Until July of this year, the most expensive stocks were among the priciest in history. That's because U.S. stocks were the most expensive they'd been since World War II, as measured by their price/earnings (P/E) ratio.
How to Calculate the Most Expensive Stocks (or the Cheapest)
The price/earnings ratio - also known as a price multiple - is a handy gauge of whether a stock you are interested in is "expensive" or "cheap."
It shows how much investors are willing to pay per dollar of earnings. In other words, a P/E ratio of 10 suggests investors are willing to pay $10 for every $1 of earnings the company generates.
A P/E ratio is derived by dividing a company's share price by its earnings per share. However, most major stock tracking sites provide it for you offhand.
A company with a higher P/E than the market or industry average indicates accelerated growth. But it also means the company will eventually have to live up to its high rating by increasing earnings - or the stock price must drop.
But August came and went, and with it, "Black Monday" and the correction that ensued. Now, on average, stocks are 9% off from their mid-year highs. The market's valuation has also dipped below average.
Still, there are high-flying stocks investors seem more than willing to snap up, despite marked up price tags...
Ten stocks on the S&P 500 right now command triple-digit valuations. They are among the most expensive stocks on the U.S. markets today. For instance, Netflix Inc. (Nasdaq: NFLX) is even more expensive now than it was a year ago. Shares in the video streaming service dipped 20% from their 52-week high in January. But NFLX stock is up 121% year to date and still trades for 229 times its adjusted earnings over the past 12 months. Valuation is up 61% compared to this time last year.
Remember that high P/E ratios aren't categorically bad - there are other layers for investors to consider when looking at the most expensive stocks.
When gauging how expensive a stock is, it's important to take the broader markets' average P/E ratio into account, as well as the average P/E across the industry in question.
"Consider Altria Group Inc. (NYSE: MO)," Money Morning Chief Investment Strategist Keith Fitz-Gerald told readers on March 2. "In Altria's case, I recommended it when it was trading at 12.56 times the prior four quarters' worth of earnings. That might seem steep, especially considering the fact it was near its 52-week high, but to me it signified future upside. The reason? The 12.56 P/E ratio actually represented a 35% discount from the S&P 500's average P/E at the time."
And in fact, many expensive stocks (in terms of P/E ratio) have performed well this year. Here are a couple of examples:
Here are the top 10 stocks with the highest P/E ratios on the Dow Jones and S&P 500 right now...
**Data from Oct. 7, 2015
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