How to Price Companies With High P/E Ratios
In this edition of The Motley Fool's "Ask a Fool" series, Motley Fool analysts Jason Moser and Brendan Mathews take a question from a reader who writes:
How do you place a reasonable value on stocks like Starbucks, Amazon.com and others that trade at high P/E? How do you know when it's a good time to buy and or sell these types of companies? Is it more of the idea you're investing in vs the numbers?
Brendan points out that valuation models based on a single attribute, like the price-to-earnings ratio, aren't necessarily reliable, especially for higher-growth companies. He suggests taking a deeper look at the company -- including its business model, market, management, etc. Jason points out that many investors fall into a trap of looking only at the numbers. As Brendan says, it's important to combine both quantitative and qualitative analysis.
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