Invest at Peak Levels: How Valuation Influences Your Acquisitions [Podcast]

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Is it considered overpaying if you are purchasing a top-tier company with its stock at an all-time peak and a P/E ratio exceeding 30, or is this a wise investment in quality?

Mike and Vero delve into the price-to-earnings (P/E) ratio without requiring predictive insights. Learn why evaluating a stock’s own 5- to 10-year averages carries more significance than comparing across industries, how to identify “priced-for-perfection” scenarios, and the reasons low P/E ratios can be misleading value traps.

Case studies feature Visa (V), Costco (COST), Canadian Natural Resources (CNQ), and National Bank (NA.TO), along with strategies to implement when prices surge, factors to consider regarding all-time highs, and modifications for those approaching or in retirement.

Secure your place (or replay) for our forthcoming webinar: thedividendguyblog.com/webinar

What You’ll Discover

P/E that supports, rather than hinders, your choices

• P/E = price divided by earnings per share; it represents a multiple of current profits.

• Utilize current and forward P/Es to differentiate momentum driven by anticipated earnings growth. Forward P/E relies on guidance/analyst forecasts and should be interpreted as a scenario, not a certainty.

• Most crucially, relate a stock’s P/E to its own 5–10-year average and trajectory, instead of contrasting it with a different industry that has distinct economic factors.

P/E expansion: when price dictates the narrative

• If the price escalates quicker than EPS, the multiple “expands.” This may be justified by (new opportunities, strong competitive edge, improved unit economics)… or it could be simply hype.

• Multiples cannot expand endlessly. If growth does not meet expectations, stocks frequently “re-rate” back to historical averages—rapidly.

Case study: Visa (V) – premium regarded as ‘standard’

• ~34x current P/E; ~30x forward; ~36x 5-year average.

• Interpretation: not inexpensive, yet not overpriced relative to its historical data. A stable, capital-efficient network with enduring growth can validate a persistent premium—if revenue/EPS continue to rise.

• Key focus areas: international volumes, new transaction types (B2B, instant payments), and regulatory influences on fees.

Case study: Costco (COST) – valued for perfect scenarios

• ~53x current P/E; ~52x forward; ~44x 5-year average –> roughly an 18% premium to its typical valuation.

• Drivers for elevated price: recurring income from subscriptions, advantages due to scale, consistent customer growth, and international expansion possibilities.

• Threat: even a solid quarter may not meet expectations if they are overly ambitious; a simple re-rating to the 5-year average indicates a potential ~15–20% drop without any downturn in business.

Low P/E isn’t always a bargain: two cases

• CNQ (~11x P/E; recent bracket ~12–15x): appears “cheap” compared to Visa/Costco, yet energy markets are volatile. Compare within its own bracket and to peers, taking into account oil price exposure, capital expenditure management, and free cash flow usage.

• National Bank (NA.TO) (~14x; long-term banking standard: ~10–11x): a lower absolute multiple than tech, but a premium within its category. Not necessarily a clear bargain unless growth/returns justify the valuation.