Don't Be Afraid of Heights: The One Thing You Need to Know About High P/E Ratios

When it comes to price-to-earnings ratios, Motley Fool co-founder and Chief Rule Breaker David Gardner has heard it all, and he has this advice for investors: Don't be afraid of a high P/E!

Remember, a P/E ratio is the multiple of a company's annual profits. According to David, companies with high P/E ratios are simply being rewarded for what the market sees as future profit potential, and if you want to get in on it, you've got to pay up. Oftentimes, inexperienced investors opt for a company with a P/E of seven and steer clear of the one with a P/E of 70, but in so doing, they are missing out on what may turn out to be an explosive growth stock.

David proved this at Motley Fool Stock Advisor when he picked up priceline.com (Nasdaq: PCLN  ) and Amazon.com (Nasdaq: AMZN  ) -- both sporting rich P/Es at the time -- and rode them way north, right where the market figured they'd go.

So go ahead ... when it comes to P/E ratios, don't be afraid of heights. Watch David's video below to learn more.

For more analysis, visit FoolTV.com.

Amazon.com and priceline.com are Motley Fool Stock Advisor picks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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4/17/2014 3:59 PM
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