A P/E of 25 can be cheap, if earnings grow 30%. The PEG ratio makes growth stocks comparable, automated across the entire market.
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Once enough history is available, the backtest chart for this strategy will appear here.
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, for example ROE above 15 %.
You decide how much each rule counts: from +1 to +3 or −1 to −3.
The sum is the score. Above the upper threshold: a high match with the profile.
These terms describe only the match with the criteria, not a recommendation to buy or sell.
The PEG ratio grades from +3 (below 0.5) to −2 (above 2.0): the lower, the more attractive.
A debt-to-equity ratio below 0.4 ensures the growth is not financed on credit.
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.
For growth-oriented investors with valuation discipline: if you want growth but refuse to pay any price, the PEG is the right yardstick, understandable, comparable and applicable across industries.
The PEG strategy follows the principle Peter Lynch established as manager of the Magellan Fund: the price-earnings ratio alone means nothing until you set it against earnings growth. A PEG of 1.0 (P/E equal to the growth rate) counts as fair; below that, undervaluation begins. The core is flanked by two Lynch-typical checks: a conservative balance sheet 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.
The PEG ratio (P/E divided by expected earnings growth) is translated into tiers: below 0.5 counts as extreme undervaluation (+3), 0.5 to 1.0 as the ideal GARP window (+2), 1.0 to 1.5 as fair (+1). From 2.0 (or when no meaningful PEG exists because earnings or growth are negative) the score is −2: the growth is then priced too expensively, or the thesis does not hold.
Two quality checks complete the picture: a debt-to-equity ratio below 0.4 adds +1. If inventories grow slower than sales, that earns +1; if they grow more than 10 percentage points faster, it costs a point. The upper threshold is 3 points for large caps, 4 for mid caps and 5 for small caps.
PEG 0–0.5: extreme undervaluation relative to growth (+3). PEG 0.5–1.0: ideal window (+2). PEG 1.0–1.5: fair (+1). PEG above 2, negative or missing: overpriced (−2).
Debt-to-equity below 0.4: conservative balance sheet (+1).
Inventories: growth below sales growth (+1); more than 10 percentage points above it (−1), the shelf-warmer early indicator.
The strength of the PEG: it makes growth stocks comparable across industries and valuation levels. The weakness: it depends on the quality of the growth estimate. For cyclicals at an earnings peak the PEG 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.
Calculation notes: "inventory growing much faster" is concretised as more than 10 percentage points above sales growth. Companies without inventories (software, services) stay neutral on both inventory rules. In the backtest the PEG comes from the data provider's historical annual ratios.
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.