Conor's avatar
$23.5m follower assets
High P/E Ratio Sign of a MOAT
When the market rewards a company with a high P/E ratio it can be a strong sign of a moat.

For example, $ZTS, $SHW, $CMG, and $LULU

P/E Ratios ranked from lowest to highest:

Sherwin-Williams 29

Zoetis 30

Lululemon 40

Chipotle 50

I would love to own each and every one of these companies but as you can see they are pricey. It's important to look for the reason why they are expensive instead of just flat-out rejecting them.

The reason is each one of these companies has a moat over their competition. Everyone says to let your winners run, but when you look at winning stocks they will have a high P/E ratio.

Next time instead of just writing off a company due to a high P/E ratio, try and understand the reasons why the P/E ratio is high and if it will remain so in the future.

I'm not advocating buying any of these companies at their current price, but I also wouldn't be surprised if they all beat the market in the next 10 years.
Christian's avatar
$LULU really still want to own. Exactly what I look for in my stocks. Strong moat over their competition reminds me of Starbucks, target and Ulta. I told you I’m long women lol and Lulu just adds directly into those names
Tom's avatar
100% agree - when I first began my value investing journey I would scoff at anything over 30x P/E. The more I read/follow markets the more I understand that those names are often priced that way for a reason! Cheap can sometimes mean over-earning, while expensive could be reflective of a moat.
Ben's avatar
At “Connorquality”
Conor's avatar
@rpinvestments that might have been a beter name!
Dave Ahern's avatar
Great post and intriguing idea. Didn't Charlie Munger once say we can buy a wonderful company at a fair price and over time if the returns on capital are great enough, we can do well over long periods? Goes to $V and $MA too.
Conor's avatar
@ifb_podcast thank you, Dave! $V P/E of 27.5 and $MA of 32.5 both over 20% lower than their 5-year averages!
Rihard Jarc's avatar
What is really $CMG's moat?
Conor's avatar
@rihardjarc fast high quality food