The PEG Ratio
The P/E ratio is the most popular lie on Wall Street. It is a number that tells you how much you are paying for every dollar a company earns. It is like the price of a movie ticket.
But a P/E ratio by itself is a lonely, useless thing. It does not tell you if the movie is any good. It is a ghost without a machine. As I’ve said, Earnings Rule the World, and the P/E is just the price of admission.
Peter Lynch, being a man who liked to see both sides of the coin, invented the PEG Ratio. This is the P/E ratio divided by the Earnings Growth Rate.
The Math for Mortals
- P/E = 20
- Growth = 20%
- PEG = 1.0
A PEG of 1.0 is a rare, beautiful thing. It means you are paying a fair price for the growth you are getting. If the PEG is 0.5, you have found a bargain. If the PEG is 2.0, you are being robbed in broad daylight.
Wall Street loves high P/E stocks because they are “exciting.” But excitement is expensive. Growth at a Reasonable Price (GARP) is what keeps you from having to sleep on a park bench.
Smartin Score Example: NVDA
People look at Nvidia and see a high P/E ratio. They panic. They run for the hills.
- Smartin Roast: If we ran the Smartin App today, it would look at that growth. If the growth is 50% and the P/E is 50, the PEG is 1.0. It’s a miracle. But if the growth slows to 10% and the P/E stays at 50, the PEG becomes 5.0. That is when the machine starts to smoke, and you should know When to Sell.
Be sensible. Look at the PEG.
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