One method of identifying which stocks to buy is to find those with price-to-earnings (P/E) ratios below their industry peers or historical averages. A low P/E suggests the stock possesses underlying worth that is not fully reflected in its current price. The logical next move is to take the price towards the “high” at which the trader intends to sell.
With stock indices reaching record highs in quick succession, locating low P/E opportunities has proven difficult in today’s markets. Equally frustrating is that several stocks rising substantially, defined as “high”, have continued ascending further. Although buying stocks with high P/E ratios defies the norms, identifying those with meaningful growth potential might be a good strategy in this context.
A recent example garnering endless coverage is Nvidia (NASDAQ:NVDA). It has maintained an upward trajectory to become the world’s most valuable company. Exclusively looking for low P/E bargains has probably caused many traders to miss out on the profitable rally. However, finding which high P/E stocks to buy is not an easy task.
The following three high P/E stocks have valuations that do not necessarily preclude the prospect of further price appreciation.
Gilead Sciences (GILD)
Despite its norm-defying nature, Gilead Sciences (NASDAQ:GILD) may be one of the high P/E stocks to buy. Typically, companies attain a high P/E ratio after their share price increases faster than earnings. However, Gilead has not performed like other high P/E ratio stocks.
GILD stock has fallen 22% year-to-date (YTD), yet it maintains a high P/E of 175x as investors react to lawsuits involving its key HIV drug profits. Litigation can make investors cautious, but settlements are nearing completion, potentially allowing prior growth to resume.
One reason Gilead may surprise among high P/E stocks is its recent progress on a weight-loss drug, a lucrative area for pharma. According to Goldman Sachs, the weight-loss industry could reach $100 billion by the end of the decade, and Gilead may have just developed a rival weight-loss pill pending review later this month.
Analysts unanimously view the stock positively and expect a rise from current levels. The average price target stands at $81.21 per share, representing nearly 30% upside. Growth estimates for Gilead for his quarter lie at 17.90%, which is over twice the S&P 500’s 8.30%.
Crowdstrike (CRWD)
Crowdstrike (NASDAQ:CRWD) is another choice in this list of high p/e stocks to buy due to its leadership in the growing cybersecurity industry. As artificial intelligence (AI) capabilities expand with technologies like ChatGPT, digital security concerns have increased. Crowdstrike’s leadership in cybersecurity appears poised to deliver continued growth for investors.
The company has benefited from the growing need to protect assets, with spending on security expected to rise double-digit for years. Unsurprisingly, the CRWD stock has increased 266% in the past year. However, earnings have not kept pace with this growth, though revenue rose solidly at 33%. Still, the stock trades at a high P/E ratio of 708x.
Two factors could further support an increase in Crowdstrike’s share price. First, it will join the S&P 500 index next week, allowing new investors to buy the high-p/e stock. Still, growth estimates for this and next year remain over 20%. Second, analysts remain broadly positive, with 94% recommending a buy and the remainder suggesting a hold.
DataDog (DDOG)
Datadog (NASDAQ:DDOG) is the final pick in this high P/E stocks to buy list. The diversified enterprise software-as-a-service (SaaS) company allows users to monitor cloud infrastructure and system performance metrics. With AI requiring significant server capacity, which must be monitored, DataDog may have more room to run.
The company has grown revenue by approximately 50% annually over the past three years and expects continued growth. Notably, Datadog has a history of exceeding estimates consistently. Over the last few quarters, it has surprised analysts with an over 25% beat. However, recent leadership changes have increased investor uncertainty, resulting in underperformance and a high P/E ratio of 342x.
DataDog recently launched an enhanced product for clients. While investors have been cautious, analysts remain positive on the outlook of the company, agreeing with management that sales should grow around 25% annually. Most analysts recommend buying DDOG stock, with an average price target representing a 25% upside to $145.93 per share.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
