Can a high P/E stock be cheap?

In the stock market, the price-to-earnings (P/E) ratio often takes centre stage. It's easy to see why: a lower P/E suggests value, while a higher P/E appears frothy. But this simplistic view often obscures more than it reveals. Consider a revealing exercise: what P/E should one have paid for a company in 2004 to earn an 11 per cent annualised return (similar to the Sensex's long-term average) over the next two decades? We performed this analysis on BSE 500 companies , and the results were striking. Unattractive P/E, Attractive returns! Company P/E in 2004 Required P/E for 11% annualised return 20Y return (% pa) Esab India 258 1,529 21 United Breweries 249 1,298 21 Ajanta Pharma 217 12,905 36 TTK Prestige 197 7,113 33 Vinati Organics 113 9,564 39 Ultratech Cement 95 452 20 Atul 78 1,123 27 Titan 66 3,203 35 Shree Cement 59 843 27 KEI Industries 54 1,847 32 BSE 500 companies excluding BFSI | Data as of December 16, 2024. P/E ratio more than 20 times and 20Y annualised return more than 20 per cent. When expensive was cheap As it turns out, some of the "cheap" stocks in 2004 were deeply overvalued, while the "expensive" ones were astonishingly cheap. Take Esab India , which traded at a seemingly high P/E of 258 times back then. Retrospective analysis reveals that an investor could have paid up to 1,500 times earnings - nearly six times its actual valuation - and still enjoyed substantial returns! Conversely, consider Tata Steel , which appeared a bargain at a P/E of 6 times but would later struggle to generate meaningful investor returns. The lesson? A company's true growth potential often lies hidden beyond the surface of its valuation metrics. Attractive P/E, Unattractive returns!