Scores are algorithm-generated research tools, not investment recommendations.
Lynch-Style PEG Analysis
A growth-at-a-reasonable-price framework that compares what you pay (P/E ratio) to what you get (earnings growth rate), adjusted for dividends and stock category.
Score output: PEG ratio + Lynch category classification
What is the Lynch Score?
The Lynch Score on AlphaStocks is a growth-adjusted valuation assessment based on Peter Lynch's PEG (Price/Earnings-to-Growth) ratio framework. Lynch managed Fidelity's Magellan Fund from 1977 to 1990, achieving 29.2% average annual returns. His key insight was that a stock's P/E ratio is meaningless without context -- you need to compare what you pay to how fast the business is growing. A PEG ratio of 1.0 means you are paying a price proportional to the growth rate; below 1.0, you are getting growth at a discount. AlphaStocks enhances this with a dividend-adjusted PEG formula (P/E divided by earnings growth rate plus dividend yield) and automatically classifies every stock in our coverage into one of Lynch's six categories: Fast Grower, Stalwart, Slow Grower, Turnaround, Asset Play, or Cyclical. Each category is evaluated with different criteria. The Lynch Score contributes 25% of the Value axis at 15% composite weight, for an effective weight of 3.75%.
How does the Lynch Score work?
The core metric is the PEG ratio: P/E Ratio divided by Annual Earnings Growth Rate. For example, a stock with a P/E of 20 growing at 20% per year has a PEG of 1.0 (fairly valued), while a P/E of 20 with only 10% growth gives a PEG of 2.0 (expensive relative to growth). Lynch considered a PEG of 1.0 the fair benchmark -- below 1.0 means growth at a discount, above 1.0 means paying a premium.
AlphaStocks uses a dividend-adjusted PEG to account for shareholder returns: Adjusted PEG = P/E / (Earnings Growth Rate + Dividend Yield). This is critical for mature, dividend-paying companies. A stock with P/E of 15, 10% growth, and 4% dividend yield has a standard PEG of 1.50 (looks expensive) but an adjusted PEG of 1.07 (fairly valued). Without this adjustment, the model would systematically underrate stocks returning value through dividends.
The model automatically classifies every stock into one of six Lynch categories based on financial characteristics. Fast Growers (20-50% earnings growth) are evaluated primarily on PEG. Stalwarts (10-20% growth, established companies) emphasize dividend-adjusted PEG. Slow Growers (0-10% growth) are evaluated mainly on dividend yield and payout sustainability. Turnarounds (recovering from distress) lean on cash flow trajectory and debt reduction. Asset Plays (value in underappreciated assets) emphasize price-to-tangible-book. Cyclicals (tied to economic cycles) use normalized earnings over a full cycle.
Earnings growth is calculated from SEC XBRL filings using the compound annual growth rate (CAGR) of EPS over the most recent three-year period. Sector-calibrated PEG thresholds ensure that a 15% growth rate is valued appropriately for a utility versus a software company. Technology and healthcare sectors have higher growth expectations, while utilities and consumer staples have lower benchmarks.
What does Lynch look for in a stock?
The Lynch model evaluates stocks differently based on their category. Here are the key evaluation criteria across the six Lynch categories:
PEG Ratio (Fast Growers & Stalwarts)
Pass
PEG below 1.0 means you are getting growth at a discount. The sweet spot in Lynch's framework is 0.5-1.0. For Fast Growers, a PEG below 1.0 scores very well.
Fail
PEG above 2.0 means the growth premium appears stretched. Significant growth deceleration would cause painful P/E compression.
Dividend-Adjusted PEG (Stalwarts & Slow Growers)
Pass
Adjusted PEG (factoring in dividend yield) below 1.5 for mature companies. Dividends represent real shareholder value that standard PEG ignores.
Fail
Even after adding dividend yield, the adjusted PEG remains above 2.0. The stock is expensive relative to total shareholder return.
Dividend Yield & Payout (Slow Growers)
Pass
Generous dividend yield (above 3%) with sustainable payout ratio (below 60%). The dividend justifies holding a slow-growing stock.
Fail
Low dividend yield or unsustainably high payout ratio (above 90%). Limited reason to hold if the company is not growing or paying meaningful income.
Cash Flow Trajectory (Turnarounds)
Pass
Operating cash flow improving and losses narrowing. Debt declining. Evidence that the turnaround is actually happening.
Fail
Cash flow still deteriorating or debt increasing. The turnaround thesis is not supported by financial evidence.
Price-to-Tangible-Book (Asset Plays)
Pass
Stock trades at a discount to tangible book value. The market may be ignoring real estate, IP, cash, or subsidiary value.
Fail
Stock trades at a large premium to tangible book. The asset play thesis does not apply.
Normalized Earnings (Cyclicals)
Pass
Using average earnings over a full business cycle, the stock appears reasonably priced. PEG calculated on normalized rather than peak earnings.
Fail
Even on normalized earnings, the stock appears expensive. The current low P/E may reflect peak-cycle earnings that will revert.
How AlphaStocks uses Lynch
The Lynch-Style PEG Analysis contributes 25% of the Value axis, which carries 15% of the composite score, giving it an effective weight of 3.75%. Its primary role is to provide the growth dimension that Graham-Style misses entirely.
Where Graham asks "is this stock cheap relative to what the business has already earned?", Lynch asks "is this stock cheap relative to how fast the business is growing?" The two perspectives complement each other. A high-growth tech company that scores poorly on Graham (expensive relative to current earnings) may score well on Lynch (reasonably priced relative to growth rate), producing a balanced Value axis score.
The Lynch model also pairs with Greenblatt-Style Magic Formula (30% of Value), which evaluates value from a return-on-capital perspective. Together, the three Value models answer: Is it cheap in absolute terms (Graham)? Is it cheap relative to growth (Lynch)? Is it cheap relative to business quality (Greenblatt)?
Lynch effective weight = 25% × 15% = 3.75% of the composite scoreCurrent top stocks by Lynch
The Lynch-Style PEG Analysis model is evaluated for all 1,595 stocks in our coverage. You can filter the full rankings table to see which stocks currently score highest on this model and compare them across all five investment frameworks.
Frequently Asked Questions
What is the PEG ratio and how does AlphaStocks calculate it?
The PEG ratio is P/E Ratio divided by Annual Earnings Growth Rate. AlphaStocks uses a dividend-adjusted version: P/E / (Earnings Growth Rate + Dividend Yield). A PEG of 1.0 means you pay a price proportional to growth; below 1.0 means growth at a discount; above 2.0 means the premium looks stretched. Earnings growth uses 3-year EPS CAGR from SEC filings.
What are Peter Lynch's six stock categories?
Lynch classified stocks into: Fast Growers (20-50% earnings growth), Stalwarts (10-20% growth, large established companies), Slow Growers (0-10% growth, mature dividend payers), Turnarounds (recovering from distress), Asset Plays (value in underappreciated assets), and Cyclicals (tied to economic cycles). AlphaStocks automatically classifies every stock in our coverage and applies category-appropriate evaluation criteria.
Why does AlphaStocks adjust PEG for dividends?
Standard PEG ignores dividends entirely. A company growing at 10% with a 4% dividend yield delivers 14% annual shareholder value, but standard PEG only counts the 10%. For mature dividend-paying companies, this causes systematic undervaluation. The dividend-adjusted formula (P/E divided by growth plus yield) gives proper credit to income-returning stocks.
How accurate is the Lynch Score for cyclical stocks?
Standard PEG is misleading for cyclicals because they look cheapest at earnings peaks (right before a downturn) and most expensive at troughs (right before recovery). AlphaStocks uses normalized earnings averaged over a full cycle where data permits and flags cyclical classification prominently. Investors must still overlay their own macroeconomic judgment.
What PEG ratio is considered a good value?
Lynch considered a PEG below 1.0 attractive and a PEG of 0.5-1.0 the sweet spot. However, context matters: for high-growth technology stocks, a PEG of 1.5 might still be "fair" given sector dynamics. AlphaStocks uses sector-calibrated thresholds so a utility is not held to the same growth expectations as a software company.
See all 1,595 stocks scored
Every stock evaluated by Lynch-Style PEG Analysis and four other proven investment models. Updated with every SEC filing.
Explore the rankingsExplore Other Models
Model names reference the published investment methodologies of their respective authors. AlphaStocks is not affiliated with, endorsed by, or sponsored by Peter Lynchor any related entities. Our implementation is an interpretation of publicly described principles and may differ from the original author's approach.
AlphaStocks provides investment research and analysis, not investment advice. Past performance does not guarantee future results. Always do your own due diligence before making investment decisions. Data sourced from SEC EDGAR and Alpaca Markets.