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, why a 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.