By John Del Vecchio and Brad Lamensdorf
The number of stocks in the S&P 500 trading over 10x sales has skyrocketed to 73. Meanwhile, the median price to sales ratio fro the index has hit a nosebleed 3.5x. When this bull market started in 2009, the ratio was less than one and you would have had to look hard for a stock trading above 10x sales.
Historically, price / sales has been a powerful valuation measure. Sales can be manipulated. John wrote an entire chapter in his book What’s Behind the Numbers? on a number of ways management teams can artificially boost the top-line.
However, the games played are more desperate at the top of the income statement. Meanwhile, between revenue and earnings there are many levers management can pull to generate earnings and “hit the number” to please investors. As a result, price to sales is often a preferable measure of valuation than earnings.
Ken Fisher introduced the measure in Super Stocks. Back in the 1980’s, it was crazy to see technology companies trading above 3x sales. We’ve come a long way! Fisher pointed out that when companies trade at those premium levels, all it takes is a glitch to send the stock plummeting.
It could be a revenue shortfall. Or increased competition. Possibly pricing pressure. It does not matter what. Expectations were so high that only perfect execution would do.
Now the entire index is trading over that level. 15% of the index is trading over 10X sales.
Should a glitch occur, and it could be anything, the downside is tremendous from here.
It’s likely to be epic.
To learn more about how these indicators can help manage risk in your portfolio, book a call with Brad.
DISCLOSURE: LAMENSDORF MARKET TIMING REPORT
Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.
This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s. Active Alts is affiliated with Lamensdorf Market Timing Report. While LMTR uses charts from SentimenTrader, they do not have a financial arrangement with SentimenTrader Past performance is not indicative of future results.