A question on investing and P/E ratios...?

Question

When looking for stocks to invest in, why would you want to buy stocks with a high P/E ratio? A low P/E ratio means a company charges less for shares and earns more per share than, say, a company with a high P/E ratio. Why would you be attracted to companes with high P/E's, doesn't that mean you pay an arm and a leg for shares that dont make as much?

Answer 1

P/E is just a point to be considered in stocks valuation. what matters is future profits outlook.

many investors willing to pay premium (means buying very high P/E stocks) for stocks that they expect to grow that much. in fact, some analyst did factored in the next year's earnings to existing price to make it 'cheap and affordable'.

but then, valuation is the eye of the stockholders i guess.

Answer 2

In a nutshell a company's PE ratio is based on how quickly the stock market expects the company in question to grow its earnings in the future. Companies with high PE stocks are generally expected to grow earnings very rapidly in coming years (ie they don't make a lot of money relative to their share price now, but probably will in a couple of years). Companies with low PEs are expected to grow more slowly and thus will make less money per dollar invested now.

For example take a company I own called Anika Therapeautics. ANIK trades at a high PE (just under 42 times earnings) however it is about to introduce a sort of a miracle gunk that eliminates wrinkles, removes scars, and does some other cool stuff. Because of this the company is likely to have much higher earnings in a year or two than it does now, and a high PE for the company is probably justified (the company also has a lot of cash on hand.)

Companies with either high or low PEs can be good investments--you're really looking for a company that does better than the market is expecting it to.

Answer 3

This is a subject that actually requires an entire book to discuss appropriately. I am not certain I can do it justice in a few paragraphs.

Just looking at P/E ratios does not offer a great deal of insight into whether a stock is a good investment or not. But low P/E ratio stocks in general do tend to outperform high P/E ratio stocks as a general class. But generalities are very bad when considering investments.

The things to consider are P/E ratio, growth rate, dividend, debt/equity ratio, return on capital, and about a half dozen other variables besides. A fundamental investor tends to consider all of these. A technical investor tends to ignore all of this and invest based on the technical performance of the shares.

I am sure that some investors tend to shy away from high pe stocks, myself included. I am sure other investors tend to focus on high pe stocks (growth stocks) because they believe that there is more opportunity for capital gains in that universe. These investors tend to be risk takers.

Answer 4

Some investors do not consider P/E a good indicator of value. They are more concerned with future earnings. They buy what they expect the stock to do, not what it is currently doing. If a stock is going through a down business cycle the earnings may be low, but if the outlook is rosy, then future P/E will be better.

Answer 5

I think you are confused ,
Most professionals look to AVOID high P/E s .

WHERE did you get the idea people were looking for them ?
There are a couple of stocks that seem to warrant the higher P/E because of very high revenue growth
( like RI MM or GOOG ) but they are few & far between.

ALSO , try avoiding ones with high debt to revenue ratios (info available in the key stats links on Yahoo)

http://finance.yahoo.com/

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Answer 6

Hi, i recommand you a good and basic tutorial for investing. it covers all Issues related to your Investing and everything around it.

http://www.investingtutorial.info/

wish it will help you.

Good Luck , Best Wishes!

Answer 7

check this link its good


http://buyingandsellingshares.blogspot.com/

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