Best Stocks Have Higher P-Es.(A)(INVESTOR'S CORNER)

Byline: CRAIG SHAW

You can't buy prime rib for the price of Salisbury steak. Well, stocks are no different.

Many investors avoid stocks that are "overvalued." One way to figure out a stock's value is the price-to-earnings, or P-E, ratio.

The P-E ratio measures a stock's current share price divided by earnings per share over the past four quarters. Say a stock sells for $30 a share. Its last four quarters of earnings total $2.00. Its P-E ratio is 30 divided by 2, or 15.

High-growth stocks have historically shown higher P-Es than the rest of the market before they made their huge price moves. They're expensive for a reason.

As William O'Neil wrote in the recently revised edition of "How to Make Money in Stocks," the average P-E ratio for the best performing issues from 1953 to 1985 at their early emerging stages was 20. From 1990 to 1995, the leaders' average P-E began at 36.

And that was only at the start of their runs. From pivot to peak, the 1953-85 winners' P-Es rose on average 125% to 45. The 1990-95 winners' P-Es climbed into the 80s. By comparison, the S&P 500's average P-E ratio for the past 25 years is 17.8.