Deep Dive: These stocks seem expensive now, but in two years you may wish you’d bought them at these prices

Deep Dive: These stocks seem expensive now, but in two years you may wish you’d bought them at these prices

2021-04-08 10:39:00

You may want to be cautious about investing in companies with high price-earnings ratios as some benchmark indices hit record highs. But that kind of thinking can cost you money.

Companies with a high P / E rating may be able to continue to rapidly increase their sales, driving profits in the process. And that could lead to higher stock prices, even though the S&P is 500
+ 0.15%

hit a new intraday high April 6 and the Nasdaq

reached a new high on February 19.

The time frame discussed is a minimum of two to three years. Economists and investment analysts expect this period to represent a return to economic growth and a recovery in corporate earnings. Meanwhile, the Federal Reserve has pledged to keep interest rates very low.

Below is a list of stocks whose P / E ratios (based on current stock prices) will decline significantly in the coming years if analyst estimates are accurate.

Amazon's example

In the five years through April 5, the shares of Amazon.com Inc.
+ 1.72%

are up 451%. Look at how high the stock's price-earnings ratios have been:


Those forward P / E ratios (based on rolling 12-month consensus estimates among analysts polled by FactSet) have always been high for Amazon, compared to those for the SPDR S&P 500 ETF Trust
+ 0.12%

and the Invesco QQQ Trust
+ 0.24%

(which follows the Nasdaq-100):


The forward P / E ratings of the two ETFs are much lower than Amazon's, although they have risen sharply from two years ago.

At any time since the e-commerce company's IPO in 1997, you could have been warned to avoid Amazon's stock. That would have been a mistake as the stock market rewards rapid revenue growth with high P / E ratings.

As with Amazon, a company's earnings can be misleading when conducting valuation research. Earnings can vary widely, especially if a company emphasizes reinvestment in the business rather than showing profit. Amazon's annual sales increased at a compound annual growth rate of 29% from 2015 to 2020. The company posted annual profits during those periods, but in 2014 it reported a net loss of $ 241 million on net sales of $ 89 billion.

An investment screen of high P / E stocks

The Nasdaq-100 is made up of the 100 largest companies in the Nasdaq Composite Index by market capitalization, excluding financial companies. That means it is weighed heavily on technology companies and other fast growers.

The following screen is based on consensus expectations among analysts surveyed by FactSet through calendar 2023, but does not include 11 for which estimates for 2023 are not available. The screen also excludes any companies that are expected to show a decline in annual sales or net losses in 2021, 2022 or 2023.

That brings the original list to 77 companies. These are the 25 that are expected to achieve the highest compound annual sales growth rates in the next three calendar years, with their current forward P / E ratios and ratios of current prices through 2023 and 2023 earnings per-share estimates:


If you continue the Amazon discussion, you can see that the analysts expect the company's revenue growth to slow to an annual rate of 19% over the next three years, but that's still a very impressive growth rate if it stays that way. And the ratio of the company's current stock price to its estimated earnings per share for 2023 is 34.8, which isn't outrageously high for a rapid grower.

To take the list from above, for MercadoLibre Inc.

and Peloton Interactive Inc.

you can see that based on current prices, the future P / E & # 39; s still look very high in two years time, just like the ones for Zoom Video Communications Inc

and Tesla Inc.

Potential bargains for patient long-term investors include Advanced Micro Devices Inc.
+ 0.93%

Facebook Inc.
+ 2.23%

and even Netflix Inc.
+ 0.45%

which is eternally expensive.

But that's when you need to do your own research.

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