We never know when a stock is too expensive. For instance, the guys at Sequoia sold their Idexx laboratories (IDXX) shares because they thought the stock was too expensive. To their surprise, the PE multiple of the stock only went higher and higher. So, that expensive stock got even more expensive. Currently, it's selling for 45 times next year's earnings. And the analysts expect a growth of about 18% annually for the next 5 years.
That's a real nice growth rate. But 45 times next year's earnings is a very expensive price to pay. Actually, it's about twice a price that I would consider expensive. So, 45 times next year's earnings would be what some people call "priced for perfection" and, while I don't really like that expression, it seems appropriate to use it for Idexx.
Another stock which I know better and I've owned for some time now is Five Below (FIVE). I really like that stock, it has everything I'm looking for. But it's expensive. And it's been expensive for a long time. Actually, it's currently more expensive than it's been for a while (about 42 times next year's earnings). OK, the estimated growth for the next 5 years is amazing (29% annually), but we all remember what happened with Dollarama lately (same kind of company with a high valuation). When the expectations for a stock become that high, the drop can be brutal. And which company can keep a pace of 25-30% growth year after year, for a long time? Very, very, very few. So, while I respect a lot the managers at Five Below, I think that the odds are not on their side for the medium term.
That's why I've reduced substantially my position in Five Below. But I keep about 75% of my shares. Because it's an incredible company. And it's hard to find a great company. So I prefer to keep smaller positions of great companies than trying to find a substitute cheaper but weaker.
Another lesson of my great wisdom freely distributed to the masses.