Peter Lynch's Fair Value Strategy
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- Assesses fair value upside by comparing current EBITDA to a five-year historical average adjusted for dividend payout ratios.
- Weight = 33%
- Calculates the earnings yield by dividing EBIT by enterprise value to gauge operating profitability relative to market valuation.
- Weight = 33%
- Averages ROE over a five-year period to provide a stable view of profitability.
- Weight = 33%
Peter Lynch’s investing strategy can be summarized by one piece of simple advice "Buy what you know." Lynch encourages investors to focus on companies and industries they understand well.
In addition to deeply researching and understanding companies he invests in, Peter Lynch considers several quantitative factors in choosing stocks to buy.
A company should be worth its “Earnings Growth Rate” times its “Current Earnings”.
Earnings Growth
Lynch places a strong emphasis on a company's earnings growth. He looks for companies with consistent and sustainable earnings growth over time.
Price-Earnings Ratio (P/E)
Lynch uses the P/E ratio as a valuation metric. A low P/E ratio might indicate that a stock is undervalued, while a high P/E ratio could suggest overvaluation. However, he cautions against relying solely on this metric and advises considering other factors as well.
PEG Ratio
The Price/Earnings to Growth (PEG) ratio is another key metric Lynch considers. The PEG ratio takes into account a company's earnings growth rate. A PEG ratio below 1 may indicate an undervalued stock relative to its growth prospects.
Strong Balance Sheet/Low Debt
Lynch prefers companies with a strong balance sheet, low debt, and a history of responsible financial management. A healthy balance sheet provides safety during economic downturns.