Growth at a Reasonable Price
Measure true earnings power relative to valuation multiples. Compute Peter Lynch PEG, dividend-adjusted PEGY, and implied margin of safety.
Company Valuation Inputs
GARP Screener Verdict
With a 20.0x P/E against a 22.0% EPS growth rate, you are paying less than 1 unit of multiple per unit of earnings expansion. High-quality compounder territory.
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The Four Valuation Quadrants
How institutional growth investors categorize companies based on multiple expansion vs. growth durability.
Prime GARP
The sweet spot of investing. The market underestimates duration of earnings growth, leaving multiples compressed despite exceptional fundamentals.
Hyper-Multiple Growth
Exceptional companies traded at speculative multiples. Any slight deceleration in revenue triggers catastrophic 40%+ multiple compression.
Classic Value Trap
Cheap on paper, but deteriorating in reality. Low multiple reflects structural obsolescence, secular decline, and negative ROIC.
Stagnant Cash Cow
Mature defensive stalwarts. High dividend yield cushions returns, but lacks the operating leverage needed to beat broad equity benchmarks.
The Mathematics of PEG
P/E = Growth Rate at Fair Value
Lynch established that a fairly priced company should trade at a P/E multiple equal to its percentage earnings growth rate (PEG = 1.0). A 20% grower is fair at a 20x P/E.
The PEGY Dividend Credit
For slower growth companies paying significant dividends, total shareholder yield (Growth % + Dividend Yield %) should replace pure earnings growth in the denominator.
Avoid the 40x P/E Mirage
Very few enterprises can sustain 40%+ annual growth for over five years. Paying 40x+ P/E creates asymmetric downside if macro tailwinds fade.
Speculative Hyper-Growth vs. Deep Value Traps vs. Institutional GARP
Why balancing multiple expansion with earnings growth duration creates the most reliable compounding engine.
| Investment Strategy | Valuation Multiple Paid | Underlying Fundamental Driver | Long-Term Return Profile |
|---|---|---|---|
| Speculative Growth (Momentum) | 50x – 100x+ P/E (PEG > 2.5) | Narrative, hype, TAM projections | -50% drawdowns on slight earnings misses |
| Deep Value (Cigar Butts) | 5x – 8x P/E (PEG N/A) | Declining revenues, negative ROIC | Permanent capital impairment (Value Trap) |
| Institutional GARP (garp.dev) | 15x – 24x P/E (PEG < 1.0) | High ROIC (>15%), Pricing Power, Clean Cash Flow | Dual Alpha: Earnings Growth + Multiple Expansion |
Fundamental Valuation & Peter Lynch Mechanics
Answers to PEG calculations, PEGY adjustments, margin of safety, and screening.
According to Peter Lynch, a fairly priced growth company should have a PEG ratio equal to 1.0 (where the P/E multiple equals the percentage growth rate). A PEG ratio between 0.50 and 1.0 is considered the optimal "sweet spot"—indicating that the investor is buying earnings expansion at an attractive discount with a built-in margin of safety.
Standard PEG ignores dividend cash flows returned to shareholders. For mature stalwarts (such as consumer staples, utilities, and healthcare leaders) with dividend yields above 2%, the PEGY ratio should always be used: PEGY = P/E / (EPS Growth % + Dividend Yield %). This gives full credit to total shareholder return.
Because fair value occurs at PEG = 1.0, Peter Lynch multiplied a company's trailing diluted EPS by its percentage earnings growth rate. For example, if a firm earns $4.00 per share and is compounding at 20% annually, its Lynch Fair Value is $80.00 ($4.00 × 20). If the stock trades at $65.00, it offers a +23% margin of safety.
Cyclical companies often show temporarily high EPS growth at the peak of an economic cycle, creating an artificially depressed PEG ratio that quickly evaporates. Verifying that Return on Invested Capital (ROIC) exceeds 15% across a full 5- to 10-year cycle ensures that earnings growth is driven by genuine competitive moats rather than temporary macro tailwinds.