Do High P/Es Indicate Future Outperformance Or Underperformance?

by: Rupert Hargreaves

I am not a fan of buying high P/E stocks. In my opinion these stocks are overvalued and too risky for me.

However, I have never really investigated this concept in any depth apart from some examples that have been based on stocks that were caught up in the Internet bubble.

I recently stumbled across this article and as a result I have decided to take a closer, more up-to-date look at the stocks covered and some extra ones, to establish how these high P/E stocks have performed over a longer time period.

Hess Corp. (HES)



Share Price (split adjusted)






9-yr Performance 232%
9-yr S&P 500 Performance 40%

Conclusion - Outperformer

The first company I am looking at is Hess, featured in the original article the stock has not done very well since. From 2004 to 2009 the stock gained 202% but the share price has hardly moved over recent years. The P/E ratio is now at a more sustainable level.

The stock is an outperformer over the past nine years, but only just.

Hologic (HOLX)



Share Price (split adjusted)






9-yr Performance 440%
9-yr S&P 500 Performance 40%

Conclusion - Outperformer

Up over 150% from 2004 to 2009, Hologic has continued to go from strength to strength and since 2009 has gained a further 290%, significantly outperforming the wider market. The stock is still trading on a high P/E though in my opinion .

Hologic is another outperformer because its P/E ratio is still high.

Gold Corp. (GG)



Share Price (split adjusted)






13-yr Performance 1,705%
13-yr S&P 500 Performance 40%

Conclusion - Outperformer

Goldcorp's data goes back much further - to 2000. As the original article says, the stock did outperform the wider market over a five year stretch from 2000 - 2005 (Gold Corp was up 700% compared to the markets fall of 12%). However, the stock has just kept going, after a 2-for-1 split in 2000 the stock continued to climb and grow. Now the stock is trading on a lower P/E of 16.

It should be noted that over a five year period the stock is actually down more than 20%

Anyway, the stock is still a significant outperformer over the past 13 years.

Apple Inc. (AAPL)



Share Price (split adjusted)






11-yr Performance 12,185%
11-yr S&P 500 Performance 78%

Conclusion - Outperformer

Apple's story is well documented. The stock has had a meteoric rise to $700 but in 2002 it was only trading at a lowly $3.5. Apple was not featured in the original article for some reason but here it provides the most publicized example of a stock on a high P/E multiple that went on to great things.

Of course Apple is an outperformer, the stock has had one of the best runs in the whole market ever.

Sun Microsystems



Market Cap

$54 billion

$10 billion




11-yr Performance -81%
11-yr S&P 500 Performance -17%

Conclusion - Underperformer

Sun did not feature in the original article but I got this data from my "Intelligent Investor" bible. Sun was part of the Internet bubble in 1999/2000 and had the same high P/E seen across the rest of the tech sector, despite only producing revenues of around $1 billion and EPS of $0.36 in 1990.

Although my data starts in 1999 it stops in 2010 as Sun was acquired by Oracle (NASDAQ:ORCL) for $10 billion. I do not have a share price for Sun but I am able to use its market cap, which shows a performance of -81% since 1999, significantly underperforming a falling market.

Home Depot (HD)



Share Price (split adjusted)






14-yr Performance 15%
14-yr S&P 500 Performance 1%

Conclusion - Outperformer

Lastly on the list is Home Depot, not featured in the original article but featured in "Intelligent Investor" as an example of what not to invest in.

Relative to the rest of the group, Home Depot does not trade on a P/E that is expensive. However, the company did trade on a P/E of 47 in 1999, which is high enough to imply Home Depot was a growth stock.

Home Depot was never a growth stock. Indeed, over the period of 1997-1999 EPS only grew 10% a year, which show Home Depot never justified its high P/E multiple.

The stock is still an Outperformer up only 11% over 14 years, compared to the S&P 500, which is up only 1% -- in 14 years!!


So how does it all add up? Surprisingly, stocks with higher P/E ratios have outperformed the market over a longer time period.





Interestingly, the original article also features several other companies and just to prove I haven't cherry picked the best performers, these are some other results.

Company P/E Share performance
Harman International Industries (HAR) 124 (2000) 67% (2000 - 2013)
Calgon Carbon (CCC) 101 (2004) 130% (2004 - 2013)
Ceradyne 101 (2000) 400% (2000-2013) Takeover

These companies once again all outperformed the market.

The data says it all, high P/E ratios do not necessarily signal poor future investment performance. Indeed, from this selection of data it appears that a high P/E is in-fact an indicator that the stock will, in future outperform the wider market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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