Still think cheap S&P 500 stocks are the best? Might be time to reconsider.
The 10 most "expensive" stocks coming into the year, including Palantir Technologies, Welltower and Axon Enterprise, gained an average of 59.3% this year, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSurge.
Their average return absolutely demolished the average 20.7% gain of the "cheapest" 10 S&P 500 stock and the 15.1% gain of the average S&P 500 stock in 2024. Stocks' trailing adjusted P-E ratios on Jan. 1 of the year were used to determine if they were "cheap" or "expensive."
"Surprise moves asset prices and the possibility of upside surprises to corporate fundamentals drives equity valuations. That's why U.S. stocks trade rich to other markets and tech has a higher P-E than energy," says Nicholas Colas of DataTrek Research.
Palantir Shows 'Expensive' Not So Bad
Defense and security stock Palantir may have looked dangerously expensive coming into the year. But it proved to be anything but.
The company sported a 249.7 P-E on Jan. 1. That made is the most "expensive" stock in the S&P 500 on that basis. It's P-E was many times higher than the average S&P 500's 31 P-E coming into the year. But buying this "pricey" stock paid off many times over. Palantir shares gained 376% in 2024, making them one of the top-performers in the S&P 500.
Palantir also sports a perfect 99 RS Rating. And it has profit growth to back it up. Analysts think the company's profit will rise 52% in 2024 and 21% in 2025.
Law enforcement supplier Axon Enterprise was another example of an "expensive" stock paying off big. The stock entered the year with a seemingly lofty P-E of 132. But despite that, the stock went on to gain 142% during the year. It carries a 97 RS Rating and analysts think profit will rise 22% in 2025 after gaining 24% in 2024.
And don't overlook health care real estate firm Welltower. It sported a 179 P-E which is sky-high, especially for a REIT. But it didn't matter. Strong demand for the company's services pushed the stock up 40% in 2024.
Not All Expensive Stocks Pay Off
Don't make the mistake, though, of thinking a stock will soar just because it has a high valuation.
Two of the 10 most expensive S&P 500 stocks, including American Tower and DexCom, saw their shares fall in 2024. An additional four of the most expensive stocks in the index lagged the S&P 500.
For instance, ride-sharing firm Uber Technologies saw shares inch up just 0.5% this year, despite its start-of-the-year valuation of 124. The stock lagged even though analysts think profit will surge 108% this year and 31% in 2025.
Similarly, some cheap S&P 500 stocks defied the odds and outperformed in 2024. United Airlines is the classic example. The airline's P-E coming into the year was just 4.8. But this cheap stock paid off, skyrocketing 144% in the year.
But overall, 2024 is another year of proof that cheaper isn't always better when it comes to investing.
'Most Expensive' S&P 500 Stocks Outperform As A Group
Highest trailing P-E ratios on Jan. 1, 2024
| Company | Ticker | YTD % ch. | P-E on 1/1/24 (trailing, adjusted) | Sector |
|---|---|---|---|---|
| Palantir Technologies | PLTR | 376.8% | 249.7 | Information Technology |
| Clorox | CLX | 14.8% | 206.3 | Consumer Staples |
| Welltower | WELL | 40.0% | 179.3 | Real Estate |
| Palo Alto Networks | PANW | 28.2% | 165.8 | Information Technology |
| Cardinal Health | CAH | 18.3% | 165.0 | Health Care |
| American Tower | AMT | -14.8% | 141.1 | Real Estate |
| DexCom | DXCM | -35.2% | 136.3 | Health Care |
| Axon Enterprise | AXON | 141.8% | 131.5 | Industrials |
| Insulet | PODD | 22.4% | 126.9 | Health Care |
| Uber Technologies | UBER | 0.5% | 124.1 | Industrials |
| Average | 59.3% |
