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Defying the Norms: 3 High P/E Stocks with Room to Maneuver

Defying the Norms: 3 High P/E Stocks with Room to Maneuver

One method for identifying stocks to buy is to find those whose price-to-earnings (P/E) ratio is lower than its industry peers or historical averages. A low P/E suggests that the stock has underlying value that is not fully reflected in its current price. The next logical step is to take the price towards the “high” at which the trader intends to sell.

As stock indexes quickly reach record highs, it is proving difficult to spot low P/E opportunities in today’s markets. Equally frustrating is that several sharply rising stocks, described as “high,” have continued to advance. Although buying stocks with high P/E ratios defies norms, identifying those with significant growth potential could be a good strategy in this context.

A recent example that receives endless coverage is Nvidia (NASDAQ:NVDA). It has maintained an upward trajectory to become the most valuable company in the world. The exclusive search for P/E bargains likely caused many traders to miss the profitable rally. However, finding high P/E stocks to buy is not an easy task.

The following three high P/E stocks have valuations that don’t necessarily preclude the prospect of further price appreciation.

Gilead Sciences (GILD)

A Gilead Sciences (GILD) sign at the company's headquarters in Silicon Valley, California.

Source: Various photographs / Shutterstock.com

Despite its norm-defying nature, Sciences of Gilead (NASDAQ:BROWN) may be one of the high P/E stocks to buy. Typically, companies achieve a high P/E ratio after their stock prices grow faster than earnings. However, Gilead has not performed like other high P/E stocks.

GILD stock is down 22% year-to-date (YTD), but it maintains a lofty P/E of 175x as investors react to lawsuits involving its top HIV drug profits. Litigation may make investors cautious, but settlements are close to being finalized, which could allow previous growth to resume.

One reason Gilead might surprise among high-P/E stocks is its recent progress in a weight-loss drug, a lucrative area for the pharmaceutical industry. According to Goldman Sachs, the weight-loss industry could reach $100 billion by the end of the decade, and Gilead may have just developed a rival diet pill, awaiting review later this month- this.

Analysts unanimously view the stock positively and expect upside from current levels. The average price target stands at $81.21 per share, an upside of nearly 30%. Gilead’s growth estimates for its quarter stand at 17.90%, more than double the S&P 500 8.30%.

Crowd strike (CRWD)

CrowdStrike sign and logo at Silicon Valley headquarters.  CRWD action.

Source: Michael Vi / Shutterstock

Crowd strike (NASDAQ:CRWD) is another pick in this list of high price-to-earnings stocks to buy due to its leadership in the growing cybersecurity sector. Like artificial intelligence (AI) capabilities are growing with technologies like ChatGPT, digital security concerns have increased. Crowdstrike’s leadership in cybersecurity appears poised to deliver continued growth for investors.

The company has benefited from the growing need to protect its assets, with security spending expected to increase by double digits over the years. Unsurprisingly, CRWD stock is up 266% over the past year. However, profits have not kept pace with this growth, even though revenues rose sharply to 33%. Nonetheless, the stock trades at a high P/E ratio of 708x.

Two factors could further support a rise in Crowdstrike’s share price. First, he will join the S&P500 next week, allowing new investors to buy the high P/E stock. Still, growth estimates for this year and next remain above 20%. Second, analysts remain generally positive, with 94% of them recommending a Buy and the rest suggesting a Hold.

DataDog (DDOG)

The Datadog (DDOG) logo displayed on a laptop screen.

Source: Karol Ciesluk / Shutterstock.com

Data Dog (NASDAQ:DDOG) is the final pick in this list of high P/E stocks to buy. The diversified software-as-a-service (SaaS) company allows users to monitor cloud infrastructure and system performance metrics. Since AI requires significant server capacity, which must be monitored, DataDog may have more space to operate.

The company has grown its revenue by approximately 50% annually over the past three years and expects continued growth. Notably, Datadog has a habit of consistently beating estimates. In recent quarters, it has surprised analysts with a rise of more than 25%. However, recent management changes have increased investor uncertainty, leading to underperformance and a high price-to-earnings ratio of 342x.

DataDog recently launched an enhanced product for customers. Although investors have been cautious, analysts remain positive about the company’s prospects, agreeing with management that sales should grow about 25% annually. Most analysts recommend buying DDOG stock, with an average price target representing a 25% upside to $145.93 per share.

As of the date of publication, Stavros Tousios did not hold (neither directly nor indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publishing Guidelines.

Stavros Tousios, MBA, is the founder and chief analyst of Markets Untold. With his expertise in foreign exchange, macros, stock analysis and investment consulting, Stavros provides investors with strategic advice and valuable insights.