This simple ratio can instantly tell you whether the stock is cheap or expensive. And the man who developed it, Peter Lynch, one of the greatest investors ever. He used it to deliver 29% annual returns for 13 straight years. It's called the Peggy ratio. And once you understand how it works, you'll never look at stocks the same way again. Today, I'll break down not just the Peggy ratio, but also the two other most important valuation ratios every investor should know, PE and PEG. I'll show you how Peter Lynch's genius method can help you find undervalued stocks before anyone else does. And the best part, you can get a free Peggy calculator using the link in the description and start applying this method right away. Let's start with the basics. The price toearnings ratio is probably the most famous valuation metric in investing. It's simple. You take the stock price and divide it by the company's earnings per share. So if a company's stock costs $30 and it earns $3 per share, a PE ratio is 10, that means you are paying $10 for every dollar the company earns. The lower the PE, the cheaper the stock appears. But there is a problem with PE ratios. They don't tell you the whole story. A company with a PE of 30 might actually be cheaper than a company with a PE of 10 if the first company is growing much faster. That's where the PEG ratio comes in. The PEG ratio was initially developed by Mario Farina and later popularized by Peter Lynch during his legendary run managing the Fidelity Magellion fund where he delivered 29% annual returns for 13 years. PE stands for price to earnings to growth. You calculate it by taking the PE ratio and dividing it by the company's earnings growth rate. So if a company with a PE of 30 is growing earnings at 30% per year, its PEG ratio is one. If another company has a PE of 10, but it is only growing at 5% per year, its PEG ratio is two. Peter Lynch's rule was simple. A PEG ratio below one suggests the stock might be undervalued, while a peg above one suggests it might be overvalued. Got it. Good. But Lynch didn't stop there. He realized there was still one crucial piece missing from this equation. [Music] The Peggy ratio is Peter Lynch's masterpiece. It takes the PEG ratio and adds one more crucial factor, the dividend yield. Here is how it works. You take the PE ratio and divide it by the sum of the growth rate plus the dividend yield. So if our company has a PE of 30, is growing at 30% per year and pays a 3% dividend. The Peggy ratio is 0.9. Lynch believed that this was the most complete picture of a stock's value because it considers price, earnings, growth, and the cash you get back as dividends. And just as with PEG, a Peggy ratio below one suggests the stock might be undervalued. The lower the number, the better the potential bargain. [Music] What makes the Peggy ratio brilliant is that it rewards companies that not only grow their earnings, but also pay dividends to shareholders. Two companies might have identical PE ratios and growth rates, but the one paying a 4% dividend will have a much better Peggy ratio than the one paying nothing. This makes perfect sense. As an investor, you should value getting cash in your pocket today while you are waiting for the company to grow. Peter Lynch used this approach to find incredible winners like Dunking Donuts, Taco Bell, and Home Depot during their early growth phases. So, here is the simple framework. First calculate the PE ratio to get a baseline valuation. Then calculate the PEG ratio to see if the growth justifies the price. Finally, calculate the PEGY ratio to get a complete picture including dividends. But remember, no single ratio tells the whole story. The Peggy ratio is a fantastic starting point, but you still need to look at the company's financial health, competitive position, and long-term prospects. Price is not everything. We also have to understand the business, its risks and opportunities. Now I know calculating these ratios for every stock you are considering can be time consuming. That's why I have created a free Peggy ratio calculator that does all the math for you. Just put in the numbers and it instantly shows you the final result. I created this calculator for myself to speed up my valuation process, but now you can get access to it using the link in the description below. It's completely free and it will save you hours of calculations. If you found value in this video, you are definitely going to enjoy five timeless money lessons from another incredible investor, Seth Clarman. Thank you for watching and see you in the next