Top Peter Lynch Stocks
Validea used the investment strategy outlined in the book One Up On Wall Street written by Peter Lynch to create our P/E/Growth Investor portfolio. Lynch's approach centers on a variable that he is famous for developing: The price/earnings/growth ratio, or 'PEG'. The PEG divides a stock's price/earnings ratio by its historic growth rate to find growth stocks selling on the cheap. Lynch's rationale: The faster a firm is growing, the higher the P/E multiple you should be willing to pay for its stock. Lynch is known for saying that investors can get a leg up on Wall Street by 'buying what they know', but that's really just a starting point for him; his strategy goes far beyond investing in a restaurant chain you like or a retailer whose clothes you buy. Along with the PEG, he focused on fundamental variables like the debt/equity ratio, earnings per share growth rate, inventory/sales ratio, and free cash flow. It's important to note that Lynch used different criteria for different categories of stocks, with the three main categories being 'fast-growers' (stocks with EPS growth rates of at least 20 percent per year); 'stalwarts' (stocks with growth rates between 10 and 20 percent and multi-billion-dollar sales); and 'slow-growers' (those with single-digit growth rates and high dividend payouts). He also used special criteria for financial stocks.