Peter Lynch's formula: your guide to stock valuation
The Peter Lynch fair value calculator is a tool that helps you figure out a stock's valuation by combining the Price-to-Earnings (P/E) ratio, growth rate, and dividend yield. It’s based on Peter Lynch's PEG ratio methodology and is designed to help you spot whether a stock is undervalued or overvalued.
Formula:
Fair Value = (P/E Ratio / PEG Ratio) × (EPS Growth Rate + Dividend Yield)
Where:
- P/E Ratio: Price-to-Earnings ratio (the latest 12-month figure). Measures the price relative to earnings.
- PEG Ratio: Price/Earnings to Growth ratio. Calculated as P/E ratio divided by the EPS growth rate, adjusted for dividends.
- EPS Growth Rate: The projected annual growth rate of Earnings Per Share (expressed as a percentage).
- Dividend Yield: The annual dividend payment expressed as a percentage of the stock price.
The calculator uses several key metrics: the last twelve months (LTM) P/E ratio, the projected EPS growth rate, the dividend yield, and peer company data for comparative analysis. The output includes the calculated fair value and the percentage by which the stock is overvalued or undervalued compared to its current market price.
The tool offers several advantages: it simplifies complex calculations, improving accuracy and saving time. It enhances investment decisions by comparing fair value to market price, helping identify undervalued stocks with growth potential and avoid overvalued ones.
Example:
Let’s take a look at Amazon (AMZN):
- The calculator might estimate its fair value at $214.2 based on a P/E of 47.9, an EPS growth rate of 45.0%, and a dividend yield of 0.0%.
- If the current market price is $228.0, that suggests AMZN is about 6.1% overvalued.
The tool is ideal for growth-oriented investors, helping identify stocks with strong earnings growth potential relative to their valuation. You can check it out here. It's free, no registration needed.