Forget CAPE fear — Peter Lynch’s PEG gives bulls a reason to keep running
The cyclically adjusted price-earnings ratio suggests US stocks are seriously stretched, but the price/earnings to growth ratio takes time into consideration
New York — By virtually any measure, US stocks are expensive. Under one especially harsh lens, the cyclically adjusted price-earnings (CAPE) ratio popularised by Robert Shiller, equities relative to 10 years of profits are more stretched than any time in a century, save the dotcom era. However, there’s still a methodology that bulls can take comfort in: price —not just to earnings, but to earnings growth. Favoured by legendary investor Peter Lynch and known as the PEG (price/earnings to growth) ratio, the technique takes the standard valuation snapshot and adds time — time for a stock to grow into its price. If you’re a bull in 2018, you’re probably making an argument that at least glances at this logic. By the standard tools, companies trade for 23 times earnings. But those earnings are increasing: analysts forecast per-share profit in the S&P 500 will rise 15% in 2018, the fastest clip since 2011. They expect growth to approach 13% a year by 2023, according to data compiled by Yar...
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