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- Value Investor Daily #73
Value Investor Daily #73
Peter Lynch Used This Tool to Find Undervalued Growth Companies
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Peter Lynch said, “The P/E ratio of any company that’s fairly priced will equal its growth rate.” That means the P/E divided by the growth rate (PEG ratio) should equal 1 for a fairly valued company.
What does that mean for value investors? If you’re going to pay up for earnings, you better get significant growth with it.
The market trades a P/E of 31.1 and an earnings growth rate of 8.24%, a PEG ratio of 3.77—very high by Lynch’s standards.
Let’s look at the Mag 7 to get a better feel for this ratio.
Company | Ticker | P/E | YoY EPS Growth | PEG Ratio |
|---|---|---|---|---|
Apple | AAPL | 39.9 | -0.82% | -48 |
Nvidia | NVDA | 56.2 | 234.04% | .24 |
Microsoft | MSFT | 36.6 | 17.35% | 2.1 |
Amazon | AMZN | 48.5 | 143.63% | .33 |
Alphabet | GOOGL | 23.1 | 44.62% | .51 |
Meta | META | 29.4 | 87.26% | .33 |
Tesla | TSLA | 106.7 | 17.67% | 6.03 |
Except for Tesla and Apple, all other Mag 7 stocks are trading at a lower PEG ratio than the market.
Nvidia, Amazon, Alphabet, and Meta all have PEG ratios below 1, which is under Lynch’s hurdle rate, making them far cheaper than the market.
Nvidia is the “cheapest” of the group, trading at a PEG of just 0.24. Expect that to move up as the astronomical growth rate of 234% slows down. Analysts foresee 127% EPS growth in 2025 and 50% in 2026, which aligns with today's P/E of 56.
We ran a screen to find more stocks Peter Lynch would take a second look at.
Company | Ticker | P/E | YoY EPS Growth | PEG Ratio |
|---|---|---|---|---|
Netflix | NFLX | 52.95 | 76.17% | .70 |
Johnson & Johnson | JNJ | 24.57 | 28.23% | .87 |
Salesforce | CRM | 59.62 | 131.07% | .45 |
T-Mobile | TMUS | 27.84 | 36.23% | .77 |
Merck | MRK | 21.57 | 165.47% | .13 |
Advanced Micro Devices | AMD | 122.84 | 853.04% | .14 |
American Express | AXP | 22.39 | 27.35% | .82 |
Disney | DIS | 42.92 | 111.22% | .29 |
Phillip Morris | PM | 20.72 | 22.34% | .93 |
Goldman Sachs | GS | 17.61 | 64.86% | .27 |
Caterpillar | CAT | 18.34 | 22.30% | .82 |
QUALCOMM | QCOM | 17.84 | 37.12% | .48 |
S&P Global | SPGI | 45.66 | 46.60% | .98 |
Of this list, Goldman, QUALCOMM, and Caterpillar have the lowest hurdle to keep the PEG ratio below 1 in the years to come, with P/E ratios under 20, making them cheap on an absolute and relative basis.
What do you think? Is Peter Lynch’s PEG rule useful? Or do you prefer Ben Graham style cigar butts?
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