Six numbers for spotting cheap stocks.

A simple screen built on the ideas of Peter Lynch. Use it to find stocks that look cheap and are still growing.

People often say Peter Lynch turned $18M into $14B. That number is about a mutual fund he ran called the Fidelity Magellan Fund, not his own bank account. Lynch ran the fund from 1977 to 1990 and averaged about 29.2% per year. An amazing record. But it happened in a specific moment in market history. No set of rules can promise the same results today.

The person that turns over the most rocks wins the game. And that's always been my philosophy.

Peter Lynch

Lynch focused on three things. Was the stock priced fairly? Was the company's balance sheet strong? Was the business growing? His advice was simple. Do the work. Look at a LOT of companies. Find the ones the market got wrong.

This guide walks through six numbers that fit the spirit of how Lynch thought. Pay a fair price. Look for a strong balance sheet. Stick to businesses you can understand. The cutoffs below are starting points, not rules Lynch wrote down. Each one has a job. Used together, they form a funnel that helps you cut a long list of stocks down to a short list worth a closer look.

You start with the entire stock market. Step by step, you remove stocks that are too expensive, carry too much debt, are growing too slowly, or are too small to study with confidence. What is left is a shortlist. A screen is the start of the work, not the end of it.

Part one

The six filters

A funnel for finding cheap, growing companies.

1. Trailing P/E under 25

   The cutoff

   Price-to-earnings ratio (last 12 months) must be under 25.

   What it means

   The trailing P/E ratio compares the stock price to what the company actually earned over the past year. Say a stock trades at $100 and earned $5 per share last year. That is a P/E of 20. In plain words, you are paying $20 for every $1 of last year's profit.

   Why it matters

   A P/E under 25 keeps your search on stocks priced on real, proven results. Stocks with very high P/Es need a lot of future growth just to justify their price. That leaves more room to be disappointed. This filter is a starting point, not a final answer. Some great companies trade above 25 for good reasons, like very strong brands or steady cash flow.

2. Forward P/E under 15

   The cutoff

   Price-to-earnings ratio (next 12 months estimate) must be under 15.

   What it means

   The forward P/E uses an estimate of what the company will earn next year, not what it earned last year. Say a stock costs $100 and analysts think it will earn $8 per share next year. That is a forward P/E of 12.5.

   Why it matters

   A forward P/E under 15 finds stocks that look cheap based on what they are expected to earn next. When the forward P/E is much lower than the trailing P/E, it means earnings are projected to grow. Here is the catch. Analyst estimates change all the time, and as a group, analysts tend to be too hopeful. Use the forward P/E as a hint, not a hard fact.

3. Debt to equity below 35 percent

   The cutoff

   Total debt must be less than 35% of shareholder equity.

   What it means

   Debt to equity tells you how much a company borrows compared to the money its owners have put in. A ratio of 35% means the company has 35 cents of debt for every dollar of equity. Lower is stronger.

   Why it matters

   Companies with low debt hold up better when the economy slows down, when interest rates rise, or when business gets bumpy. They have more room to invest, pay dividends, or buy back shares. Heavy debt can sink even profitable companies when times get tough. One note: this filter does not work well for banks, REITs, or utilities. Those businesses use debt by design and need to be looked at with different tools.

4. EPS growth above 15 percent

   The cutoff

   Earnings per share must grow more than 15% per year.

   What it means

   EPS growth is how fast a company's profit per share is rising from one year to the next. A 15% rate means the company earned 15% more per share than the year before. Simple as that.

   Why it matters

   Growth is what drives a stock price higher over time. A company growing earnings at 15% or more is doing real work. It is beating inflation, beating most rivals, and beating the average return of the broader market. Combined with the low P/E filters above, this makes sure you are not just buying cheap stocks. You are buying cheap stocks that are still growing. Lynch himself liked even faster growers (20% or more) and called them "fast growers." But he also held steady performers that grew slower. Pick a rate that fits your own plan.

5. PEG ratio under 2

   The cutoff

   Price/earnings-to-growth ratio must be under 2.

   What it means

   The PEG ratio answers a simple question. Am I paying too much for this company's growth? You take the P/E ratio and divide it by the growth rate. A company with a P/E of 20 that is growing earnings at 25% per year has a PEG of 0.8. Lower is better.

   Why it matters

   The PEG ratio links price and growth into one number. Lynch's own rule was stricter than this screen. In his book One Up on Wall Street, he wrote that a fairly priced company has a P/E equal to its growth rate. In other words, a PEG of 1.0 is fair value, and below 1.0 is a bargain. A PEG under 2 is a looser limit. It still cuts out stocks where the price has run far ahead of the growth. If you want to follow Lynch's actual rule, tighten this to PEG under 1.

6. Market cap above $5 billion

   The cutoff

   Company must be worth more than $5 billion.

   What it means

   Market cap is the total value of all the company's shares added together. You take the stock price and multiply it by the number of shares. A $5 billion floor focuses your search on mid-size and large companies. These are real, established businesses with steady revenue and lots of public information about them.

   Why it matters

   Here is where this screen steps away from how Lynch actually invested. Lynch loved small companies. Many of his biggest winners, stocks that went up ten times or more, were small or medium businesses that big Wall Street firms had not noticed yet. So why use a $5 billion floor here? Because most retail investors do not have time to dig into small companies, where the financial numbers can be messy and the trading can be thin. At $5 billion or more, you get cleaner data, more analyst coverage, and less wild day-to-day price movement. If you have time to do the deeper work on small companies, lower the floor. The trade-off is more research per stock and bigger swings in your results.

Part two

Putting it all together

Using this as part of the toolbag

Each number tells part of the story. The real power is in using them together. The two P/E ratios filter for a fair price. EPS growth and PEG show that the company is growing and that you are not paying too much for that growth. Debt to equity protects you from companies that owe too much. And the market cap floor makes sure the data you are looking at is solid enough to trust.

When a stock passes all six, it looks like a healthy, growing business priced at a reasonable level. That is a starting point for further work. It is not a recommendation, and it is not a buy signal. It is just a name worth researching.

If you want a free tool to start running these filters yourself, Stock Analysis has a clean stock screener that handles all six inputs. The Clinic has no business relationship with Stock Analysis and does not get paid for the link.