Margin of safety: is the price reasonable?

Cheap and expensive are lazy words. A stock on 8 times earnings that is quietly shrinking is expensive. A stock on 60 times earnings that is compounding at 50% a year may not be. Value MoS, short for margin of safety, is our attempt to price growth honestly instead of punishing companies for having any.

Why we use PEG, not raw P/E

Raw P/E treats every earnings stream as identical, so it flags fast-growing businesses as dangerous and shrinking ones as safe. That gets the risk exactly backwards, and it is how value investors spend a decade in value traps, stocks that stay cheap because the business behind them keeps shrinking.

You already price this way when you shop. The yoghurt at half price with tomorrow's date on it is not a bargain. It is fairly priced for the day it has left.

So we divide the multiple by the growth behind it. That ratio is the PEG, the P/E divided by the growth rate. A high-multiple compounder is not penalised just for being a high-multiple compounder. If the growth supports the price, the reading is fair. A low multiple with no growth behind it gets no reading at all: with no growth to price, the pillar will not call it cheap.

Here is what that looks like on two real companies, and the answer is not the one a screener would give you. (Prices are the close of 9 October 2026; earnings, revenue and readings from our tables on 12 October 2026.)

MercadoLibre trades at 48 times last year's earnings. Biogen trades at 26 times. On a raw multiple Biogen is half the price. On our value pillar MercadoLibre reads 89.2, well above the median company's 64.8, and Biogen gets no reading at all.

The reason is in the growth line. MercadoLibre's earnings per share went from $9.53 in 2022 to $39.40 in 2025, about 60% a year, on revenue that grew from $10.5 billion to $28.9 billion with a flat share count. Biogen's earnings per share fell from $31.42 in 2019 to $8.79 in 2025 while revenue slipped from $14.4 billion to $9.9 billion. There is no growth to divide by, so the pillar declines to call it cheap.

A raw price-to-earnings ratio sees one stock at half the price of the other. It cannot see that one of the two earnings streams is shrinking.

Growth gets measured across several windows, from three years out to ten. One bad quarter should not rewrite a company's growth profile, and companies that took a one-off hit (the COVID years are full of them) should not be judged forever on the worst twelve months of their life.

What we compare against

Two reference points, both relative rather than absolute.

The company against its own ten-year history. Is this business expensive by the standards of this business?

The company against its sector. Software does not trade like utilities, and pretending otherwise just ranks industries instead of companies.

Price is never an afterthought

A great business at a silly price is still a silly purchase. This is the pillar where you check the price against the growth you are buying.

How to read it

Value MoS is a check on price, not a buy signal. A high reading tells you the price is not the reason to say no. It says nothing about whether the business is any good, which is what the Quality and Economic Profit pillars are for. A blank reading means there was nothing honest to price, whether no earnings growth, no recent profit or too short a record. It is not a bad grade.

The mechanics inside the pillar stay internal.

Common questions

Why PEG instead of P/E?

Raw P/E treats every earnings stream as identical, which flags fast-growing businesses as dangerous and shrinking ones as safe. Dividing the multiple by the growth behind it prices growth honestly, so a compounder is not penalised for compounding and a cheap business with no growth is not called cheap.

What is a value trap?

A stock that looks cheap on a headline multiple because the business behind it is shrinking. The multiple is low for a reason, and it can stay low for a decade while the earnings it is a multiple of keep falling.

Why compare against the sector rather than the whole market?

Software does not trade like utilities. Ranking every company against one absolute scale mostly ranks industries, which tells you nothing about whether this particular business is expensive for what it is.

Educational and proprietary. This explains what our research does, not the exact formula behind it, and it is not personalised investment advice. See the full disclaimer.