One Up On Wall Street: How To Use What You Already Know To Make Money In

by Peter Lynch

One more thing about growth rate: all else being equal, a 20-percent grower selling at 20 times earnings (a p/e of 20) is a much better buy than a 10-percent grower selling at 10 times earnings (a p/e of 10). This may sound like an esoteric point, but it’s important to understand what happens to the earnings of the faster growers that propels the stock price. Look at the widening gap in earnings between a 20-percent grower and a 10-percent grower that both start off with the same $1 a share in earnings: COMPANY A (20% EARNINGS GROWTH) COMPANY B (10% EARNINGS GROWTH) BASE YEAR $1.00 A SHARE $1.00 A SHARE Year 1 $1.20 $1.10 Year 2 $1.44 $1.21 Year 3 $1.73 $1.33 Year 4 $2.07 $1.46 Year 5 $2.49 $1.61 Year 7 $3.58 $1.95 Year 10 $6.19 $2.59 At the beginning of our exercise, Company A is selling for $20 a share (20 times earnings of $1), and by the end it sells for $123.80 (20 times earnings of $6.19). Company B starts out selling for $10 a share (10 times earnings of $1) and ends up selling for $26 (10 times earnings of $2.60).