How Peter Lynch Used the PEG Ratio to Uncover 10-Bagger Stocks

Published by MoatPicks.io Research Team • Quantitative Value Methodology

1. Why the Classic P/E Ratio is Incomplete

Traditional Wall Street analysts often look at Price-to-Earnings (P/E) in a vacuum. However, paying 20x earnings for a utility company growing at 2% per year is extremely expensive, while paying 25x earnings for a company doubling its revenues at 50% per year is extraordinarily cheap.

2. The Peter Lynch PEG Formula

Peter Lynch, who achieved a 29.2% annual return at Fidelity Magellan from 1977 to 1990, pioneered the PEG Ratio:

Under Lynch's criteria:

• PEG < 1.0: Undervalued stock. You are paying less than the company's growth rate justifies.
• PEG = 1.0: Fairly valued company.
• PEG > 1.5: High valuation risk unless sustained hyper-growth accelerates further.