A P/E of 25 can be cheap, if earnings grow 30%. The PEG ratio makes growth stocks comparable, automated across the entire market.
Save the strategy and StockScorer checks its rules for you every day. You'll get a heads-up whenever a stock crosses the upper or lower score threshold.
Gap to MSCI World: +247.0 percentage points total, +6.3 per year
Index, start = 100
Past performance is not a reliable indicator of future results.
Based on all 16,182 stocks with a score. Not rated are stocks that the profile does not classify because of a size limit or an exclusion rule.
| Score | Number of stocks | High match | Medium match | Low match | Not rated |
|---|---|---|---|---|---|
| -3 | 1,862 | 0 | 0 | 1,859 | 3 |
| -2 | 3,468 | 0 | 0 | 3,463 | 5 |
| -1 | 5,133 | 0 | 0 | 5,114 | 19 |
| 0 | 1,266 | 0 | 0 | 1,259 | 7 |
| +1 | 951 | 0 | 0 | 924 | 27 |
| +2 | 883 | 0 | 755 | 0 | 128 |
| +3 | 1,253 | 0 | 1,081 | 0 | 172 |
| +4 | 1,181 | 905 | 0 | 0 | 276 |
| +5 | 185 | 134 | 0 | 0 | 51 |
Every stock runs through the same disclosed rules. The points add up to a score, traceable down to the individual rule.
Each rule checks a metric against a threshold, here for example “Very low price-to-growth ratio (PEGY 0–0.5)”.
In this profile, each rule that is met counts +1 to +3 or −1 to −2 points. Exclusion rules take a stock out of the rating regardless of its points: it is then not rated.
The sum is the score. That gives three classes: high, medium, low match.
These terms describe only the match with the criteria, not a recommendation to buy or sell.
The PEGY (P/E / (trailing growth + dividend yield)) grades from +3 (below 0.5) to −2 (above 2.0). Between 1.0 and 2.0 there are no points.
A debt-to-equity ratio below 0.33 (one third) stands for a conservative balance sheet, modelled on Lynch's description of a normal balance sheet.
If inventories grow slower than sales, demand is pulling: the early indicator earns a point.
Inventory growing much faster than sales announces discount battles and costs a point.
These exact rules run over every stock daily.
After signing up for free, you can copy the full profile in the rule editor, adjust its thresholds, and save it as your own starting profile.
See and copy all rules for freeIndex, start = 100
The backtest shows a total return of +487.2%. The MSCI World reaches +240.1% over the same period.
The same strategy with the same settings, started at every possible date. Each dot is a separate run over 5 years.
The periods overlap heavily, neighbouring runs share almost all periods. The spread therefore looks smaller than it would for independent periods. Past results say nothing about future ones.
Strategy calculated without fees and taxes, dividends reinvested.
Point-in-time composition since June 30, 2009: each period uses the members at that time. Stocks that left the market early may be missing, which favours the result.
Historical period, quarterly rebalancing. Past performance is not a reliable indicator of future results.
Purely mechanical rule application, no curated-list effect: stocks with a high match can fall just like any other stock.
Dots per card, in this order: Growth, Valuation, Balance sheet & risk. Filled means at least one rule in the category is met.
For growth-oriented investors with valuation discipline: if you want growth but refuse to pay any price, the PEGY is a simple yardstick that is comparable across industries. It only uses past growth and does not say whether it will continue. Small caps take priority among the size classes.
The PEG strategy is inspired by Peter Lynch's PEG idea but does not reproduce his method (see the section "Where this strategy departs from Lynch"). The core idea: the price-earnings ratio alone means nothing until you set it against earnings growth. We use the PEGY for that: P/E divided by earnings growth PLUS dividend yield, because a dividend is part of the total return. The growth figure is the trailing 5-year EPS CAGR as of each date, not an estimate. A PEGY below 1.0 earns points (+2, and +3 below 0.5), while the 1.0 to 2.0 window earns none. The core is flanked by a balance-sheet rule (debt-to-equity below a third) and the often overlooked inventory early-warning indicator. When inventories pile up faster than sales grow, discount campaigns and margin slumps are coming, long before they show up in the income statement.
An exclusion rule first excludes growth above 50% per year (5-year EPS CAGR; a missing value does not exclude). This is our own ceiling against outliers. The PEGY (P/E divided by trailing earnings growth PLUS dividend yield) is then translated into tiers: PEGY 0 to 0.5 earns +3, PEGY 0.5 to 1.0 earns +2. From 2.0 (or when no meaningful PEGY exists because earnings or growth are negative) the score is −2: the growth is then priced too expensively, or the thesis does not hold. The 1.0 to 2.0 window deliberately earns no points: a PEGY above 1.0 means the P/E is higher than growth and dividend yield combined.
Two quality checks complete the picture: a debt-to-equity ratio below 0.33 (a third) adds +1. It is modelled on Lynch's description of a normal balance sheet (75% equity, 25% debt), not a buy threshold of his. If inventories grow slower than sales, that earns +1; if they grow more than 10 percentage points faster, it costs a point. For financials, balance-sheet and inventory rules do not apply; they get a flat +1 instead. The thresholds are a uniform 4 points on top and 2 at the bottom across all size classes, with priority given to small caps.
Growth gate (exclusion rule): 5-year EPS CAGR up to 50% p.a., excluded above that. This is our own ceiling against outliers.
PEGY 0–0.5: very low price-to-growth ratio (+3). PEGY 0.5–1.0: low price-to-growth ratio (+2). PEGY above 2, negative or missing: priced expensively (−2). PEGY 1.0–2.0: no points.
Debt-to-equity below 0.33: conservative balance sheet (+1, non-financials only).
Inventories: growth below sales growth (+1); more than 10 percentage points above it (−1), the shelf-warmer early indicator (non-financials only).
Financials: a flat +1 in place of the balance-sheet and inventory rules.
The strength of the PEGY: it makes growth stocks comparable across industries and valuation levels, and the dividend yield in the denominator captures total return. The weakness: it uses trailing growth and says nothing about whether it will continue. For cyclicals at an earnings peak the PEGY looks deceptively low, because the high growth is not sustainable. The sister strategy Balanced GARP addresses exactly this case by deliberately not rewarding extremely low PEGs.
Converting to Lynch's notation: with the plain PEG, without dividend, 1.0 is fair. Lynch's dividend-adjusted form is (growth + dividend yield) / P/E, where below 1 is weak, 1.5 is okay and 2 or more is what you look for. Our PEGY is the inverse (P/E / (growth + dividend yield)). Turned around, a PEGY up to 0.5 is what you look for, 0.67 is okay and above 1.0 is weak. The 0.67 to 1.0 window therefore sits below Lynch's "okay", yet earns +2 here and, together with the balance-sheet and inventory rules, can reach the threshold of 4 points. That tiering is our own. The 1.0 to 2.0 window earns no points.
Limit of the growth gate: the 50% ceiling on the 5-year CAGR is our implementation. Lynch warns about very high growth rates (50 to 100%); the hard exclusion rule is ours. It also catches recoveries from a weak base year: if earnings per share rise from 0.10 to 1.00 over five years, that is 58.5% p.a., even though the company earned next to nothing before.
Financials: balance-sheet and inventory rules do not fit banks and insurers. They get a flat +1 instead, roughly a stand-in for the two inapplicable rules. A financial with a PEGY below 0.5 therefore reaches the threshold of 4 points without any balance-sheet check. This is a deliberate trade-off. Companies without inventories (software, services) stay neutral on both inventory rules.
In the backtest, our pipeline computes the PEGY from historical data with the same formula as live, using trailing growth as of each date.
The strategy takes Lynch's PEG idea and his inventory indicator, nothing more. What belongs to Lynch's approach but is missing or different here:
No six stock categories: Lynch sorts stocks into six categories. For him the PEG fits mainly growth stocks, not cyclicals, turnarounds or asset plays. This strategy applies the same rules to every stock.
No qualitative check: the story behind the company (source of growth, competitive advantage) is not judged by any rule set.
No net-cash-adjusted P/E: the P/E enters the PEGY unadjusted.
No share buybacks and no insider buying as a signal.
Our own point tiers and thresholds: the tiers (+3, +2, −2), the balance-sheet and inventory points and the thresholds 4 and 2 are our choice, not Lynch's.
Trailing instead of expected growth: Lynch combines history with his own judgement, partly also with estimates. Here only the trailing 5-year EPS CAGR goes into the denominator, deliberately, so that the strategy can be recomputed (backtested).
For investors who want to filter growth companies systematically by their price-to-growth ratio: as a core strategy or as a valuation check over a growth watchlist.