Investing in the right company is the key question driving most people culling the equities market. And what makes a business the “right company” is a decidedly tricky question. Value investors try to get the most of their investment dollar by seeking out “cheap” stocks that are trading for a lower price than their underlying assets would indicate is appropriate. Growth investors, however, are more concerned with the long-term prospects for a company, showing a willingness to pay a premium in the short term to get a company that will keep growing in the long term. Neither approach is right or wrong, and often time they’re more connected than anyone realizes, but they represent two different approaches to investing.
As such, the S&P 500 does have its fair share of stocks that are most definitely NOT attractively priced based on their earnings, near-term growth potential, and book value. In order to buy a piece of these companies, investors have to pay a serious premium. This isn’t to say that these stocks are or are not good buys based on their price. As any growth investor would tell you, there remain real reasons for buying up even the priciest stock. One of the companies on this list is a prime example. Amazon (AMZN) may cost a lot based on its earnings and book value, but it’s also seen as leading the trend towards online retail. As such, if Amazon’s the next generation’s Wal-Mart (WMT), it may still be worth paying extra now to get in relatively early. That being said, if Amazon doesn’t become the next Wal-Mart, there may be a whole slew of very disappointed investors who sank a lot of money into shares that most likely aren’t going to provide the returns initially imagined.
So, how does one define “expensive” in terms of stocks? For this screen, three measures will be used. The first is P/E ratio, or price to earnings ratio. This is a simple ratio of the cost of a stock divided by that companies earnings, giving a sense of how much one has to pay for every dollar of earnings. Each of these five companies has a P/E of over 70, meaning investors are paying at least $70 for every dollar of reported earnings. The second stat is PEG, which is a ratio of P/E to projected growth, giving a sense of who the earnings of a company look in relation to its expected growth. Each of these five companies has a PEG of over three. Finally, P/B ratio, or price to book value, has long been a favorite of value investors. It measure the price of a stock in relation to the book value, or total value of a company’s tangible assets after removing liabilities. Each of these companies costs at least $5 for every dollar of book value. So, without further ado…
El Paso Corporation (EP)
Market Cap: $23.00 billion P/E: 169.58 PEG: 8.27 P/B: 5.29
El Paso is an energy company operating primarily in the natural gas transmission, production, and exploration sectors.
Amazon (AMZN)
Market Cap: $85.54 billion P/E: 136.91 PEG: 4.87 P/B: 11.03
As mentioned above, the online retailer will need to continue growing at a rapid rate to warrant its current price. That being said, a lot of people seem confident it can do just that.
Crown Castle International (CCI)
Market Cap: $15.33 billion P/E: 103.80 PEG: 5.56 P/B: 5.70
Crown Castle is a company that owns, operates, and leases structures and other devices used in wireless infrastructure.
Red Hat (RHT)
Market Cap: $11.56 billion P/E: 79.66 PEG: 4.21 P/B: 8.27
Red Hat is a global software company that provides open source software solutions.
Sara Lee (SLE)
Market Cap: $12.55 billion P/E: 74.10 PEG: 7.23 P/B: 6.28
Beyond its namesake, Sara Lee’s brand portfolio includes Ball Park, Hillshire Farm, and Jimmy Dean.
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