Invest like Peter Lynch with these 3 ASX stocks

Would Peter Lynch have liked the growth prospects of G8 Education Ltd (ASX:GEM), Mayne Pharma Group Ltd (ASX:MYX) and Northern Star Resources Ltd (ASX:NST)?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Peter Lynch was a famous fund manager who achieved a 20-year average return greater than any other mutual fund manager on record. Lynch turned his Magellan Fund from just $18 million in assets to over $14 billion in assets between 1977 and 1990.

When he retired, his fund had over 1,500 stock positions.

However Lynch is best known for his invest in what you know investment strategy. He believed ordinary investors could beat Wall Street analysts with basic maths and knowledge gained as a consumer.

One of the most prominent valuation techniques he popularised was the price-earnings growth ratio, or PEG ratio. It is computed by taking the price-earnings ratio and dividing it by the forecast growth in earnings per share (EPS).

A result less than one indicates possible undervaluation while a result greater than one indicates possible overvaluation.

For example, Woolworths Limited (ASX: WOW) is expected to grow its earnings per share by approximately 5% in the next year and trades on a price-earnings ratio of 18. Therefore, it has a PEG ratio of 3.6.

3 companies possibly undervalued…

G8 Education Ltd (ASX: GEM) is a childcare centre owner and operator with over 360 centres through Australia and Singapore. It's grown exceptionally well over the past two years but trades on a PEG ratio of 0.40.

Mayne Pharma Group Ltd (ASX: MYX) is a pharmaceutical company which develops and manufactures branded and generic products to sell in global markets. With analysts' expectations for the company to report EPS of 4.6 cents in 2015, it trades on a PEG ratio of 0.53.

Lastly, Northern Star Resources Ltd (ASX: NST) is Australia's second largest gold miner. It has enjoyed a spectacular rise in price over the past year thanks to its ability to take advantage of the falling gold price by acquiring new projects from distressed companies. It has a PEG ratio of just 0.14.

Our #1 dividend stock – Yours Free!

Of the three companies here I think G8 Education is the best buy at today's prices.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the companies mentioned in this article. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »