High P-E Ratio Sign of Growth, Not Warning.(THE IBD 100)(INSIDE THE IBD 100)

Byline: CRAIG SHAW

Don't let the search for "value" blind you to what's truly priceless: a stock that makes money.

Value investors shun stocks with high share prices relative to their profit level. The price-to-earnings, or P-E, ratio is the basic measure of this trait. It tells you how much you're paying for a stock.

The P-E ratio divides a stock's current share price by the firm's profits the past year. Say a stock sells for $30 a share. Its last four quarters of earnings add up to $1.50. Its P-E ratio is 30 divided by 1.5, or 20.

The problem is good stocks trade at a premium from the start. Growth stocks tend to sport higher P-Es than the rest of the market, even when their rallies begin. And a rising P-E simply means heavy demand for the stock is pushing its share price northward.

The 95 best small- and mid-cap stocks of 1996-97 boasted an average P-E of 39 at their pivot and 87 at their peak. The 25 best large caps of those years started with an average P-E of 20 ...