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How to Construct Peter Lynch’s Valuation Charts with GuruFocus Financials Charts in Two Clicks

May 29, 2013 | About:

In his excellent book, "One Up on Wall Street," Peter Lynch used many charts that look like the one below to illustrate the valuation of stocks.

836219747.jpg Regarding the chart, he wrote in pages 164 to 165 of the book, “A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies – such as Shoney’s, The Limited, or Marriott – when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the chances are you’d do pretty well.”

In this chart, Peter Lynch drew the stock prices on the right axis, and the earnings on the left axis. The charts are in logarithmic scale. He aligned the value of $1 in earnings per share to $15 in stock prices. Therefore, if we draw in stock prices, the “earnings line” he mentioned above is equal to the stock prices at a P/E ratio of 15.

We can easily construct Peter Lynch Charts with GuruFocus Financial Charts tools. For instance, if we go to the financial charts of Wal-Mart (WMT), we can get Peter Lynch Charts in a few clicks:

1. Fill in 15 in Price at "P/E = 15" check the checkbox

2. Click on Logarithmic on the top right corner

That’s it. You get charts like this:

1369778220853.png

According to Peter Lynch, the best buying time will be when the green line (price) is lower than the blue line (earnings line). In this case, it would be around the middle of 2011. Indeed, if you bought Wal-Mart in June 2011 at around $54, you have gained more than 40% in about two years. Not bad from a large company like Wal-Mart.

Is Wal-Mart a good buy right now? Probably not, as the price line and the earnings line are almost overlapped. This suggests that the stock is now fully valued.

Try our financial charts here.

If you are an affiliate of GuruFocus, your affiliate code has been embedded into the chart.

Update: We have added Pre-defined chart settings in our Interactive Charts. You can select "Peter Lynch Charts" in the there and it will be displayed immediately.

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Comments

dwhitney
Dwhitney premium member - 1 year ago
Very cool!
Moneymaker5o1
Moneymaker5o1 - 1 year ago


Why P/E = 15? average price of the market?
gurufocus
Gurufocus premium member - 1 year ago
P/E=15 is what Peter Lynch used in the chart.
quixote1
Quixote1 premium member - 1 year ago
So the question is:What P/E to assign to the different growth companies.......

Any guidelines?

Thank you.This site is awesome!
gurufocus
Gurufocus premium member - 1 year ago
Although Peter Lynch said in his book that the fair P/E ratio should be equal to the growth rate. But for the charts, he used P/E=15 for all companies. That is also what we are doing in Peter Lynch Charts.
yoramhtm
Yoramhtm premium member - 1 year ago


I would like to mention that almost every week,here in Gurufocus , Mr. Chuck Carnevale analyzes a company by his fundamentals analyzer software tool-FAST Graphs ,using the same idea of Peter Lynch to illustrate the valuation of a stock .

I recomend to read his excelent articles
Steve Pomeranz
Steve Pomeranz premium member - 1 year ago
Help, please

When I use price and price at PE 15 (or Price at any multiple, for that matter) the lines are don't separate. the PE box doesn't seem to work.

Any ideas?
donli
Donli premium member - 1 year ago
@Steve, Please try again. I just fixed the problems.

Don

Gurufocus Developer
jeffandbrenda
Jeffandbrenda - 1 year ago


cant get it to work
gurufocus
Gurufocus premium member - 1 year ago
hi Jeffandbrenda,

all you need to do is go here:

http://www.gurufocus.com/chart/WMT

and find the line "Pirce at P/E=15" and click on the checkbox.

did you get error message?

jeffandbrenda
Jeffandbrenda - 1 year ago


got it to work with firefox, but not internet explorer
lordandmasterpa
Lordandmasterpa - 1 year ago


How is this any different from simply saying, "Buy at a p/e below 15, and sell at a p/e above 15"???
gurufocus
Gurufocus premium member - 1 year ago
hi Jeffandbrenda,

can you let us know which version of Internet Explorer you used?

jeffandbrenda
Jeffandbrenda - 1 year ago


its the newest one, not sure of the number maybe IE 9
decathlon2
Decathlon2 premium member - 1 year ago
How is this any different from just saying buy when the p/e ratio is below 15?
gurufocus
Gurufocus premium member - 1 year ago
"How is this any different from just saying buy when the p/e ratio is below 15?"

it is not different if you just look at the current valuation. But observing the chart give you some idea on how historically the price deviates from the earnings line.[/color]
william.b.thomson
William.b.thomson premium member - 9 months ago
PE Ratio of TTM or Forward? Thanks.
gurufocus
Gurufocus premium member - 9 months ago
We only use TTM ratios.
irie267
Irie267 - 9 months ago
There's a typo; "changes" should be "chances" in the quote.
market58w2
Market58w2 - 6 months ago

I just want to understand the math behind this. I know in the book that Peter Lynch does do this, but how does it make sense. I mean: What would the P/E of a stock price normally be at, if it were not 15. I just want to understand the math and logic behind the reasoning.

fahriyaras
Fahriyaras - 6 months ago

The example in the video doesn't use "Logarithmic" scale but Peter Lync was using a logarithmic. Also in the text above, it says "click Logarithmic". Which one should we do to get the exact Peter Lync chart? Or does it really matter?

gurufocus
Gurufocus premium member - 6 months ago

Log or not does not really matter to see the valuation. The way Peter Lynch drew has to use logarithmic. But we scale the earnings up by a factor of 15, it gets the same results as the way Peter Lynch drew.

winford1
Winford1 - 2 months ago

Would it make a difference if we found the PE for a particular stock and put that # in the chart instead of 15?

eball
Eball premium member - 2 months ago

Why don't your predefined "Peter Lynch" charts seem to use the log scale?

gurufocus
Gurufocus premium member - 2 months ago

Log or not does not really matter to see the valuation. The way Peter Lynch drew has to use logarithmic. But we scale the earnings up by a factor of 15, it gets the same results as the way Peter Lynch drew.

market58w2
Market58w2 - 1 month ago

Could someone please explain the math behind this? In his book, Peter Lynch draws a price and EPS line. When the EPS is 1, the price is 15. I understand that. Nevertheless, is Gurufocus's Peter Lynch graph doing the same thing as he did? What does "Price at P/E=15" actually mean? To full replicate the earnings line, the EPS must be 1 while the Price must be 15. I am getting confused. Could someone please give some math as to what should be divided or multiplied with the earnings or the price to find the value that is shown by the "Price at P/E=15" metric? I am very confused.

hvt2107
Hvt2107 - 1 month ago

This is one of the best articles for value oriented investors.

jgraf
Jgraf premium member - 2 days ago

2 questions: I applied this chart to both GME and CPA and it applied a 15 multiple on the June qtr 2014 EPS versus the TTM EPS. FYI. I would imagine it should be applied to the TTM. Secondly, anythoughts on using the 5yr growth rate versus 15? Does it matter? I read the book also, I thought Lynch refered to the growth rate. Any feedback would be helpful.

gurufocus
Gurufocus premium member - 2 days ago

hi Jgraf,

yes, it is applied to TTM EPS. The Peter Lynch Chart itself has been using 15. But you can certainly use growth rate.

peixia
Peixia - 1 day ago

Can gurufocus or anyone please tell me the page(s) in "One up on Wall Street" where he align the value of the value of $1 in EPS to $15 in stock price?
I read the book and pored through all pages on earnings but no-where did I find $15 in stock price aligned to $1 EPS, even in the pages mentioned by GuruFocus.
Appreciate your help in this as I would like to read the alignment within the context in Lynch's book.
Thank you.

gurufocus
Gurufocus premium member - 1 day ago
Peixia, if you look carefully those charts, $1 of earnings at left axis is always aligned with 15 in stock prices at the right axis.
peixia
Peixia - 1 day ago

Thanks for your prompt clarification. I notice the alignment in the Dow Chemical chart on p.165. And this is where I get confused.
Aligning $15 stock price to $1 eps to derive an earnings line implies a one-size-fits-all fair-value p/e of 15 for all stocks. Correct me if I am wrong here but this is how I interpret the derived earnings line for comparison against the stock price.
Yet Lynch in the last para on p.169 specifically highlights the avg p/e levels varying across slow growers, cyclicals and fast growers. He mentioned that looking to buy only low-p/e stocks did not make sense to him because what's a bargain for Dow Chemical isn't necessarily the same as a bargain p/e for Walmart.
Therefore, a fixed fair-value p/e of 15 for all stocks run contrary to his comments in the aforesaid para on p.169.

gurufocus
Gurufocus premium member - 1 day ago

Prexia,

Agree with what you are saying but that was how he drew the charts.

When you value the stock, you certainly have to look much more than just the charts. Peter Lynch did use PE=Growth rate for a lot of fast growers.

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