*this article is published in caclubindia.

com under my profile (ACS Pankaj Khanna)

http:!!!.caclubindia.comarticlesdon"t"i#nore"stocks"!ith"hi#h"pe"$$%&'.asp
(i#h P) Stocks can be #ood buys.
As a matter of fact investors keep an eye on price-earnings ratio (PE) before buying stocks & its
the typical behavior of the investor to buy stocks with a low PE ratio in order to get superior
returns compared with the ones who buys high PE stocks !owever completely ignoring the high
PE segment may not be a lucid idea as investors could be forgoing a good investment
opportunity
"or instance# Educomp $olutions has generated an absolute % year return of &&'( despite trading
at a high PE of && in )arch *++, -ts possible that a stock can have a high PE and still be cheap
-ts due to .uality of management# good visibility of future and above all good corporate
governance !ere are four reasons under which a high PE stock would be a good investment is/
(i#h *ro!th )+pectations in ,uture
0eyond .uestion the current share price is based on the e1pected future earnings and investors
are willing to invest keeping in mind the future prospect of the company so a high PE in such a
case would be very beneficial A high PE stock may not be e1pensive relative to its growth
prospect on the contrary stocks which have low PE reflects poor growth which in turn can pe
predicted to have poor return
*ood - Stron# ,undamentals
$trong "undamentals will boost the company and will drive it to success in the long run 2he
factors include good management# strong brand e.uity# goo pricing power etc 2he idea which
crops up through this is that it is .uite profitable to invest in such a stock then to risk the money
where these factors are absent -nfosys# 2itan -ndustries & 2ata )otors are glaring e1amples
Chan#in# .ature of /ndustries
3hanges and fluctuations in the industrial cycles may cause a high PE 2herefore valuation and
assessing of companies which are changing in nature may not be truly reflected in their PEs
4hen there is a downturn the earnings are affected and PE appears high at the bottom but that
does not signify that the stock price is e1pensive and that it will fall -n this type of cases the PE
are artificial
0i# projects to be undertaken in future
!igh PE is generally a common trend in companies which have large pro5ects in the .ueue or are
planning huge e1penditure -nvestors believe that the price they pay for such companies is low
compared to the potential -f the company is unable to meet its obligations then the high PE may
turn out to be unwarranted and on the contrary the market price will come down
2herefore it can be concluded that taking any hasty decision 5ust by seeing high & low PE may
be a mistake A high PE does not always means that the company is overvalued# 5ust as low PE
does not mean it is undervalued