Formula: Fair P/E = Growth Rate + Dividend Yield
Fair Price: EPS × Fair P/E
Graham Number Calculator
Calculate intrinsic value using Benjamin Graham's conservative formula based on earnings per share and book value. Ideal for defensive value investing.
Dividend Discount Model Calculator
Determine fair value for dividend-paying stocks based on expected future dividend payments. Best for mature companies with stable dividends.
Peter Lynch, the legendary manager of Fidelity's Magellan Fund who achieved an average annual return of 29.2% from 1977 to 1990, developed a simple yet powerful formula for evaluating growth stocks. His approach focuses on the relationship between a company's price-to-earnings ratio and its growth rate, known as the PEG ratio.
The core principle is straightforward: a fairly valued stock should have a P/E ratio roughly equal to its earnings growth rate. For example, a company growing earnings at 15% annually should trade at around 15 times earnings. Lynch enhanced this by including dividend yield, recognizing that dividends contribute to total shareholder returns.
Fair P/E Ratio = Expected Growth Rate (%) + Dividend Yield (%)
Fair Stock Price = EPS × Fair P/E Ratio
While the Peter Lynch formula is valuable, it has limitations. It works best for growth rates between 10-30%. For very high growth rates (above 40%), the formula may overestimate fair value. Similarly, for cyclical companies or those with unstable earnings, other valuation methods may be more appropriate.
The Peter Lynch Fair Value formula calculates a fair P/E ratio by adding the expected growth rate and dividend yield. Fair P/E = Growth Rate + Dividend Yield. The fair stock price is then calculated as EPS × Fair P/E.
Peter Lynch believed a fairly priced stock should have a PEG ratio of 1, meaning the P/E ratio equals the growth rate. A PEG below 1 may indicate an undervalued stock, while a PEG above 1 may suggest overvaluation.
The Peter Lynch formula works best for growth stocks with expected growth rates between 10-30%. It may be less reliable for very high growth rates or for companies with unstable earnings.
The P/E ratio measures stock price relative to earnings, while the PEG ratio divides the P/E by the expected growth rate. The PEG ratio accounts for growth, making it more useful for comparing growth stocks.
Peter Lynch is one of the most successful mutual fund managers in history, achieving a 29.2% average annual return managing Fidelity Magellan Fund from 1977 to 1990. His fair value formula helps investors identify undervalued growth stocks.
Yes, Peter Lynch recommended adding the dividend yield to the growth rate when calculating fair P/E. This accounts for the total return an investor receives from both price appreciation and income.
The calculator provides a reasonable estimate for growth stocks, but should not be used in isolation. Combine it with other valuation methods like DCF analysis, Graham Number, or comparable company analysis for a more complete picture.