How to Calculate the Most Expensive Stocks (or the Cheapest)
The price/earnings ratio – also known as a price multiple – is a handy gauge of whether a stock you are interested in is “expensive” or “cheap.”
It shows how much investors are willing to pay per dollar of earnings. In other words, a P/E ratio of 10 suggests investors are willing to pay $10 for every $1 of earnings the company generates.
A P/E ratio is derived by dividing a company’s share price by its earnings per share. However, most major stock tracking sites provide it for you offhand.
A company with a higher P/E than the market or industry average indicates accelerated growth. But it also means the company will eventually have to live up to its high rating by increasing earnings – or the stock price must drop.
But August came and went, and with it, “Black Monday” and the correction that ensued. Now, on average, stocks are 9% off from their mid-year highs. The market’s valuation has also dipped below average.
Still, there are high-flying stocks investors seem more than willing to snap up, despite marked up price tags…
Ten stocks on the S&P 500 right now command triple-digit valuations. They are among the most expensive stocks on the U.S. markets today. For instance, Netflix Inc.(Nasdaq: NFLX) is even more expensive now than it was a year ago. Shares in the video streaming service dipped 20% from their 52-week high in January.
But NFLX stock is up 121% year to date and still trades for 229 times its adjusted earnings over the past 12 months.
Valuation is up 61% compared to this time last year.
Remember that high P/E ratios aren’t categorically bad – there are other layers for investors to consider when looking at the most expensive stocks.
When gauging how expensive a stock is, it’s important to take the broader markets’ average P/E ratio into account, as well as the average P/E across the industry in question.
“Consider Altria Group Inc. (NYSE: MO),” Money Morning Chief Investment Strategist Keith Fitz-Gerald told readers on March 2. “In Altria’s case, I recommended it when it was trading at 12.56 times the prior four quarters’ worth of earnings. That might seem steep, especially considering the fact it was near its 52-week high, but to me it signified future upside. The reason? The 12.56 P/E ratio actually represented a 35% discount from the S&P 500’s average P/E at the time.”
And in fact, many expensive stocks (in terms of P/E ratio) have performed well this year. Here are a couple of examples:
- The Dow’s third-highest P/E belongs to Nike Inc. (NYSE: NIKE) at 31.11. Shares are up 26.99% year to date.
- The aforementioned NFLX stock has enjoyed a meteoric 121.52% rise this year. It’s got the third-highest P/E ratio on the S&P 500 at 246.20.
- The S&P’s ninth- and tenth-highest P/E ratios, Under Armour Inc. (NYSE: UA) and Vulcan Materials Co. (NYSE: VMC), have both gotten share price bumps of roughly 45% in 2015.
Here are the top 10 stocks with the highest P/E ratios on the Dow Jones Industrial Average (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX) right now…
10 Most Expensive Stocks on the Dow Jones (by P/E Ratio)
**Data from Oct. 7, 2015
|General Electric Co.||GE||Industrial Goods||73.76||$27.67|
|NIKE Inc.||NKE||Consumer Goods||31.11||$122.15|
|Procter & Gamble Co.||PG||Consumer Goods||24.14||$73.62|
|The Coca-Cola Co.||KO||Consumer Goods||23.95||$41.49|
|Home Depot Inc.||HD||Services||23.09||$119.34|
|Walt Disney Co.||DIS||Services||21.53||$103.46|
SEE THE NEXT PAGE FOR THE S&P 500
10 Most Expensive Stocks on the S&P 500 (by P/E Ratio)
**Data from Oct. 7, 2015
|Kraft Heinz Co.||KHC||Consumer Goods||483.13||$73.05|
|Computer Sciences Corp.||CSC||Technology||429.93||$63.62|
|Apartment Investment and Management Co.||AIV||Financial||211.56||$38.56|
|SL Green Realty Corp.||SLG||Financial||180.85||$113.63|
|Perrigo Company Plc.||PRGO||Healthcare||175.51||$156.24|
|Staples Inc.||SPLS||Consumer Goods||154.62||$12.63|
|Regeneron Pharmaceuticals Inc.||REGN||Healthcare||114.38||$484.38|
|Under Armour Inc.||UA||Consumer Goods||108.54||$98.86|
|Vulcan Materials Co.||VMC||Basic Materials||104.45||$94.12|
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