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Lately, the S&P 500 (SNPINDEX: ^GSPC ) has been hitting record high after record high. That has a lot of people wondering whether we're entering bubble territory. You should never try to time the market, but right now, it's especially important to make sure the stocks you're buying aren't too expensive.
A great metric to help investors see whether a stock is expensive is its price-to-earnings ratio. This tells you how much a stock is worth, relative to how much money its company made over the past year. Right now, the average S&P stock trades for a P/E of 19.3.
For comparison's sake, the S&P's most expensive stocks -- all listed below -- have P/Es well above this average. But as you'll see, that doesn't necessarily mean they should all be avoided.
5. U.S. Steel (NYSE: X ) , P/E of 124
Shareholders of U.S. Steel, one of America and Europe's largest steel producers, have certainly seen better days. The stock has just 10% of the value it had back in 2008 -- when the developing world hungered for steel.
So why is the stock considered expensive? It's because the company's earnings are so low -- coming in at just $0.06 per share. But it's important to remember that U.S. Steel operates in a highly cyclical industry, and analysts expect that the cycle has hit a bottom. In fact, they expect the company to grow earnings by 190% per year from now until 2016.
Of course, that's certainly no guarantee. Demand from China, as well as other developing parts of the world, will have to pick up for this to pan out. But if you believe in the thesis analysts are putting out there, U.S. Steel shares aren't nearly as expensive as they look right now.
4. Crown Castle International (NYSE: CCI ) , P/E of 140
Crown is one of the major players in the industry. By "tower industry," I'm referring to the towers that now dot our landscape to help ensure wireless data can be transmitted with ease.
Building out the infrastructure necessary to be a major player is expensive, but once towers are in place, a company like Crown can benefit from relatively low costs and high revenues as it charges customers who have no other choice but to use the company's towers.
Analysts expect earnings to grow 54% per year from 2013 to 2016 as a result. But when you consider that any consolidation within the telecom field could negatively affect revenue (it decreases the number of potential Crown customers), and the fact that the stock already has lofty expectations built in, you might be better off investing your money elsewhere.
3. Lam Research (NASDAQ: LRCX ) , P/E of 166
Lam's core business is in making equipment that helps to manufacture computer chips. The company trades at a lofty 166 times earnings right now, but if Lam is able to meet analyst expectations for 2013, today's price is just 12 times expected earnings.
The sector that Lam is in is highly competitive, and having a diverse client base is important. Lam counts Samsung as one of its major clients, which is great news right now, as Samsung is putting a pretty serious dent in Apple's iPhone ambitions. But if the day comes where Samsung isn't as hot, Lam needs to have a different customer that can pick up the slack.
For that reason, I'd say Lam might be slightly overvalued at today's prices.
2. Pioneer Natural Resources (NYSE: PXD ) , P/E of 237
Pioneer is an independent oil and natural gas company that's focusing on North America's various shale plays. It's important to understand two key variables that play an enormous role in whether Pioneer is worth your money.
The first is that companies like Pioneer do everything they can to make sure there's oil or natural gas in the ground before buying or leasing land, but there's no foolproof way to guarantee that it is all extractable.
The second variable is that even if the company does extract as much as it thinks it can, commodity prices for oil and natural gas have to be high enough to justify the investment.
Those are two big variables, but if they work out in the company's favor, shares could trend still higher. Given the uncertain nature of the industry, I prefer to focus elsewhere.
1. Netflix (NASDAQ: NFLX ) , P/E of 557
Finally, we have one of the most debated stocks out there. Netflix stock was absolutely slammed in late 2011, when the company botched its Qwikster spinoff, brashly raised prices without much explanation, and decided to forgo profits in an effort to expand globally.
But time seems to heal all wounds, and shareholders who bought in amid the turmoil have been rewarded. What does that mean for investors today? Well, the company has proved its moxie -- winning over a global audience, and getting more original content out there. I won't make any predictions on where this stock is headed, but I'll just say investors need to be careful of the lofty expectations that are already baked into the stock's price.
More traditional choices
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