still benefit from his investment strategy. That approach offers investors a few good reasons to buy Chewy stock.
Despite its smaller size, Chewy has found a competitive advantage against Amazon, and it managed to grow revenue even as e-commerce slowed in 2022. With the discount in the stock price and lower valuation, it stands an excellent chance of serving individual investors much like a Peter Lynch stock would have in the last century.
