This is how Peter Lynch describes his process: “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.”
As examined yesterday, GuruFocus tools can easily create a chart of Peter Lynch Fair Value for any stock in just two steps:
1. Click on Price at P/E = 15
2. Click on Logarithmic on the top right corner
Peter Lynch says that the best time to buy a stock is when the green line goes below the blue line, as in the case of Wal-Mart:
“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,” GuruFocus wrote yesterday. “Not bad from a large company like Wal-Mart.”
Using Peter Lynch
We can use this method to create a chart and determine whether each of the 30 stocks in the Dow Jones Industrial Average is undervalued or overvalued.
3M Co. (MMM)
According to the chart, the green line was below the blue line for much of 2011 and 2012, but it has surpassed the green line substantially now. This indicates that 3M was recently a good bargain, but is now overvalued.
Alcoa also appears overvalued.
American Express Co. (AXP)
American Express’ green line has exceeded its blue line for much of 2013, indicating that investors could not expect a good return on this stock if they bought it now.
AT&T appears overvalued.
Bank of America (BAC)
Bank of America appears overvalued.
For Boeing, the green line topped the blue line also beginning around this year, indicating overvaluation.
Caterpillar Inc. (CAT)
The green line is lower than the blue line, meaning Caterpillar is undervalued.
Green below blue – good value.
Cisco Systems Inc. (CSCO)
Chevron appears undervalued.
E.I. du Pont de Nemours & Company (DD)
This stock has flip-flopped from overvalued to undervalued already this year.
Exxon Mobile Corporation (XOM)
The chart indicates that Exxon has been in a state of undervaluation since early 2010.
General Electric Co. (GE)
Green is above blue – overvalued.
Hewlett Packard (HPQ)
Hewlett-Packard appears unclear, because it has a loss.
Home Depot (HD)
Home Depot appears overvalued.
Intel Corp. (INTC)
Intel appears undervalued.
IBM Corp. (IBM)
IBM appears undervalued.
Johnson & Johnson (JNJ)
Johnson & Johnson appears overvalued.
JPMorgan Chase (JPM)
JPMorgan Chase appears undervalued since 2010.
McDonald’s Corp. (MCD)
It appears the last few years have not been a good time to buy McDonald’s.
Merck & Co. Inc. (MRK)
Merck & Co. appears overvalued.
Microsoft recently became overvalued.
Pfizer appears undervalued.
Procter & Gamble (PG)
Procter & Gamble appears overvalued.
Coca-Cola Co. (KO)
Coca-Cola appears overvalued.
Travelers Companies (TRV)
Travelers companies appears undervalued.
United Technologies Group (UTX)
United Technologies Group appears undervalued.
United Health Group Inc. (UNH)
United Health Group appears undervalued.
Verizon Communications (VZ)
Verizon Communications appears overvalued.
Wal-Mart Stores Inc. (WMT)
Wal-Mart appears overvalued.
Walt Disney Co. (DIS)
Walt Disney appears overvalued.
According to the Peter Lynch Fair Value method, 17 out of the 29 decipherable (excluding Hewlett-Packard, which had a loss) companies appeared overvalued, and 12 appeared undervalued, suggesting investors can still find strong possibilities for return in what many are calling an overvalued market.
Try a Peter Lynch Chart here.