Say a particular stock has a PE ratio of 30. Given that a standard valuation is closer to 10 or 15 times earnings, a PE ratio of 30 implies that investors foresee a lot of growth.

How can I understand this growth, specifically for a company that doesn't appear to have any kind of technology-spin. (The company I am looking at it is a consumer staples non-cyclical company.)

A good example might be Costco (NASDAQ:COST) which trades at 26.17x earnings.


Does the company see itself expanding into new product lines or new territories? What is the current predicted growth for the company's earnings for the next 5 years? These would generally be where I'd look for growth in companies.

In the case of Costco, there may be a perception of the company as being a "safe" company as the market capitalization for the stock is over $50 billion which is rather large. Thus, there is something to be said for Costco providing a dividend and may well weather the current market for an idea compared to holding funds in money markets that are paying nothing in some cases. There is also something to be said for looking at the industry and sector values that Costco is in where on Yahoo! Finance, I find the P/E for the industry and sector to be 35.05 and 28.47, respectively. Thus, Costco isn't as inflated as the other stocks in the same ballpark for another idea here.

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