We base our stock recommendations on the investment strategies of well-known "legendary" stock experts. HCI Group (HCI), scores a 100% rating based on the price-to-earnings to growth strategy used by Peter Lynch.
HCI, formerly Homeowners Choice, is a holding company engaged in the property and casualty insurance business, that would be considered a "fast-grower" under Peter Lynch's P/E/Growth methodology.
Under this strategy, the investor should examine the P/E (8.15) relative to the growth rate (31.66%), 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 HCI (0.26) is very favorable.
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 strategy 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 HCI is 31.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.
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. HCI's Equity/Assets ratio (34.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.
This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. HCI's ROA (13.86%) is above the minimum 1% that this methodology looks for, thus passing the 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 methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for HCI (52.13%) is considered very favorable.
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