Glossary term
PEG Ratio
Price / Earnings divided by earnings growth rate. PEG below 1 is the textbook growth-at-a-reasonable-price threshold; PEG above 2 signals the market is paying richly for growth assumptions that may not materialise. HALO 100 uses PEG bands as part of its compounder screen; Hypergrowth relaxes them in exchange for higher growth signal.
Definition & Context
Peter Lynch popularised PEG in the 1980s as a way to compare valuations across companies with different growth rates. The formula is trailing or forward P/E divided by expected earnings growth (expressed as a whole number: 20% growth = 20). A PEG of 1.0 means you are paying one unit of P/E for each point of expected growth; below 1 is cheap, above 2 is expensive. The ratio collapses when growth is low or near zero (the denominator blows up the output).
PEG is sensitive to the growth assumption, which is always an estimate. Sell-side consensus growth numbers are usually optimistic; three-to-five-year forward rates based on revenue CAGR smooth out the noise. PEG also punishes high-quality businesses with modest but durable growth — Coca-Cola-style compounders look expensive on PEG despite delivering superb long-run returns. For that reason PEG is used as a filter, not a verdict.
Why It Matters for Investors
Closelook’s HALO 100 uses a three-year forward PEG below 1.5 as one of four compounder screens (alongside gross margin expansion, net retention above 110%, and ROIC above 15%). The Hypergrowth model portfolio inverts the screen — tolerating PEG up to 3 in exchange for 30%-plus revenue growth — while the AI Buildout portfolio ignores PEG because the Rubin universe is driven by capex cycles, not organic-growth multiples.
Related Concepts
PEG is one of three quality lenses alongside EBITDA Multiple and Gross Margin; it complements Net Retention as a forward-looking compounder signal.