The PEGY Ratio: Peter Lynch's Growth-at-a-Reasonable-Price Metric

Running Fidelity's Magellan Fund, Peter Lynch earned a ~29% annual return over 13 years partly by refusing a simple mistake: overpaying for growth. A P/E ratio alone can't tell you whether a stock is expensive, because a fast grower deserves a higher multiple than a slow one. Lynch's fix folds growth — and later dividends — into the price. That's the PEGY ratio.

From PEG to PEGY

Start with the PEG ratio: price-to-earnings divided by the earnings growth rate. Lynch's rule of thumb was that a fairly priced company should have a PEG around 1.0 — a P/E of 20 is reasonable for 20% growth, but expensive for 10% growth.

The PEGY ratio improves on this by adding dividend yield to the denominator. A dividend is part of your return too, so a company growing earnings 10% a year while paying a 3% yield is delivering more total value than growth alone suggests.

The formula

A quick example

A company trades at a P/E of 18, grows earnings ~15% a year, and pays a 2% dividend yield. PEGY = 18 ÷ (15 + 2) = 18 ÷ 17 ≈ 1.06 — roughly fair. If the same company's P/E were 12, PEGY would be 12 ÷ 17 ≈ 0.71, which Lynch would find genuinely attractive.

Where it works — and where to be careful

• Best for profitable, growing companies with a reasonably predictable growth rate.
• Garbage in, garbage out: the whole ratio hinges on the growth estimate. Use a sober, evidence-based rate, not a hockey-stick forecast.
• Not for unprofitable companies (no meaningful P/E) or cyclical businesses at a peak or trough in earnings.

Because PEGY leans entirely on a growth assumption, it's strongest as one voice among several. Valuo pairs it with Buffett's cash-flow DCF, Graham's deep-value number, and Phil Town's Rule #1, so a single optimistic growth input can't carry the whole verdict.

See it computed

Valuo computes the PEGY fair value for any US ticker and shows how far today's price sits from it. Browse the best PEGY value stocks or read the full methodology.