Full transcript
0:00This simple ratio can instantly tell you
0:03whether the stock is cheap or expensive.
0:06And the man who developed it, Peter
0:08Lynch, one of the greatest investors
0:11ever. He used it to deliver 29% annual
0:15returns for 13 straight years. It's
0:19called the Peggy ratio. And once you
0:23understand how it works, you'll never
0:26look at stocks the same way again.
0:29Today, I'll break down not just the
0:31Peggy ratio, but also the two other most
0:35important valuation ratios every
0:37investor should know, PE and PEG. I'll
0:42show you how Peter Lynch's genius method
0:45can help you find undervalued stocks
0:48before anyone else does. And the best
0:51part, you can get a free Peggy
0:54calculator using the link in the
0:56description and start applying this
0:58method right away. Let's start with the
1:02basics.
1:06The price toearnings ratio is probably
1:08the most famous valuation metric in
1:11investing. It's simple. You take the
1:14stock price and divide it by the
1:16company's earnings per share. So if a
1:19company's stock costs $30 and it earns
1:24$3 per share, a PE ratio is 10, that
1:28means you are paying $10 for every
1:32dollar the company earns. The lower the
1:35PE, the cheaper the stock appears. But
1:38there is a problem with PE ratios. They
1:42don't tell you the whole story. A
1:45company with a PE of 30 might actually
1:49be cheaper than a company with a PE of
1:5210 if the first company is growing much
1:57faster. That's where the PEG ratio comes
2:01in.
2:04The PEG ratio was initially developed by
2:08Mario Farina and later popularized by
2:11Peter Lynch during his legendary run
2:14managing the Fidelity Magellion fund
2:18where he delivered 29% annual returns
2:22for 13 years. PE stands for price to
2:27earnings to growth. You calculate it by
2:31taking the PE ratio and dividing it by
2:34the company's earnings growth rate. So
2:38if a company with a PE of 30 is growing
2:42earnings at 30% per year, its PEG ratio
2:47is one. If another company has a PE of
2:5210, but it is only growing at 5% per
2:56year, its PEG ratio is two. Peter
3:00Lynch's rule was simple. A PEG ratio
3:04below one suggests the stock might be
3:07undervalued, while a peg above one
3:10suggests it might be overvalued.
3:14>> Got it. Good.
3:17But Lynch didn't stop there. He realized
3:21there was still one crucial piece
3:24missing from this equation.
3:27[Music]
3:29The Peggy ratio is Peter Lynch's
3:32masterpiece. It takes the PEG ratio and
3:36adds one more crucial factor, the
3:40dividend yield. Here is how it works.
3:44You take the PE ratio and divide it by
3:47the sum of the growth rate plus the
3:51dividend yield. So if our company has a
3:54PE of 30, is growing at 30% per year and
3:59pays a 3% dividend. The Peggy ratio is
4:030.9.
4:05Lynch believed that this was the most
4:07complete picture of a stock's value
4:11because it considers price, earnings,
4:16growth, and the cash you get back as
4:19dividends. And just as with PEG, a Peggy
4:23ratio below one suggests the stock might
4:27be undervalued. The lower the number,
4:30the better the potential bargain.
4:33[Music]
4:35What makes the Peggy ratio brilliant is
4:38that it rewards companies that not only
4:41grow their earnings, but also pay
4:44dividends to shareholders. Two companies
4:48might have identical PE ratios and
4:51growth rates, but the one paying a 4%
4:55dividend will have a much better Peggy
4:58ratio than the one paying nothing. This
5:01makes perfect sense. As an investor, you
5:04should value getting cash in your pocket
5:07today while you are waiting for the
5:10company to grow. Peter Lynch used this
5:14approach to find incredible winners like
5:18Dunking Donuts, Taco Bell, and Home
5:20Depot during their early growth phases.
5:27So, here is the simple framework. First
5:31calculate the PE ratio to get a baseline
5:35valuation. Then calculate the PEG ratio
5:39to see if the growth justifies the
5:42price. Finally, calculate the PEGY ratio
5:46to get a complete picture including
5:49dividends. But remember, no single ratio
5:53tells the whole story. The Peggy ratio
5:56is a fantastic starting point, but you
5:59still need to look at the company's
6:02financial health, competitive position,
6:05and long-term prospects. Price is not
6:09everything. We also have to understand
6:12the business, its risks and
6:14opportunities.
6:18Now I know calculating these ratios for
6:21every stock you are considering can be
6:24time consuming. That's why I have
6:27created a free Peggy ratio calculator
6:30that does all the math for you. Just put
6:33in the numbers and it instantly shows
6:36you the final result. I created this
6:39calculator for myself to speed up my
6:43valuation process, but now you can get
6:46access to it using the link in the
6:48description below. It's completely free
6:51and it will save you hours of
6:53calculations. If you found value in this
6:56video, you are definitely going to enjoy
6:59five timeless money lessons from another
7:03incredible investor, Seth Clarman. Thank
7:06you for watching and see you in the next