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

May 29, 2013 | About:
GuruFocus

GuruFocus

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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.

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 changes 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:

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.

 


Rating: 3.1/5 (37 votes)

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Comments

dwhitney
Dwhitney premium member - 10 months ago
Very cool!
Moneymaker5o1
Moneymaker5o1 - 10 months ago


Why P/E = 15? average price of the market?
gurufocus
Gurufocus premium member - 10 months ago
P/E=15 is what Peter Lynch used in the chart.
quixote1
Quixote1 - 10 months 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 - 10 months 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 - 10 months 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 - 10 months 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 - 10 months ago
@Steve, Please try again. I just fixed the problems.

Don

Gurufocus Developer
jeffandbrenda
Jeffandbrenda - 10 months ago


cant get it to work
gurufocus
Gurufocus premium member - 10 months 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 - 10 months ago


got it to work with firefox, but not internet explorer
lordandmasterpa
Lordandmasterpa - 10 months 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 - 10 months ago
hi Jeffandbrenda,

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

jeffandbrenda
Jeffandbrenda - 10 months ago


its the newest one, not sure of the number maybe IE 9
decathlon2
Decathlon2 premium member - 8 months ago
How is this any different from just saying buy when the p/e ratio is below 15?
gurufocus
Gurufocus premium member - 8 months 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 - 5 months ago
PE Ratio of TTM or Forward? Thanks.
gurufocus
Gurufocus premium member - 5 months ago
We only use TTM ratios.
irie267
Irie267 - 4 months ago
There's a typo; "changes" should be "chances" in the quote.
market58w2
Market58w2 - 2 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 - 2 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 - 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.

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