High Flier

What Is a High Flier?

The term “high flier” refers to a company that has seen its valuation rise substantially relative to its peers. It is usually used in relation to companies that have risen rapidly, showing a corresponding rise in valuation metrics such as its price to earnings (PE) ratio.

At times, the term can have a negative or skeptical connotation, raising doubt as to whether the recent rise will prove sustainable in the long run.

How High Fliers Work

It has always been the case that some stocks perform far better than others. In the late 1990s, for instance, companies whose business were related to the then-nascent technology of the Internet saw meteoric rises in their valuations as compared to companies in more traditional “Old Economy” industries. In other cases, some individual companies—such as Warren Buffett’s Berkshire Hathaway (BRK)—show dramatic and steady growth over the years, eclipsing that of the overall market.

Depending on the context, the term “high fliers” may carry the implication that the success of the company in question is due to unsustainable factors such as a market bubble. This proved to be true in relation to most of the high fliers during the dotcom bubble, although some of the companies lauded in that period did prove to be successful in the long run. Investors who use the term in this manner may wish to express skepticism about the high prices being paid by investors relative to fundamental metrics such as the company’s earnings per share (EPS) or book value.

Investors wishing to judge for themselves whether the success of a high flier is sustainable have many analytical tools at their disposal. In addition to using financial ratios such as PE, price to book value (P/BV), and price to free cash flow (P/FCF), methods such as discounted cash-flow analysis (DCF) or reproduction value analysis can also prove helpful. 

Real World Example of a High Flier

At the end of 2020, technology companies are once more at the apex of the stock market in terms of valuations, with the five of the top six largest companies all hailing from that sector. Specifically, these are: Microsoft (MSFT), with a market capitalization of ~$1.36 trillion; Apple (AAPL), at ~$1.29 trillion; Amazon (AMZN), at ~$1.23 trillion; Alphabet (GOOG), at $919 billion; and Meta (META), formerly Facebook, at ~$584 billion.

Yet although these companies are notable for their size, they are not especially notable from a valuation perspective. Together, their average PE ratio is roughly 41 when calculated based on their trailing twelve months’ (TTM) earnings. By contrast, the Cyclically Adjusted PE Ratio for the S&P 500 was just over 30 as of January 30th, 2020.

If we limit our use of the term “high flier” to refer only to companies that are richly valued from a PE perspective, and if we include only companies with a market capitalization of $50 billion or greater, then we are left with a very different list of high fliers. This includes Advanced Micro Devices (AMD), with a PE of roughly 120; Zoom Video (ZM), with a PE of 269; and Netflix (NFLX), with a PE of just over 80; among others.