You have value, you have growth and then you have GARP. Peter Lynch popularized Growth At a Reasonable Price using the PEG ratio. But was that the best way? The PEG ratio compares the PE ratio (price to earnings) to the growth rate. Generally speaking, you would like the ratio to be around 1 where the PE ratio is roughly similar to growth. This simple ratio will help you with the following: 🔹 Avoid Overpaying for Growth 🔹 Ability to Compare Companies Across Industries 🔹 Simplicity However, the PEG ratio also has its downfalls such as the following: 🔸 Future growth estimates could be inaccurate 🔸 Historical growth rates might not predict future growth 🔸 PE is too simple a measure of a firm's value 🔸 Hyper-focus on earnings discounts other forms of growth What if a company had a one-time spike in earnings? What if they are growing revenues at a record pace and later on will tighten up margins for earnings growth? Is growth being funded through debt? Is the company trading at a massive discount due to risk (think tariffs)? When analyzing stocks, we need to be as complex as necessary but as simple as possible. The PEG ratio is perhaps too simple a tool to use in isolation. Another more elegant way is to develop a ranking or grading system for stocks based on value and growth factors. ➡️ We will assign 50% weight to numerous valuation factors including free cashflows, sales, book value, and earnings. ➡️ We will assign 50% weight to numerous growth factors such as sales, earnings and operating income. We consider not only trailing growth but the acceleration of growth. Sound difficult? At Portfolio123 we have pre-built core ranking systems for such styles as value, growth, sentiment, low volatility, earnings quality and momentum. You simply copy and paste the styles you want into a new ranking system, modify it and in a minute, you are ready with your GARP trading system. Let’s compare using a simple test. ▶️ Russell 3000 index ▶️ Backtest from 1999 until today ▶️ 4-week rebalancing ▶️Top 100 stocks using the PEG ratio ▶️Top 100 stocks using the value/growth ranking system The simple PEG ratio results in 11.79% CAGR. The identical set-up using the Portfolio123 ranking system has almost 2x the CAGR clocking in at 21.82% with over twice the Sharpe Ratio. The conclusion is clear – the PEG ratio is simple…too simple for today’s market.