Dividend Stocks for Passive Income: A Realistic Guide
Learn how dividend stocks for passive income really work, why dividends aren’t “free money,” and how to use Investorean’s Dividend Screeners to find best deals
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.
Related Posts
Value Stock Screener: How to Find Undervalued Stocks
Learn what a value stock screener is, how it works, and how to use Investorean Discounted P/E Ratio Screener to spot value opportunities with historical context
How the US‑Israel‑Iran war will impact the stock markets
Explore how a U.S.-Israel-Iran war could impact stock markets: oil supply risks, safe‑haven rallies, defense winners, tech losers and investor guidance