​Credit Acceptance: A Peter Lynch Play

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Market strategist John Reese selects stocks based on a detailed historical analysis of the strategies of many of the stock market's most legendary investors. In his Validea newsletter, he looks at a top-ranked stock based on noted fund manager Peter Lynch.

Credit Acceptance Corporation (CACC) offers financing programs that enable automobile dealers to sell vehicles to consumers. The company earns a 100% rating based on our price-to-earnings growth investing strategy of Peter Lynch.

DETERMINE THE CLASSIFICATION:

This methodology would consider CACC a fast-grower.

P/E/GROWTH RATIO: PASS

The investor should examine the P/E (10.54) relative to the growth rate (30.32%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company.

This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for Credit Acceptance (0.35) is very favorable.

SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold.

Credit Acceptance, whose sales are $1.14 billion, needs to have a P/E below 40 to pass this criterion. The stock's price to earnings ratio of 10.54 is considered acceptable.

EPS GROWTH RATE: PASS

This methodology 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 EPS growth rate for Credit Acceptance is 30.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.

TOTAL DEBT/EQUITY RATIO: NEUTRAL

Credit Acceptance is a financial company so debt to equity rules are not applied to determine the company's financial soundness.

EQUITY/ASSETS RATIO: PASS

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. It's Equity/Assets ratio (31.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.

RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. The stock’s ROA (11.83%) is above the minimum 1% that this methodology looks for, thus passing the criterion.

John Reese is editor of Validea.

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Companies

Symbol Name Price Change % Volume
CACC Credit Acceptance Corporation 411.78 -3.10 -0.75 82,268 Trade

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