Peter Lynch - "One Up On Wall Street", P/E ratios, pg. 165-166
"If you remember nothing else about p/e ratios, remember to avoid stocks with excessively high ones. You'll save yourself a lot of grief and a lot of money if you do. With few exceptions, an extremely high p/e ratio is a handicap to a stock, in the same way that extra weight in the saddle is a handicap to a racehorse.
A company with a high p/e must have incredible earnings growth to justify the high price that's been put on the stock. In 1972, McDonald's was the same great company it had always been, but the stock was bid upto $75 a share, which gave it a p/e of 50. There was no way that McDonald's could live up to those expectations, and the stock price fell from $75 to $25, sending the p/e back to a more realistic 13. There wasn't anything wrong with McDonald's. It was simply overpriced at $75 in 1972.
An if McDonald's was overpriced, look at what happened to Ross Perot's company, Electronic Data Systems (EDS), a hot stock in the late 1960s. I couldn't believe it when I saw a brokerage report on the company. This company had a p/e of 500! It would take five centuries to make back your investment in EDS if the earnings stayed constant. Not only that, but the analyst who wrote the report was suggesting that the p/e was conservative, because EDS ought to have a p/e of 1,000.
If you had invested in a company with a p/e of 1,000 when King Aurthur roamed England, and the earnings stayed constant, you'd just be breaking even today."
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