What PE Ratio Range Should be Used When Buying Stocks?


(Reader’s note – the PE, or Price Earnings ratio, is the price of a stock divided by its earnings per share.  It is a widely used measure to determine how expensive a stock is when compared to its peers or the market.)
There are two camps of investors – Value Investors and Momentum Investors.  Value investors look for stocks that are underpriced, buy them until they are overpriced, and then sell.  Momentum investors find stocks that are going up, buy them, and then sell them when they start to slow their ascent.  Value Investors buy low and sell high.  Momentum investors buy high and sell higher.
With a PE of 90, that stock would certainly not be of interest to Value investors.  It is really high in price.  The average PE for US stocks is typically around 15, although it varies by industry.  Value investors would be looking for PEs of around 10 or less.
It might be of interest to momentum investors, but even for them, a PE of 90 is pretty rich.  If you are buying based on the greater idiot theory (figuring you paid too much but you can sell it to someone for more), obviously when the price gets to a certain point you start to wonder if you’ll end up being the greatest idiot.
Unless the earnings are expected to jump way up and justify the price (like earnings are expected to double or triple), I wouldn’t touch the stock.  You are likely to see a decline, or at least see it sit in the same price range for years while earnings try to catch up to the lofty price.  Some of the great growth stocks do have PE’s in the 30’s of even 40’s, however.  For example, Home Depot regularly had a PE in the 30s while it was still a hot growth stock.  It’s rate of earnings growth justified a high PE.  It was an industry leader.
I can see few stocks justifying a PE of 90, however.  I would put my money somewhere else for now and watch your stock to see if it becomes more reasonably priced.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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