Lynch — PEG, fair value, and the six categories

PEG

PEG = P/E ÷ the earnings growth rate (in percentage points)

Below 1.0, you are paying less than one point of price-to-earnings per point of growth — Lynch's shorthand for a fairly priced grower. At 30× earnings with 25% growth the PEG is 1.2; the same 30× with 10% growth is 3.0, which Lynch would call expensive unless the business is extraordinary.

Lynch later preferred a dividend-adjusted form, (growth + dividend yield) ÷ P/E, because a grower paying you 3% while compounding is not the same proposition as one paying nothing. Pythia renders it in Lynch's own orientation — higher is better — rather than converting it into a reciprocal the reader then has to invert mentally.

Fair value, as a framing device

Lynch fair value ≈ EPS × growth rate

At $5 of EPS and 20% growth that is $100. A price of $70 leaves roughly 30% headroom. Lynch was explicit that this is a rule of thumb for framing a conversation, not a valuation model — there is no discounting, no terminal value, and no cost of capital in it.

The six categories, and why they matter more than the formulas

Lynch sorted companies into slow growers, stalwarts, fast growers, cyclicals, turnarounds and asset plays — and the PEG rules apply to growers. Applied elsewhere they mislead in a specific, predictable way:

• Cyclicals look cheapest at peak earnings, when the P/E is lowest and the next move is down. A low PEG on a cyclical at the top of its cycle is a warning, not a bargain.
• Turnarounds have depressed or negative earnings, so the growth rate is either enormous or undefined; either way the ratio is noise.
• Asset plays are valued on what they own, which earnings-based ratios cannot see at all.

This is why Pythia suppresses the PEG verdict entirely for companies classified cyclical, turnaround or asset play rather than printing a number whose own author said it does not apply. The category is part of the answer.