Peter Lynch PEG idea:

The PEG ratio (Price/Earnings-to-Growth) is a valuation measure championed by Peter Lynch to determine if a stock is reasonably priced by measuring its P/E ratio against its estimated earnings growth rate. The formula is:

PEG Ratio = (P/E Ratio) / (Annual EPS Growth Rate)

Interpretation:

  • PEG < 1: Stock can be undervalued.
  • PEG = 1: Stock is reasonably priced (Lynch’s rule of thumb).
  • PEG > 1: Stock can be overvalued.

Lynch also thought that the P/E ratio of a company should approximately be equal to its growth rate for a company to be fairly priced[6]. This makes the PEG ratio particularly good to compare companies with varying growth rates.

He later developed this method to incorporate dividend yield, coming up with the PEGY ratio, which is:

PEGY Ratio = P/E Ratio/(EPS Growth Rate + Dividend Yield)

This adjustment helps value mature, dividend-paying companies.