Validea’s Strategy of the Week series highlights time-tested investment strategies based on the insights of legendary investors. This week, we turn our focus to a Wall Street icon whose common-sense philosophy and astonishing long-term track record continue to resonate with investors of all levels—Peter Lynch.
The Legend Behind the Strategy
Peter Lynch may be the most successful mutual fund manager of all time. During his tenure at the helm of Fidelity’s Magellan Fund from 1977 to 1990, Lynch delivered an eye-popping 29.2% average annual return, nearly doubling the S&P 500’s 15.8% over the same period. His ability to identify winning stocks across sectors and market environments turned Magellan into one of the best-performing mutual funds ever.
Lynch was also a gifted communicator. In his best-selling book, One Up on Wall Street, he broke down the art of investing into plain-English wisdom. His wit and accessible ideas helped popularize equity investing for everyday investors. Quotes like “Go for a business that any idiot can run—because sooner or later, any idiot probably is going to run it,” reflect both his investing philosophy and his humor.
The PEG Ratio: A Core Lynch Insight in GARP Investing
At the heart of Lynch’s strategy is a metric he helped popularize: the Price/Earnings to Growth ratio, or PEG. The PEG adjusts a stock’s P/E ratio for its historical growth rate, helping investors find growth stocks that are still attractively valued. As Lynch explained, fast-growing companies deserve higher multiples—but only if the price still makes sense relative to that growth.
Validea’s P/E/Growth Investor Model is built using the framework laid out in One Up on Wall Street. The model is designed to capture the essence of Lynch’s approach—combining growth, value, and a deep look at business fundamentals—to find stocks that could be tomorrow’s winners.
Peter Lynch’s strategy is one of the most well-known examples of GARP investing, or “Growth at a Reasonable Price”. GARP combines the best of both worlds—growth investing, which focuses on companies with strong earnings expansion, and value investing, which emphasizes buying stocks at attractive prices. By using the PEG ratio, Lynch sought to identify stocks that were not only growing quickly but also trading at valuations that made sense relative to that growth. This blend of quality and value is why GARP remains a powerful and enduring approach, especially for investors who want growth potential without overpaying.
Key Criteria Used in the Lynch P/E/Growth Model
✔ PEG Ratio ≤ 1.0 – The hallmark of this strategy. A PEG ratio under 1.0 suggests the company’s growth is not yet fully reflected in its price.
✔ Earnings Growth – Emphasizes firms with strong historical EPS growth, particularly for “fast growers” (20%+ annual growth) and “stalwarts” (10–20% growth with stable earnings).
✔ Debt/Equity Ratio – Lower debt ratios are favored, especially for fast growers where financial flexibility is key.
✔ Inventory/Sales Ratio – Highlights companies efficiently managing inventory—a key sign of healthy operations.
✔ Free Cash Flow – Positive free cash flow is essential—it shows the company can fund growth without relying on new financing.
✔ Net Cash Position for Financial Stocks – For banks and financials, net interest margins and leverage are also considered.
Lynch also tailored his criteria based on the type of company: fast growers, stalwarts, and slow growers. This nuanced, category-specific approach gives the model flexibility while remaining true to Lynch’s principles.
Model Performance & Return History
Since its inception on Validea in 2003, the 20-stock, monthly rebalanced Peter Lynch-based portfolio has delivered a 1,142.0% cumulative return, outperforming the S&P 500 by 667.4%. This version of the model has been the best-performing variant among Lynch-based strategies on the Validea platform.
Top 3 Best-Performing Years:
- 2009: +62.3% (vs. S&P 500 +23.5%)
- 2013: +47.6% (vs. +29.6%)
- 2021: +34.3% (vs. +26.9%)
Bottom 3 Worst-Performing Years:
- 2008: -33.6% (vs. -38.5%)
- 2018: -22.7% (vs. -6.2%)
- 2015: -13.8% (vs. -0.7%)
* Returns are model returns and do not reflect actual trading. Full performance disclaimer
Top Stocks in the Lynch Model (as of 2/28/2025)
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| Ticker | Company | Latest Close | Market Cap ($mil) | PE Ratio | EPS Growth | Yield | Relative Strength | Shareholder Yield |
|---|---|---|---|---|---|---|---|---|
| PLAB | PHOTRONICS INC | $21.68 | $1,378 | 9.2 | 36.7% | 0.0% | 40 | 1.0% |
| BAP | CREDICORP LTD | $191.68 | $15,226 | 10.1 | 40.0% | 0.0% | 71 | 0.1% |
| BIDU | BAIDU INC (ADR) | $97.50 | $34,189 | 10.4 | 31.0% | 0.0% | 52 | 0.2% |
| OFG | OFG BANCORP | $41.07 | $1,866 | 9.7 | 27.3% | 2.4% | 73 | 1.4% |
| OZK | BANK OZK | $45.38 | $5,155 | 7.4 | 17.0% | 3.5% | 63 | 6.8% |
| AX | AXOS FINANCIAL INC | $65.52 | $3,741 | 8.8 | 25.9% | 0.0% | 80 | 4.4% |
| TCBX | THIRD COAST BANCSHARES INC | $34.35 | $474 | 13.7 | 29.2% | 0.0% | 92 | -21.7% |
| EWBC | EAST WEST BANCORP INC | $92.24 | $12,770 | 11.1 | 15.3% | 2.4% | 77 | 17.9% |
| FBP | FIRST BANCORP | $19.42 | $3,182 | 10.7 | 35.2% | 3.3% | 73 | 13.4% |
Key Takeaways
- PEG = Power: Lynch’s PEG ratio simplifies the growth/value balance, helping identify reasonably priced growth stocks.
- Know What You Own: While Lynch is famous for “buy what you know,” he emphasized thorough analysis—earnings, cash flow, and balance sheet health matter.
- Adaptable Strategy: The model accounts for company type—slow growers, stalwarts, or fast growers—making it flexible across market conditions.
- Long-Term Performance: With a cumulative return over 1,100% since 2003, the strategy has proven effective for disciplined, long-term investors.
Want to learn more about how the strategy works?
▶ Watch our overview on YouTube
▶ Hear us talk through the Lynch model on Excess Returns
👉 Or explore the full Lynch model and stock list on Validea
