Investing in high PE stocks

The first criteria 95% investors look at is P/E of the stock. And higher the P/E is more expensive the stock is. So for most of the investors, a general thumb of the rule is P/E ratio for the company should not be, lets say, not more than 30. So, even if we have a great company, which has very good business, good ROE, ethical promoters, in short fulfills every other parameter you look in a company before you invest, you still won't invest in a company which has high P/E ratio.
                 Now, let me try and break this myth. Here's the calculation:

	Base Year EPS	Base Year PE		CMP
	28.25	51.5		1454.875
Default Growth Rate	30%
Year	EPS in nth year	PE in nth year	CMP in nth Year
1	36.7	50	1836
2	47.7	48	2292
3	62.1	46	2855
4	80.7	44	3550
5	104.9	42	4405
6	136.4	40	5454
7	177.3	38	6736
8	230.4	36	8296
9	299.6	34	10186
10	389.5	32	12462
11	506.3	30	15189
12	658.2	29	19087
13	855.6	28	23957
14	1112.3	27	30032
15	1446.0	26	37596
16	1879.8	25	46995
17	2443.7	24	58650
18	3176.9	23	73068
19	4129.9	22	90858
20	5368.9	21	112747
	CAGR returns	24.3%

As can be seen above in the base year, the P/E ratio of the company is 51, and we have assumed that the EPS will grow at 30%. so, even if the company goes through P/E de-rating and by the end of 20th year, the P/E ratio becomes 21, one would still get CAGR return of 24.3%.

That is effective to 77.5 times of increase in wealth i.e. if  one would invest Rs. 1 lac, in a stock which would show P/E de-rating and grow its earning at CAGR of 30%, this Rs. 1 lac will become a cool Rs. 77.5 lac. Well the initial base year figures are of Symphony Ltd.

So, hopefully one you will next see a stock, you would dig deeper in see its potential and won't discard it on the fact that it trades at high P/E ratio.