In 2016, General Mills stock traded at a price of $72 per share despite earning only $2.92 per share in net profits. That was a P/E ratio of 24. That was well above the blended P/E ratio of 17.8 that had characterized the past three decades of General Mill’s valuation from 1985 through 2015. This elevated P/E ratio was especially ominous for a company that was only growing profits by 4-6%.
If you are going to ignore your better judgment concerning P/E ratios, you should run towards Amazon, Alphabet f/k/a Google, Visa, and Mastercard stock. At least with those companies, the double-digit growth has a fair chance of bailing you out because the subsequent decline in the P/E ratio can be offset a fair amount by the higher profit base.
It would not be particularly intelligent to pay an elevated valuation for a business that is just mozy-ing along. Over … Read the rest of this article!