PEG Ratio Valuation Rules (2026)
The PEG ratio adjusts a stock's earnings multiple based on expected EPS growth rate, preventing investors from discarding fast-growing companies trading at high P/E ratios.
| PEG Ratio Range | Valuation Verdict | Peter Lynch Insight |
|---|---|---|
| < 1.0 | Undervalued (Bargain Growth) | Growth rate exceeds P/E multiple; prime GARP candidate |
| 1.0 = 1.0 | Fairly Valued | Stock price accurately reflects expected EPS growth rate |
| > 1.5 | Overvalued | P/E ratio is too high relative to realistic EPS growth |
Price/Earnings-to-Growth (PEG) Valuation Rules
- Undervalued (PEG < 1.0): Stock P/E ratio is lower than its expected annual EPS growth rate (Peter Lynch GARP bargain).
- Fairly Valued (PEG = 1.0): Stock price accurately reflects earnings growth prospects.
- Overvalued (PEG > 1.5): P/E multiple is excessively inflated relative to realistic EPS growth.
GARP (Growth At A Reasonable Price) Strategy
- Overcoming High P/E Bias: A stock with P/E of 30x growing EPS at 35% (PEG 0.85) is CHEAPER than a stock with P/E of 15x growing EPS at 5% (PEG 3.0).
- PEGY Adjustment: Includes dividend yield: PEGY = P/E / (EPS Growth Rate + Dividend Yield %).
PEG Growth Screen
Use 3-5 year projected Forward EPS Growth rates rather than past trailing growth to calculate forward PEG for high-tech and mid-cap growth stocks.