Stocks are hitting new 2-year highs both in the United States and in Europe. As the rally off the March 2009 lows pushes stocks to new levels, some investors are starting to ask: are stocks too expensive now?
Overall, the S&P 500 index doesn't look very expensive. It is trading at about 15x forward estimates. Historically, the index has averaged a trailing P/E of about 15 since 1920. It is, however, well off the low valuations of March 2009.
So, the current S&P 500 is not "cheap" and it's not "expensive." It is within the range of the average valuation for the index.
P/Es Over 50 Make a Comeback
Part of the fear about stocks now being too expensive comes from some prominent companies now trading well above the overall S&P 500 average. Lots of investors follow these companies.
Out of the S&P 500, 12% of companies are now trading at 25x forward estimates or higher. These stocks would be considered "expensive" by historical standards.
Out of the expensive stocks, 18 companies in the S&P 500 are trading with forward P/Es of 50 or higher. This list includes some investor favorites such as Amazon.com (AMZN) trading with a P/E of 67 and Wynn Resorts (WYNN) at 68 times forward estimates.
Looking outside of the S&P 500, you can find some other investor favorites also trading with nose-bleed forward P/Es such as Netflix (NFLX) at 61 and Baidu.com (BIDU), the Chinese Internet search engine, with the sky-high P/E ratio of 76.
Don't Ignore Valuations
There have always been some "expensive" stocks. But two years after the worldwide stock market crash, are nose-bleed level P/Es a sign of some irrational exuberance starting to percolate in equities or that healthy risk has returned?
As this rally picks up speed, investors should be watching P/E ratios for signs of overheating. While overall, stocks aren't expensive right now, the P/E ratio has only been moving one way the last several months: higher. And some individual stocks may simply be too hot to handle.
15 Stocks With Forward P/E Ratios Over 50
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.
updated Nov 04, 2010
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