The 100 P/E Stock You Must Buy Now

Sometimes, cheap stocks trade for more than 100 times earnings. Really:

Company

2004 P/E

5-Year Return

Frontier Oil (NYSE: FTO  )

210.4

258.3%

Hess (NYSE: HES  )

208.2

202.8%

Arena Resources

101.4

729.7%

Hologic (Nasdaq: HOLX  )

118.9

156.4%

Calgon Carbon

100.9

119.9%

Source: Capital IQ, a division of Standard & Poor's.

Five stocks, five multibaggers. But to get those returns, you had to buy these winners when they were trading for a triple-digit P/E.

Crazy.

Or is it? According to Capital IQ, there were 21 stocks trading for at least 100 times earnings five years ago that have since produced positive returns. The market fell 20% over the same period.

Bursting the value bubble
Of course, I'm cherry-picking here. So, let's try another awful five-year stretch -- from January 2000 to January 2005. Stocks were down roughly 12% over that period, yet Capital IQ found 23 premium-priced winners, including these three multibaggers:

Company

2000 P/E

5-Year Return

Ceradyne (Nasdaq: CRDN  )

100.8

1,701.4%

Goldcorp (NYSE: GG  )

188.7

754.9%

Harman International

124.9

753.8%

Source: Capital IQ, a division of Standard & Poor's.

It's true that we can't take high P/Es as predictive of great returns. But it's probably fair to say that a 100-or-better P/E, in and of itself, shouldn't disqualify a stock from your consideration.

High = buy?
In fact, if you're David Gardner, it may even be a buy signal.

Documented evidence that the mainstream financial media consider a stock overvalued -- which a high P/E may signal -- is one of David's criteria for a company that may become a Rule Breaker, a firm whose innovative prowess transforms its chosen industry, unleashing billions in market value.

"The reason [a premium valuation] is valuable is that it keeps people out of a stock; later on, as the company proves out its position as a profitable, even dominant, leader, then the skeptics finally buy -- which is what can give you serious appreciation as an early investor," David wrote in 2006.

But media skepticism is only one of the six signs of a rebellious winner. The other five:

  • Top dog and first mover in an important, emerging industry.
  • Sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors.
  • Strong past price appreciation.
  • Good management and smart backing.
  • Strong consumer appeal.

The next 100 P/E winner
Very few richly valued stocks ever become Rule Breakers. But when all six signs truly do come together in a single stock ... Wow.

Take Apple (Nasdaq: AAPL  ) . In the 12 months leading up to January 2004, its stock had risen 60% (past price appreciation) thanks to the iPod (top dog, consumer appeal), which caught fire after CEO Steve Jobs ordered a version of its iTunes Music Store built for Windows (good management, visionary leadership). Months before, in May, Barron's had cited "concerns over valuation" (expensive).

Apple, which suffered with a triple-digit multiple for much of 2003, is why I'll never again simply pass over a stock that trades for 100 times earnings -- stocks like Teradyne and current Motley Fool Rule Breakers winner BioMarin Pharmaceuticals (Nasdaq: BMRN  ) .

But my favorite is one that you don't see here. It's my latest pick for Rule Breakers, a premium-priced stock that gushes cash and leads in the development of one of the world's most promising new technologies. I believe it's a misunderstood multibagger in the making, and I'll be buying shares when disclosure rules allow.

Interested? Click here for 30 days of free access to Rule Breakers -- you'll get the name of that stock, as well as our team's five top growth stocks for new money.

Fool contributor Tim Beyers had stock and options positions in Apple, a Stock Advisor selection, at the time of publication. Tim is a member of the Rule Breakers team, which counts Ceradyne and BioMarin among its holdings. Its disclosure policy lives richly every day so that you can, too.


Read/Post Comments (7) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 23, 2009, at 7:45 AM, JakilaTheHun wrote:

    P/E ratios are such a poor valuation measure. I'm not sure why investors have convinced themselves it's a useful metric.

    Also, investors are willing to pay a premium P/E during the good times and normally are only willing to pay a downgraded P/E during the bad times, which is nonsensical because earnings will be better-than-average during the good times (meaning one should be willing to pay a lesser P/E) and worser-than-average during the bad times (meaning one should be willing to pay a greater P/E).

    Also, sometimes, you can end up with high P/E ratios when a company is barely profitable, so it doesn't surprise me that there have been some great buys with P/E ratios of upwards of 100.

  • Report this Comment On January 23, 2009, at 12:15 PM, ByrneShill wrote:

    PE is only meaningful for stable, slowly-growing companies. And it only is what it is: earning divided by price.

    If a company breaks even (0 earning but no loss) and has a stock price of 1$ (or any price higher than 0), then its PE is infinite. Makes it neither a good or bad investment.

  • Report this Comment On January 23, 2009, at 1:08 PM, RHaganC wrote:

    This is VERY misleading, and am a bit frustrated here fools...

    You only use hindsight examples. Well, that's not really useful in current terms wher eyou dont KNOW what will have returns like that, right? What is the percentage of triple digit PE stocks that tanked in those periods? I don't know, but if you want to tout about this, show ALL the facts.

    I realize you will use more than PE to justify your pics, and your point is that it isn't always a crazy sign to have triple digit - but I still find this misleading, shows info from a currently unattainilbe position, and doesn't refrence the negatives well enough.

  • Report this Comment On January 23, 2009, at 4:36 PM, TMFMileHigh wrote:

    Hello RHaganC,

    Can I ask why you think this article is misleading? True, the examples are historic in nature. I don't know of any other kind.

    And it's not like this is a new strategy. David has employed it for years, earning very high real-money returns. So have I. Hypothetical, this isn't.

    But you asked for more data and you shall have it.

    Over the five-year period ending this week, 74 stocks traded for more than 100 times earnings. Of those, 29 -- or 39% -- beat the market. The biggest loser was RF Micro Devices, down 89.5%.

    Over the 2000-2005 stretch, 69 stocks traded for more than 100 times earnings. Of those, 25 -- 36% -- beat the market. The biggest loser was Harmonic, down 91.2%.

    Does this help? I hope so.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On January 31, 2009, at 10:32 PM, RandolphFL wrote:

    TIM.

    I like the article and find the information useful.

    I also found it amusing that RHaganC was ridiculing your examples for being 'historic in nature'.

    I'm hoping RHagan can provide some examples of.. well, 'examples' which are based on events which have not yet, but will occur.

    I am accostomed to high quality articles on TMF and also to the comical nature of some criticism. Had that been all, there woudl be no reason for me to comment.

    My comment is inspired by your response to RHaganC. While I don't feel that your article is misleading per se, with the addition of your reply to RHaganC, it becomes so.

    Bear with me as this will seem extremely basic, but lets all agree on a fact:

    -100 < -1 < 1 < 100

    That is, we are agreeing that negative one hundred is less than negative one, which is less than one, which is less than one hundred. (I don't have time to go into the proof, so just press your 'i believe' button for now if you still have reservations.)

    So a company that is trading at more than 100$ per share would definately be trading at 'more than 100 times earnings' (using your terms) if the company earned an amount less than or equal to $1 per share.

    Since we earlier agreed that -1 and -100 are both less than 1, then a company with a loss of 1$ per share (or a profit of -1$ per share) and a price of $100 per share IS a company that trades 'at more than 100 times earnings'.

    100 > (-1 x 100)

    While I believe that on a given days in 2000 or 2004, it is probable that 74 or 69 individual stocks with non-negative , non-zero, earnings traded at more than 100 times earnings, I do not agree the same is true of all stocks.

    While I don't believe you were trying to pull the wool over anyones eyes, it does go to further demonstrate the lack of utility of PE ratios in comparing stocks.... A negative PE ratio is certainly lower than a positive PE ratio, but who would argue it is better?

  • Report this Comment On March 02, 2011, at 12:40 PM, racchole wrote:

    The article is not misleading at all. The author is proving that high PE's should not be the only determining factor when deciding not to buy a stock. He does not say that you should buy all stocks with high PE's, nor should you just buy stocks with low PEs. The point is that good value can be found at any PE, ceteris paribus.

    And he goes on to prove his point in his comment.

  • Report this Comment On October 07, 2013, at 9:26 PM, fuzzywzhe wrote:

    Stupidest

    Advice

    Ever

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