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P/E ratio

1,311 Views | 6 Replies | Last: 6 yr ago by jh0400
jamey
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AG
How do you analyze companies you really like, but that have ridiculously high P/E ratios?


Netflix, Amazon...etc

Both great ideas, game changers....but how can I buy them now with P/E ratios like they are

Do you just say, oh well too late or dive in and hope those prices don't nosedive to reflect more realistic valuations

Or is there a good way to analyze.those PE ratios, for medium long term upside?
redsox34
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AG
If you have a long term time horizon then it really shouldn't matter and you can dollar cost average on the way down if it does correct. That being said, in my opinion, PE ratio is essentially useless.
FDT 1999
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AG
I don't just look at the PE ratio because it doesn't tell the whole story. I'll look at the PEG ratio and also price/sales ratio to help give me a better picture. Just because a PE ratio is high isn't necessarily bad if the growth is high too, and a low PE isn't necessarily good if growth sucks.
jrt336
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You have to think about it years out. If a stock is $100 now with $1.00 in EPS, you'd have to think about what the EPS might be a few years from now. If you think EPS could increase from $1 to $5 in 3 years, and could still fetch a high multiple (lets say 35x) because it would still have a long runway for growth, then you might expect it to trade for $175 ($5 EPS x 35 multiple) 3 years from now.
aggiehunter3
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AG
I stopped worrying too much about PE ratios.

Example: I bought VEEV at $28 per share. Every quarter I held they would beat earnings but would fall down to the $20-$22 area, because they were "overvalued" based on their P/E which was 70-80 at the time. So I started buying into the analysts opinions and believed they were overvalued and sold for breakeven. Rather than being convicted to hold based on what I thought about the co./sector and my own dd.

The stock now trades at $61 per share and has a PE over 130.

I also have seen many stocks that trade at low multiples ran into the ground.
Casey TableTennis
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AG
My comments are with respect to investing not trading.

Companies can not have insane P/Es forever. If you can reasonably model/predict when supernormal growth will end and at what pace it will taper off, discounted cash-flow models can be adjusted to accommodate the higher potential.

I would take a very critical eye to any P/E (high, low, or right with peers) and strive to interpret what it is that telling me about the stock. If a thorough analysis suggests the market P/E is materially off, that presents investment opportunity. Opportunity alone does not make a good investment. There typically needs to be a catalyst to shock stocks toward the "right" price, which may not happen for long periods and can test convictions.

In my experience, the higher the P/E, the less room for mistakes, and the more things that need to go right to work out.
bmks270
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AG
UA is an example of what can happen. Good to be diligent of high PE ratio.
jh0400
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AG
Tech companies like AMZN, NFLX, VEEV, etc tend to follow the rule of 40. As long as revenue growth plus operating margin > 40, then everything is ok. Note that the operating margin that is used in that calculation is a non-GAAP measure that excludes stock-based comp and various other items.
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