When High P/E is not a problem?

[Vipultheinvestor]

Hello investors,
You have always overheard that a stock with high P/E is overvalued and stock with low P/E is undervalued. But it is not correct.
Alone a high and low P/E doesn't tell much about a stock.
It must be used in correlation with EPS growth.
A stock with High P/E but it is growing faster aka high EPS growth may justify the high P/E because of high growth rate.
.
A stock with low P/E but it is growing at a slower rate than the industry average may justify the low P/E as investors are not confident in that company.
.
So, your investment decision should not only rely on a particular ratio.
.
This method was popularised by Peter Lynch in his book ' One Up on Wall Street ' and this method is known as the PEG ratio. We'll discuss this ratio in our further post.

 

[mohan.sic]

Hello investors,
You have always overheard that a stock with high P/E is overvalued and stock with low P/E is undervalued. But it is not correct.
Alone a high and low P/E doesn't tell much about a stock.
It must be used in correlation with EPS growth.
A stock with High P/E but it is growing faster aka high EPS growth may justify the high P/E because of high growth rate.
.
A stock with low P/E but it is growing at a slower rate than the industry average may justify the low P/E as investors are not confident in that company.
.
So, your investment decision should not only rely on a particular ratio.
.
This method was popularised by Peter Lynch in his book ' One Up on Wall Street ' and this method is known as the PEG ratio. We'll discuss this ratio in our further post.

perfect.... Also when we are looking at index pe's from valuation point if view, most people are stuck at past and think that anything above Nifty pe of 20 is expensive. This is not correct way of looking at it.

As the index majors are getting replaced from value stocks to growth stocks, our approach to pe outlook should also change.

 

[stoch]

Hello investors,
You have always overheard that a stock with high P/E is overvalued and stock with low P/E is undervalued. But it is not correct.
Alone a high and low P/E doesn't tell much about a stock.
It must be used in correlation with EPS growth.
A stock with High P/E but it is growing faster aka high EPS growth may justify the high P/E because of high growth rate.
.
A stock with low P/E but it is growing at a slower rate than the industry average may justify the low P/E as investors are not confident in that company.
.
So, your investment decision should not only rely on a particular ratio.
.
This method was popularised by Peter Lynch in his book ' One Up on Wall Street ' and this method is known as the PEG ratio. We'll discuss this ratio in our further post.

Because the market can stay irrational longer than you think. In the bull market, inflated P/E is not a problem because everybody thinks that company profits will rise and eventually justify high P/E. It all depends on where we are in the economic cycle.