Buying stocks with high PE ratios has not been a good strategy

“Buying stocks with high PE ratios has not been a good strategy,” Barclays Jonathan Glionna observes. From his note to clients on Friday:

“We believe the stocks of companies with high expected revenue growth underperform over long periods because of two reasons. First, the expectations of high growth may not be met. Second, companies with high revenue growth often have high price-to-earnings ratios. When you invest in growth, you pay for it — often too much. Buying companies with high revenue growth creates exposure to companies with high price-to-earnings multiples and, historically, investing in companies with high PEs has led to poor results. Figure 14 shows the performance of a strategy that went long stocks with high PEs and short stocks with low PEs. Over the last 25 years, that strategy would have resulted in substantial losses. Overall, we believe high revenue growth strategies should be pursued with a cautious approach and not chased when the price is high — as it is now.”

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