At first glance, stocks with lofty P/E ratios such as Chipotle Mexican Grill
But instead of quickly concluding that a stock is "cheap" or "expensive" based on its P/E ratio, ask yourself why the stock trades at such a high multiple. Sure, there are some stocks out there that have no reason to be expensive, but others can justify their valuations by possessing tremendous growth potential.
These stocks have never been statistically cheap, but they've produced stellar returns for investors over the years by consistently beating market expectations.
Pay up for quality
FBR Small Cap (FBRVX) manager Chuck Akre isn't afraid of paying up for what he believes to be superior stocks. For instance, a good number of his fund's top holdings, including Penn National Gaming
When Akre visited Fool HQ recently, he noted that the cheapest that the fund has been able to buy shares of CarMax
Look no further
Obviously, finding bona fide value in stocks trading with high-ish valuations is the hard part. Two things to look for are companies that sell a premium service or are dominant in their market niche. Certainly Starbucks, Amazon, and eBay fit this mold.
In the same vein, Motley Fool co-founder Tom Gardner and the Motley Fool Hidden Gems team saw tremendous growth potential in Ctrip.com back in December 2005, despite its high P/E ratio. It traded with no long-term debt and was well-positioned in the growing Chinese online travel reservation business, so Tom recommended the stock to Hidden Gems subscribers. Since then, Ctrip.com is up 91%.
If you'd like to learn more about the other Hidden Gems picks, including Ctrip.com and Chipotle, simply follow this link for a free 30-day trial to the service. The team has had a great track record of selecting some of the best small companies on the market -- on average, Hidden Gems picks are beating the market by more than 32 percentage points.
Todd Wenning's random '90s movie of the day is "If Looks Could Kill," starring Richard Greco. He owns shares of Starbucks. Chipotle is a Rule Breakers recommendation. Starbucks, Amazon.com, and eBay are Motley Fool Stock Advisor picks. CarMax is an Inside Value selection. The Fool's disclosure policy is definitely not The French Teacher.