A quantish approach using Peter Lynch Stock Screener to find stocks with solid PEG ratios, strong EPS growth and more quality filters

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Easily recognized by his plume of bright white hair and circular glasses, Peter Lynch’s investment record while at the helm of Fidelity’s Magellan Fund will go down as one of the best in history. Between 1977 and 1990, Lynch produced an eye-popping 29.2% average annual return. While it’s true that the S&P 500 posted an impressive 15.8% average annual return over the same period, Lynch still managed to nearly double his benchmark. During Lynch’s tenure at Fidelity, the Magellan Fund posted the best 20-year return of any fund ever.

Lynch’s books One Up on Wall Street and Beating the Street were critical resources for many entering the investment industry in the nineties. Fortunately for us, Lynch outlined his key investment beliefs that helped him produce his staggering performance figures. We suggest you pick up one of Lynch’s books to get a detailed look into his unique strategy. Here are the highlights:

Look Around You

One of Lynch’s most famous principles was “buy what you know.” No, don’t blindly invest in Starbucks, Mastercard, Netflix, or other every day goods and services you consume. That’s just a starting point for your analysis. But it can be an excellent starting point—behind high quality goods and services with loyal customers are often high quality companies.

Use the PEG

The PE/Growth ratio, or “PEG”, is a stock’s price-to-earnings multiple (P/E) divided by its growth rate. Let’s say IBM’s P/E ratio is 10x and its EPS growth over the last five years has been 3% per year. Its PEG ratio would be 3.3 (i.e., 10 divided by 3). Another stock has a P/E ratio of 25x (expensive!) but it has been growing by 20% per year, meaning its PEG is 1.25. Investors in this stock are paying less for growth.

But wait, there’s more! Lynch recognized that larger companies with strong, steady cash flow (so-called “stalwarts”) can be desirable. To compensate, Lynch added the dividend yield to the earnings growth rate. Returning to our example above, let’s assume IBM has a 5% dividend yield. Now, its PEG is 1.25 (10 divided by 8), the same as the faster growing stock.

See the Peter Lynch Stock Screener to help guide you and further details below the embed

Lynch looked for stocks with PEG ratios below 1. Stocks with PEG ratios below 0.5 could be real bargains.

Cheaper than Peers

In addition to the PEG, Lynch looked for stocks with P/E ratios less than their respective industry average P/E ratios.

Strong Balance Sheets. Strong Margins.

Lynch paid close attention to balance sheet health. Lynch wanted firms with sufficient financial flexibility to see them through economic slowdowns. Consistent and high margins were also preferred.

The tickrz Peter Lynch stock screener will help you uncover stocks that fit Lynch’s investment approach.

Peter Lynch Stock Screener