As prices increase, our thoughts shout, “That’s way too costly!” We then observe how these “expensive” stocks continue to rise, pondering whether to invest or pull back.
My viewpoint is clear: assessment without context is simply speculation. A high P/E doesn’t inherently indicate a bubble, nor does a low P/E automatically imply a bargain. The key element is whether the price is founded on fundamentals and sustainability—or just on hype and conjecture.
Here’s a concise guide on managing high-P/E stocks, accompanied by three cases from your selection—Waste Connections (WCN), Dollarama (DOL.TO), and Microsoft (MSFT)—along with their 5-year P/E charts.
How to assess a “high” P/E (My straightforward guidelines)
1) Is the P/E increasing more quickly than earnings?
This indicates P/E expansion. It’s fine if earnings are also growing quickly and predictably. It’s risky if only the multiple is rising.
2) Compare the current P/E to its own 5-year range/average.
High-quality firms trade at certain multiples. If a stock usually trades around 30–40× and is currently at 34× with an unchanged strong investment premise, it’s not “crazy”—it’s normal.
3) Apply the relevant perspective for the business model.
Capital-light compounders (software, networks, acquisitions) merit higher P/Es. Capital-intensive models often look more appealing with cash-flow or EV/EBITDA metrics. Don’t evaluate pipelines by EPS, don’t judge REITs by regular P/E.
4) Validate the Dividend Triangle.
If revenue, earnings, and dividends are all on the rise at the same time, it’s simpler to rationalize a premium. If any part is uncertain, that premium is at risk.
5) Differentiate between moat and momentum.
Recurring revenue, switching costs, network effects, and pricing power justify a higher multiple. Viral excitement does not.
6) Focus on your position size, not the headlines.
Even outstanding companies can be “priced for perfection.” Position limits, adjustments, and rebalancing protect against narrative fluctuations.
With these concepts in mind, let’s evaluate your three high-P/E selections.
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Case Study 1: Waste Connections (WCN / WCN.TO)
Insights from the 5-year P/E chart:
The line is considerably high (recent reading ~71×). You’ll notice abrupt changes and extended periods where the multiple remains elevated. This shows that the market consistently pays a premium for this company.
Business quality & expansion factors:
Waste management is a dependable and stable sector. Route density, local permits, and long-term contracts generate local monopolies. WCN integrates disciplined mergers and acquisitions, pricing above inflation, and stable free-cash-flow growth. This blend is perfectly aligned with a premium profile—enduring demand.