PE ratio also known as Price to Earning ratio and the most popular ratio among the investors. They use this to identify undervalued or overvalued stocks.
we already covered what is PE ratio and how you can utilize this ratio, if you want to learn about this then simply click here.
The very basic logic behind PE is, If earnings low then PE high and If earning high then PE low. In general parlance if stocks PE high then it considered as overvalued and if stock comes with low PE then it considered as undervalued.
Generally people avoid investing in stocks with high PE but everything comes with exceptions.
Stocks with high PE means "people and investors are willing to pay high prices for low earning stocks". Why people or investor doing so ? there can be various reason behind this, after all its a stock market and everyone have their own perception. Reasons can vary person to person.
There can be various reason for paying high PE stocks and one reason can be, Investors are very optimistic about future of the company. They believe in company's growth. Although current earning is very low but investor think that with the growth of the company this earning increase and ultimately it reflect in its stock price.
Other reason can be, people want to secure their money in well established company. Generally you find stocks of well established blue chip companies which have proven themselves in the past and showing consistent earning trade at high PE. People like to buy these stocks because of capital concern. People trust on these companies and they are ready to buy its stocks at high PE.