No, there is no such thing as price-to-innovation. Explaining the viral clip, and the valuation metric that Peter Lynch employed.



There was a clip from a CNBC interview that went viral, in what was seen as Wall Street making up new numbers to justify stocks at record highs.

In it, Sherry Paul, managing director for Morgan Stanley Private Wealth, tells a bemused Carl Quintanilla of CNBC about what she calls a “price-to-innovation” multiple.

MarketWatch reached out to Morgan Stanley to get Paul to elaborate. While the firm declined the interview request, a spokeswoman did confirm that what Paul was talking about — and she did mention it in the clip — was price-to-earnings-to-growth, or PEG. It appears Paul was just trying to give PEG a new name.

PEG is not new. The idea is to take price divided by earnings, and then divide it again by the expected earnings growth rate. According to a paper from the Journal of Risk and Financial Management, PEG’s origins date back to 1969, but it gained prominence from Peter Lynch, the famous fund manager of Fidelity’s Magellan fund. His basic rule was that companies with PEG of 1 or less were attractive, and PEGs of more than 2 were overvalued.

Applying that insight now shows at least one Magnificent Seven stock, Nvidia
NVDA,
+2.35%,
on the cheap side, with a 0.7 PEG ratio, according to FactSet data, using forecasts for next year’s earnings and what it calls the long-term earnings per share growth rate. That compares to a price-to-earnings multiple of 50.6 for next year’s earnings. Meta Platforms
META,
+1.75%,
with a 0.9 PEG ratio, also is undervalued on this number, compared to a P-to-E ratio of 22.6.

Other tech giants are in the fairly valued camp in PEG terms, like Amazon
AMZN,
+1.34%
(1.2) and Alphabet
GOOGL,
+0.87%
(1.3), while Microsoft
MSFT,
+1.43%
(2.4), Apple
AAPL,
-0.36%
(2.7) and especially Tesla
TSLA,
+4.19%
(12.3) look expensive.

The cheapest S&P 500 stock on PEG terms is United Airlines
UAL,
-1.08%,
at just 0.1. Discover Financial Services
DFS,
-0.79%,
Everest Group
EG,
-0.59%,
Coterra Energy
CTRA,
-0.91%
and TJX
TJX,
+0.03%
are each on 0.2, according to FactSet.

Mid-America Apartment Communities
MAA,
+0.05%
has the highest PEG ratio of S&P 500 companies at 64.4, followed by Teradyne
TER,
+0.58%
(45.3), Kenvue
KVUE,
+0.96%
(41), Skyworks Solutions
SWKS,
+1.49%
(35) and Realty Income
O,
-0.09%
(30). Other companies don’t have PEG ratios at all owing to forecasts of earnings declines, such as Exxon Mobil
XOM,
+0.13%,
or expected losses, such as Boeing
BA,
-0.14%.



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