Peter Lynch
GARP
Peter Lynch managed the Fidelity Magellan Fund to a 29.2% annual return over 13 years. His approach combines growth investing with value discipline through the PEG ratio, seeking companies with strong earnings growth that trade at reasonable multiples relative to that growth. Lynch classifies companies into six categories and applies different criteria depending on the type.
Valuation Method
PEG Fair Value
Fair value derived from the PEG ratio. Calculates a fair P/E equal to the earnings growth rate, then multiplies by current EPS. A stock trading below this value may be undervalued relative to its growth.
Checklist (7 Criteria)
| # | Criterion | Metric | Threshold | Data Source |
|---|---|---|---|---|
| 1 | PEG Ratio | P/E / EPS Growth Rate | < 1.0 (ideally < 0.5) | Market Price, EPS, 3-5 yr EPS growth rate |
| 2 | Earnings Growth Rate | 3-5 Year EPS CAGR | 15-30% (Fast Grower sweet spot) | Income Statement: EPS history |
| 3 | Debt/Equity | Total Debt / Equity | < 0.33 preferred | Balance Sheet |
| 4 | Free Cash Flow | FCF Positive | Yes, and growing | Cash Flow Statement |
| 5 | Inventory vs. Sales | Inventory Growth vs. Revenue Growth | Inventory growth < Revenue growth | Balance Sheet: Inventory; Income Statement: Revenue |
| 6 | Return on Equity | ROE | > 15% | Net Income / Equity |
| 7 | Net Cash Position | Cash - Long-term Debt | Positive preferred | Balance Sheet |
Intrinsic Value Method
Lynch Fair Value
EPS * EPS Growth Rate * 1.0A PEG-based fair value estimate. A PEG of 1.0 means the stock is fairly valued; trading below this level suggests undervaluation. Simple but effective for growth companies.
Verdict Logic
First classify the company (Slow Grower, Stalwart, Fast Grower, Cyclical, Turnaround, Asset Play). BUY if >= 5 of 7 criteria pass AND PEG < 1.0. HOLD if >= 5 of 7 criteria pass but PEG >= 1.0. FAIL if fewer than 5 of 7 criteria pass.
What Would Peter Lynch Buy Today?
Sources
One Up on Wall Street
1989Peter Lynch
Lynch's classic guide for individual investors. Introduces the six company categories (Slow Grower, Stalwart, Fast Grower, Cyclical, Turnaround, Asset Play) and the PEG ratio as a primary valuation tool.
Beating the Street
1993Peter Lynch
The follow-up to One Up on Wall Street. Provides detailed case studies of how Lynch applied his framework while managing the Magellan Fund, including the specific financial metrics he tracked.