---
name: lynch-garp
lens: Growth at a Reasonable Price by Category
attributed_to: Peter Lynch
style: growth
markets: Broad — best on mid-caps with visible end products; weakest on financials and commodities
description: Classify the company into a growth category first, then apply the valuation and expectation rules that belong to that category rather than one universal multiple.
---

# GARP-by-Category Lens

> **Framework, not investment advice.** This is our own summary of a publicly
> documented methodology, reconstructed as a procedure. It is not written or
> endorsed by the person named, and any verdict it produces holds only under this
> framework.

## What this lens optimizes for

Paying a multiple that is justified by the earnings growth actually being
delivered, with the crucial preliminary step of deciding *what kind of company*
this is. The most common error the lens is designed to prevent is applying
fast-grower expectations to a cyclical, or turnaround patience to a structural
decline.

## Market-fit note

- Category discipline matters more in A-shares, where sentiment can push a
  slow-grower to fast-grower multiples on a thematic label.
- Retail-visible businesses (consumer, restaurants, retail chains) are where the
  lens's observational edge is real; industrial B2B names give up that edge.
- The category rules assume the earnings series is meaningful. Where earnings are
  policy-administered or heavily subsidy-dependent, classify by the underlying
  operating business, not the reported line.

## Priority signals (walk in this order)

1. **Assign the category. Exactly one.**
   - *Slow grower* — mature, low single-digit growth. Held, if at all, for the
     dividend. Valuation anchor: yield and payout sustainability.
   - *Stalwart* — large, 8–12% growth, defensive. Anchor: a modest premium to
     growth; the expected outcome is a moderate gain, not a multiple.
   - *Fast grower* — 20%+ sustained, usually smaller, with room to replicate.
     Anchor: growth versus multiple, plus how many years of replication remain.
   - *Cyclical* — earnings swing with a cycle. Anchor: **inverted** — a low
     multiple on peak earnings is expensive; a high multiple on trough earnings can
     be cheap.
   - *Turnaround* — the question is survival, not growth. Anchor: balance sheet and
     the specific fix.
   - *Asset play* — value sits in an asset the market is not counting. Anchor:
     the asset's realizable value and the mechanism by which it gets realized.
2. **Verify the category against the numbers**, not the label the market has
   applied. Five to ten years of revenue and earnings, and where in the cycle those
   years sit.
3. **Apply the category's valuation rule.** For growth categories, compare the
   multiple to the sustainable growth rate; a multiple far above the growth rate
   requires an explicit reason. For cyclicals, normalize earnings across the cycle
   before any multiple is computed.
4. **Test the growth's mechanics.** For a fast grower: how many units/stores/
   customers exist, how many can exist, at what rate they are being added, and what
   the unit economics look like at maturity. Growth must be countable.
5. **Balance sheet check.** Net debt to equity, and whether growth is being funded
   by operating cash or by financing. A fast grower funded by debt is a cyclical
   wearing a costume.
6. **Inventory and receivables versus sales.** Inventory growing faster than sales
   is the earliest and cheapest warning available.
7. **Insider and buyback behaviour** as corroboration, never as the thesis.
8. **The two-minute statement.** State, in plain language, why you own this, what
   has to happen, and what would make you stop. If it takes longer than two minutes,
   the case is not understood.

## Disqualifiers (hard vetoes)

- **Category cannot be assigned**, or the company sits in two categories at once
  with no dominant one.
- **Multiple far above growth rate with no stated reason** other than that the
  story is popular.
- **Cyclical valued on peak earnings** with a low headline multiple presented as
  cheapness.
- **Growth funded by rising leverage** while operating cash flow lags reported
  earnings.
- **Diversification into unrelated businesses** at the expense of the core engine.
- **"The next X"** as a central argument — an explicit warning sign under this
  framework, because it substitutes analogy for arithmetic.

## Scoring rubric

| Gate | Pass condition |
| --- | --- |
| Category | Assigned, evidenced, single |
| Valuation rule | The category's own rule applied, arithmetic shown |
| Countable growth | Units and rate stated, maturity economics estimated |
| Funding | Growth financed from operations |
| Working capital | Inventory and receivables not outrunning sales |
| Two-minute statement | Written, with the stop condition |

## Typical misuse

- **Formulaic multiple-versus-growth screening.** The comparison is a starting
  heuristic, not a valuation. It is meaningless for financials, for companies with
  low or negative earnings, and for any cyclical.
- **Extrapolating a growth rate off a depressed base.** A 60% rebound year is not a
  growth rate.
- **Applying it to financials.** Bank and insurer earnings are provisioning
  choices; earnings-multiple logic and this lens's growth tests do not translate.
- **Ignoring the category's own trap.** Turnarounds fail more often than they
  succeed; asset plays can stay unrealized indefinitely; stalwarts de-rate quietly.
- **"Buy what you know" as a licence.** Familiarity with a product is a source of
  hypotheses, not a substitute for the financial work — and it systematically biases
  toward consumer names.

## Falsifiers

- Same-store or same-customer metrics turn negative while total revenue grows →
  the growth is expansion-funded, and the fast-grower category is void.
- Inventory days rise for two consecutive periods against flat sales → the earnings
  quality premise fails.
- Normalized mid-cycle earnings come in far below the trailing figure → the company
  was a cyclical all along and the valuation must be redone.

## Output contract

Report under the skill-level output contract. State the verdict as "under a
GARP-by-category framework, …", name the assigned category and the evidence for it
first, and show the arithmetic for that category's valuation rule. This is
analysis, not investment advice.