Originally Posted by
born2invest
I remember reading "Paths to Wealth Through Common Stocks" by Phil Fisher.
He mentioned that as soon as a stock gets big enough in market cap to have institutional investors, the P/E generally jumps up quite dramatically.
If you look at any stock where the market cap grows from say 100 million to 1 billion in market cap. You will notice not much institutional shareholders until it gets to around the 300 million market cap. Once it gets to 300 million, the institutional buyers are allowed to buy according to their fund “rules and regulations” so the P/E of the stock goes from around 10-12 and jumps up quite a bit to around the 17-22 P/E mark.
Therefore the trick is to find a good stock before the institutional buyers are permitted to buy it. If you buy a stock growing at 10% earnings each year combined with the P/E almost doubling, it is a recipe for outstanding returns. Hence why I focus most of my time on companies around 50-400 million market cap.