When looking at capital goods companies like SIEMENS, ABB, CG POWER, BHEL, SUZLON, HITACHI ENERGY, and GE T&D, an important metric to consider is the price earnings (P/E) ratio. This ratio, ranging from 100 to 325, can be confusing. A P/E ratio of 100 means the company is expected to double its earnings every year to justify its current price. High P/E ratios often make investors wary of investing in these stocks.
When looking at capital goods companies like SIEMENS, ABB, CG POWER, BHEL, SUZLON, HITACHI ENERGY, and GE T&D, an important metric to consider is the price earnings (P/E) ratio. This ratio, ranging from 100 to 325, can be confusing. A P/E ratio of 100 means the company is expected to double its earnings every year to justify its current price. High P/E ratios often make investors wary of investing in these stocks.
The Challenge with High P/E Ratios
Many investors shy away from stocks with high P/E ratios. For example, stocks like BHEL and SUZLON ENERGY have shown significant price increases. ABB, Siemens, and CG Power are also performing well. Often, companies turning around have very low or negative earnings at their lowest point, resulting in high P/E ratios that persist for a long time. This high P/E ratio can discourage investors from buying these stocks.
Despite the conventional wisdom of avoiding high P/E stocks, many high P/E stocks can be very profitable. At WeekendInvesting, we have found that most high P/E stocks perform well in our portfolios. The high P/E ratio reflects the market’s expectation of significant future growth. Ignoring high P/E stocks might cause investors to miss out on potential gains. The market’s valuation of a stock often includes its potential for future growth, which can be substantial.
The Impact of Market Conditions
The past decade, especially during COVID-19, saw a lot of money being printed, which raised the value of all stocks. Previously, a cheap stock might have had a P/E ratio of 10, but now that could be 20. Similarly, the Indian market, which used to rally between 14 and 22 times earnings, now ranges from 18 to 30 times. The same trend is seen in the US market. The absolute P/E ratio number has less relevance now; it’s the relative P/E ratio that matters more.
At WeekendInvesting, we don’t focus much on P/E ratios when selecting stocks. Ignoring a stock solely because of a high P/E ratio can be a missed opportunity. The key takeaway is not to dismiss a stock just because its P/E ratio is high. The high P/E ratio indicates the market’s expectation of significant growth. Staying open to investing in high P/E stocks can lead to better investment outcomes.
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