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TABLE OF CONTENTS
How to Find Overvalued Stocks Using Discounted P/E Screener
Learn to spot overvalued stocks with Investorean’s Discounted P/E screener by comparing current and forward P/E to historical averages and peers.
Most investors use P/E ratios to hunt for cheap stocks. Fewer use them correctly to spot overvalued stocks - companies priced far above their historical or forward earnings norms. The Investorean Discounted P/E Ratio Screener gives you exactly the fields needed to do this fast and systematically, if you flip the logic.
Here’s a practical, no-nonsense guide to using it to surface potential overvaluation.
What the Discounted P/E Screener Actually Shows
The screener provides side-by-side valuation context, not just raw multiples. Key fields:
- P/E ratio - current trailing P/E
- Avg. P/E - company’s historical average P/E
- Fwd. P/E - forward P/E based on earnings estimates
- Avg. Fwd. P/E - historical average forward P/E
- P/E to Avg. - relative comparison vs historical norm
- Fwd. P/E to Avg. - forward multiple vs its norm
Most users set these to “below average” to find bargains. To find overvalued stocks, you do the opposite.
Core Principle: Overvaluation = Multiple Expansion Beyond Norm
A stock is potentially overvalued when:
- Current P/E is well above its historical average
- Forward P/E is well above its historical forward average
- Price rose faster than earnings expectations
- Multiple expansion, not fundamentals, drives returns
You’re looking for valuation stretch, not just high P/E.
A P/E of 40 is not automatically overvalued if the long-term average is 38.
A P/E of 25 can be overvalued if the average is 14.
Context beats absolute numbers.
Step-by-Step: Configure the Screener for Overvalued Stocks
Step 1: Flip the Relative Filters
In the screener fields:
- Set P/E to Avg. → Above
- Set Fwd. P/E to Avg. → Above
This immediately filters for companies trading richer than their normal valuation range.
This is the most important move. It turns a value screener into a stretch screener.
Step 2: Add Absolute Valuation Guards
Now tighten with hard limits:
- Set P/E ratio → Greater than a threshold (example: > 30)
- Set Fwd. P/E → Greater than a threshold (example: > 28)
This removes cases where a stock is only slightly above its average but still cheap in absolute terms.
You want:
- High vs history
- High vs market norms
Not just one of them.
Step 3: Narrow by Sector (Critical)
High multiples are normal in some sectors and dangerous in others.
Use the Sector filter:
- Tech / AI / Software — naturally higher ranges
- Utilities / Energy / Financials — lower normal ranges
Overvaluation signals are stronger when a typically low-multiple sector screens expensive.
Example logic:
- Utility at 28 P/E → red flag
- AI software at 28 P/E → maybe normal
Sector context prevents false positives.
Step 4: Check Forward vs Trailing Gap
Now look at the relationship between:
- P/E ratio
- Fwd. P/E
If forward P/E is not meaningfully lower than trailing P/E, the market is not expecting strong earnings acceleration.
That means:
- Price is high
- Growth expectations are not compensating
- Multiple compression risk increases
That’s a classic overvaluation setup.
Step 5: Use Market Cap as a Risk Lens
Add Market Cap awareness:
- Mega caps with stretched multiples → repricing risk hits portfolios broadly
- Small caps with stretched multiples → repricing risk hits violently
Same overvaluation signal — different risk profile.
Patterns That Often Signal Overvaluation in the Screener
When scanning results, watch for:
- P/E far above Avg. P/E
- Forward P/E also above Avg. Forward P/E
- No major forward multiple compression
- Sector normally trades cheaper
- Recent strong price run (check chart after shortlist)
That cluster is more reliable than any single metric.
What This Screener Cannot Tell You
Be precise about limits:
- It does not prove a stock will fall
- It does not measure competitive advantage
- It does not judge earnings quality
- It does not price in new product cycles
It flags valuation stretch, not business weakness.
Some stocks stay overvalued for years. This is a risk filter, not a timing tool.
Best Practice Workflow
Use the screener like this:
- Filter for P/E to Avg. = Above
- Filter for Fwd. P/E to Avg. = Above
- Add absolute P/E floors
- Narrow by sector
- Export results (CSV button)
- Review charts + earnings trend
- Check growth vs multiple expansion
Fast. Repeatable. No guesswork.
Bottom Line
Most investors misuse P/E tools to chase “cheap.” The smarter use is spotting multiple inflation vs historical norms.
The Investorean Discounted P/E Ratio Screener already gives you the comparison columns, you just need to reverse the default value-hunting logic.
Overvaluation is rarely hidden. It’s usually visible, if you measure against the right baseline.
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