Lately, the S&P 500 (SNPINDEX:GSPC) has been hitting record high after record high. That has a lot of people wondering whether we’re entering bubble territory. You should never try to time the market, but right now, it’s especially important to make sure the stocks you’re buying aren’t too expensive.
A great metric to help investors see whether a stock is expensive is its price-to-earnings ratio. This tells you how much a stock is worth, relative to how much money its company made over the past year. Right now, the average S&P stock trades for a P/E of 19.3.
For comparison’s sake, the S&P’s most expensive stocks — all listed below — have P/Es well above this average. But as you’ll see, that doesn’t necessarily mean they should all be avoided.
5. United States Steel Corporation (NYSE:X), P/E of 124
Shareholders of United States Steel Corporation (NYSE:X), one of America and Europe’s largest steel producers, have certainly seen better days. The stock has just 10% of the value it had back in 2008 — when the developing world hungered for steel.
So why is the stock considered expensive? It’s because the company’s earnings are so low — coming in at just $0.06 per share. But it’s important to remember that United States Steel Corporation (NYSE:X) operates in a highly cyclical industry, and analysts expect that the cycle has hit a bottom. In fact, they expect the company to grow earnings by 190% per year from now until 2016.
Of course, that’s certainly no guarantee. Demand from China, as well as other developing parts of the world, will have to pick up for this to pan out. But if you believe in the thesis analysts are putting out there, United States Steel Corporation (NYSE:X) shares aren’t nearly as expensive as they look right now.
4. Crown Castle International Corp. (NYSE:CCI), P/E of 140
Crown Castle International Corp. (NYSE:CCI) is one of the major players in the industry. By “tower industry,” I’m referring to the towers that now dot our landscape to help ensure wireless data can be transmitted with ease.
Building out the infrastructure necessary to be a major player is expensive, but once towers are in place, a company like Crown Castle International Corp. (NYSE:CCI) can benefit from relatively low costs and high revenues as it charges customers who have no other choice but to use the company’s towers.
Analysts expect earnings to grow 54% per year from 2013 to 2016 as a result. But when you consider that any consolidation within the telecom field could negatively affect revenue (it decreases the number of potential Crown Castle International Corp. (NYSE:CCI) customers), and the fact that the stock already has lofty expectations built in, you might be better off investing your money elsewhere.
3. Lam Research, P/E of 166
Lam’s core business is in making equipment that helps to manufacture computer chips. The company trades at a lofty 166 times earnings right now, but if Lam is able to meet analyst expectations for 2013, today’s price is just 12 times expected earnings.
