The holy grail of stock investing is buying great companies on the cheap. Stock picker Peter Lynch plied a variation of that strategy to fame and fortune in the 1980s, using his so-called PEG ratio. It compares companies’ valuation, as measured by their price-earnings ratio (P/E), with expected growth to find stocks that offer the highest growth for the lowest price.
It is harder to find overlooked stocks than it was in Mr Lynch’s day because more people are looking for them – anyone with a smartphone has free access to extensive markets and financial information. The result of greater competition is evident in the numbers: Fast-growing or highly profitable companies are almost always the most expensive, while the cheapest ones come with lacklustre growth or thin profits.
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