Buffett taught us to seek quality at a reasonable price. He’s happy to sit tight with moaty giants compounding wealth over decades. Peter Lynch, on the other hand, made GARP investing his battlefield, tracking down fast growers that hadn’t yet captured Wall Street’s imagination. His legendary 13-year run at Fidelity’s Magellan Fund saw an annualized return of 29.2%, more than doubling the S&P 500.
What made Lynch’s approach work so well was his insistence on paying attention to both the P and the G. He didn’t chase growth blindly. He asked: is the price justified? Is the growth real? And can I still sleep at night after buying this?
That philosophy is perfectly suited to small-cap stocks.
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In the lower reaches of the market, inefficiencies are everywhere. The analyst coverage is sparse, the narratives are confused, and investor attention is fickle. But this also means GARP investors, those of us who prize quality and value, but demand real growth, can carve out an edge. These companies aren’t household names. But some of them are quietly doubling revenue, expanding margins, and compounding intrinsic value well before the market catches on.
That’s what this screen looks for: small-cap stocks where growth is alive and well and so is the discipline of valuation.
Here is what we are looking for in this screen.
- 5 yr average EPS growth > 15%
- Next year EPS growth estimate > 15%
- 5 yr Operating Income growth > 15%
- 5 yr Revenue growth > 8%
- Earnings Yield > 5%
- PEG ratio, both trailing and forward, < 1.2
Additionally, we have restricted the screen to the US stocks. Let’s take a look at what turned up.
We know that these companies have been growing well in the past 5 years and should post continued growth in the next few years. Additionally, we know that these companies have seen their stocks driven down to the point where they represent great values. Anytime you are looking at a stock that has seen price weakness in the recent years, you have to review its business and the market to ensure that you are aware of what may be causing it, and that this is a temporary situation.
I like the following stocks and will add these to my watchlist for further research:
- ACLS, Axcelis Technologies – A semiconductor equipment manufacturer with strong growth and significant stock buybacks as the stock price is undervalued. The tariff situation introduces a bit of uncertainty, though it could be argued that on the balance it will work out well for them. Appears to be trading at about 30% discount to the intrinsic value.
- AMPH, Amphastar Pharma – A pharmaceutical company that makes various ingredients for generic and proprietary injectable, inhalation, and intranasal products, as well as insulin active pharmaceutical ingredient, or insulin API products. Most of their business is US based. The stock appears to be trading at about 39% discount to the intrinsic value.
There is no guarantee that these stocks will end up as a Buy stock – this just means that the financials look sufficiently interesting for me to go deeper in the stock. If after my due diligence any of these stocks turn out to be great buys, I will communicate this to my Premium subscribers. If you want to be in the loop and follow my portfolio, you can sign on to my Premium membership on Substack here.
Shailesh Kumar, MBA is the founder of Astute Investor’s Calculus, where he shares high-conviction small-cap value ideas, stock reports, and investing strategies.
His work has been featured in the New York Times and profiled on Wikipedia. He previously ran Value Stock Guide, one of the earliest value investing platforms online.
Subscribe to his Substack to access premium stock reports and strategy insights.
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