“Legendary mutual fund manager Peter Lynch made his fame by generating outsized returns investing in growth companies. He is willing to pay up for faster growing companies,” GuruFocus writes for Forbes. “He famously said that he would rather pay a P/E of 20 for companies that grow 20% than P/E of 10 for companies that grow at 10% a year.”
“the calculation of Peter Lynch Fair Value is very straightforward. It simply equals to the growth rate multiplied by its earnings. That is: Peter Lynch Fair Value = Earnings Growth Rate * Earnings,” GuruFocus writes. “Therefore, if a company grows its earnings 20% a year, to Peter Lynch, its fair valuation is 20 times its earnings.”
GuruFocus writes, “Apple has been able to grow its earnings per share at more than 60% a year, which is the result of tremendous revenue growth and margin expansion. Apple earned more than $40 a share for the trailing twelve months. If Apple is worth a P/E of its growth rate of 60, the stock would be worth more than $2400 a share. Of course, Peter Lynch would only be willing to pay a P/E of 20 for the companies that grow faster than 20% a year. In this case, Apple shares would be worth about $1000 a share to Peter Lynch. ”
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