Stocks with high PE ratios – Can We Call This A Stock Market Bubble?

The greatest investors of all time, like Warren Buffett, a name we all recognize, have always advocated for value investing with long-term goals. But have you noticed what’s happening in the market lately? The trendiest equities are often the stocks with high PE ratios—not just 30% or 50%, but soaring to 300-400%. But are these extremely high P/E ratios justified, or are we headed for trouble?

If you are unfamiliar with value investing, it is based on buying fundamentally strong stocks at prices below their intrinsic value and holding them for the long term. Value investors focus on companies with solid balance sheets, strong earnings, and sustainable business models—usually trading at lower P/E (Price to Earnings) ratios. Their strategy is all about patience, waiting for their investments to grow and yield returns over time.

Explore the Fundamentally Strong Stocks – Seizing Opportunities Amid Market Corrections

Can We Call This A Stock Market Bubble?

In contrast to the principles of value investing, it is the stocks with high PE ratios which are trending in the market today. These stocks are often found in the technology sector or disruptive industries. This is where companies are driven by strong growth potential and future earnings expectations, creating immense investor enthusiasm. But are these sky-high valuations sustainable?

The risk is real, especially for companies with shaky fundamentals or heavy debt. Once the market corrects, much of the hype could disappear, leaving investors to bear significant losses.

With fundamentals sometimes ignored, could we be facing the next big stock market bubble?

Also read: 52-week low stocks: Opportunities for Smart Investors

the Stock Market Bubble- Stocks with high PE Ratios

What is the Stock Market Bubble? A stock market bubble happens when stock prices rise way above what they are actually worth. This usually happens because people get excited about certain stocks and buy them in large numbers, even if the companies aren’t doing that well financially.

Key Signs of a Stock Market Bubble:

–Overpriced Stocks: Stock prices become much higher than the company’s real value.
–Speculation: Investors buy stocks hoping prices will keep going up, not because the company is strong.
–FOMO (Fear of Missing Out): People invest because they don’t want to miss out on big gains, which drives prices even higher.
–Ignoring Risks: Investors often overlook warning signs and continue to push prices up.
–Burst: Eventually, when the prices can’t be justified anymore, the bubble bursts and stock prices fall sharply.

Example: Dot-Com Bubble (1995-2000): Investors rushed to buy internet-related stocks, expecting huge future profits. Many companies didn’t have strong earnings, and when the bubble burst, stock prices crashed, causing big losses.

In simple terms, a stock market bubble is when stocks become overhyped and overvalued, and when reality hits, the prices drop suddenly.

Stocks with high PE Ratios

Let’s take a look at a few companies leading this trend, despite the astronomical P/E ratios:

Gravita India Ltd, E2E Networks Ltd, Zen Technologies Ltd, Waaree Renewables Technologies Ltd, Zomato Ltd, Urja Global Ltd, Inox Wind Ltd, Vikas Lifecare Ltd, Servotech Power Systems Ltd, Info Edge (India) Ltd, NYKAA, Nureca Ltd

Out of these 12 stocks, only 4 surpass the industry benchmark Return on Equity (ROE) of 15-20%. This suggests that the high P/E ratios of these 4 stocks are justified, while the rest appear to be overhyped for various reasons. As a value investor, my strategy would be to wait and observe—especially if the stocks have strong fundamentals and belong to growth-oriented sectors. Another point worth noting is that many of these stocks are newly listed. Their share prices seem inflated largely due to media attention and social media hype.

Be a smart investor and focus on value investing!!

That’s all for today’s post. Hope you get some valuable insights from here.

Happy reading!

Disclaimer

The blog is meant for informational purposes and serves the general analysis of the stocks. The contents provided here are based on careful research and analysis utilizing the fundamental and technical indicators over a period of time. The post does not consist any direct recommendation about Investing or trading in the securities market. Thorough research and careful consideration are necessary for individuals to fulfil their responsibility in making financial decisions. Seeking professional advice before making any financial decisions is always advisable.