The Lynch PEG Ratio
A P/E of 30 sounds expensive — until you learn the company is growing 30% a year. A P/E of 8 sounds cheap — until you learn earnings are shrinking. Peter Lynch's fix was a single elegant ratio that puts price and growth on the same line, so a multiple finally means something. It's also the ratio most easily fooled — because it leans on the one number nobody can pin down.
01Where it comes from
Peter Lynch ran Fidelity's Magellan Fund to about 29% a year from 1977 to 1990 — turning it into the biggest mutual fund in the world — and then wrote the investing classic One Up on Wall Street(1989). His most quoted line is a rule of thumb so simple it's almost suspicious: “The P/E ratio of any company that's fairly priced will equal its growth rate.”
In other words, a company growing earnings 20% a year deserves roughly a P/E of 20. Pay much less and you may have a bargain; pay much more and you're betting on a future that has to arrive. Divide the two and you get the PEG.
Lynch never treated the ratio as a universal key, though. His real framework sorted companies into six types — slow growers, steady “stalwarts,” fast growers, cyclicals, turnarounds, and asset plays — and the PEG belonged mainly to the fast growers, where the price and the earnings-growth rate genuinely are the whole story. On a cyclical or a turnaround he'd have laughed at plugging a single growth rate into anything. He was just as insistent that the number meant nothing without the story behind it: his famous “two-minute drill” was being able to explain, in plain English, whya company would grow — the products, the market, the reason — before you ever leaned on a ratio about that growth. The PEG was shorthand for a judgment he'd already done the work to earn, never a substitute for making it.
02The formula
A P/E of 12 on a company growing 12% gives a PEG of 1.0— Lynch's definition of fair. The whole ratio hinges on that growth number in the denominator — and that's exactly where it can betray you.
The app also plots a companion Lynch used constantly: price versus 15× earnings — his shorthand fair-value line for a typical grower — so you can see at a glance whether a stock sits above or below it over time.
03Where the growth number breaks
The PEG only works if “growth” is a stable, knowable number. On our two recurring stocks, watch how quickly that assumption collapses.
Linamar's P/E is a cheap-looking ~9. But what growth rate do you divide by? Its earnings lurched from −49% to +132%in a single year. Plug in last year's 132% and the PEG says “screaming buy”; plug in the −49% and it's undefined. For a cyclical, the PEG isn't wrong — it's unanswerable, because there's no such thing as “the” growth rate.
Using its steady ~20% revenue growth (its reported EPS is too lumpy from acquisitions to trust), Constellation's PEG lands near 2.5— well into “expensive.” Yet it's one of the finest compounders on the TSX. The PEG has a real blind spot here: it treats all growth as equal and penalizes durable, high-quality growth that the market rationally pays a premium for. A high PEG is a caution flag, not a verdict.
04When the PEG lies
Four ways it misleads
- Cyclicals have no “growth rate.” As with Linamar, earnings that swing wildly make the denominator meaningless — and a peak-year growth figure makes the worst stocks look cheapest.
- Trailing vs. forward changes everything.Last year's growth, next year's estimate, and a long-term analyst number can give three different PEGs for the same stock. Always know which one you're using.
- It penalizes quality.A durable 20% compounder and a fragile 20% flash-in-the-pan get the same PEG, even though one deserves a far higher multiple. PEG can't see durability.
- It ignores everything else.Debt, dividends, cash, and business quality don't enter the ratio at all. A low PEG on a leveraged, low-quality business is often a trap.
Lynch never meant the PEG as a precise valuation — it was a fast, back-of-the-envelope sanity check to keep him from overpaying for growth. Used that way, beside a real valuation and a look at how stable the growth actually is, it's invaluable. The app shows it — and the price-vs-15×-earnings line — as one lens among many, never the answer on its own.
See the PEG and the 15× line on any stock
The research page shows the PEG ratio and Lynch's price-vs-15×-earnings chart beside the Graham methods and the DCF — recomputed from current data — so you can judge the multiple against the growth and see how steady that growth really is.