P/E Ratio and Growth Rate
The growth stocks generally command a higher P/E ratio because their future earnings are expected to be greater. In Stocks for the Long Run, Jeremy Siegel examines the P/E ratios of growth and technology stocks. He examined Nifty Fifty stocks for the duration December 1972 to Nov 2001. He found that
| Portfolio | Annualized Returns | 1972 P/E | Warranted P/E | EPS Growth |
|---|---|---|---|---|
| Nifty Fifty average | 11.62% | 41.9 | 38.7 | 10.14% |
| S&P 500 | 12.14% | 18.9 | 18.9 | 6.98% |
This suggests that the significantly P/E ratio for the Nifty Fifty as a group in 1972 was actually justified by the returns during the next three decades. However, he found that some individual stocks within the Nifty Fifty were overvalued while others were undervalued.
Read more about this topic: Earnings Growth
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