Lux Investing
You find extremely well managed commodity companies undergoing expansions in immediate future at sub 8 P/E mul
tiples while similar companies in capital goods space are commanding dizzy P/E multiples well above 38 or so. Which one you prefer to invest in and why? Are people taking too much of a risk by investing in exorbitant P/E companies?
Public Comments
- Well, first of all the P/E should never be judged in isolation, and one of the other prime factors you should consider is growth rate. It's unlikely you'll find many companies selling at 38 P/E unless their growth rate is above average (or possibly if there is a very short-duration hiccup in their earnings). But even given that, I am partly in sympathy with your attitude, since some investors often do overpay for growth that sometimes cannot be maintained, and underpay for solid slow-growth companies. If I was 95% confident that a growth rate of, say, 30% could be maintained over the long haul (5 years+) I would certainly consider paying a 30 P/E for it. But the P/E for cases like CRM or STAR is assuming a growth rate that I doubt too much to sink my money into them. This is all from a long-term perspective, of course. Day-traders have their own rules and thought processes that I don't quite follow.
- See industry PE before investing in High PE company. There are some sectors like Shipping, Banking which always maintain low PE
