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Plenty Of Price, Not Much Sales

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  • With Brent crude oil attacking $65 and U.S. home prices up 10% over the last year, to name just two inflation indicators, it may be wise to recall that the 10-Year t-note touched 3.24% as recently as November 2018.
  • The Street expects the Federal Reserve (Fed) to hold off on rate hikes until the cows come home, yet the consensus also expects the labor market to be on fire, with just 4.6% unemployment in 2022.
  • Stocks that trade for 10, 20, 30 times sales, many based on hopes and dreams of robust profits in 2025 or 2030 or beyond, may look appealing to some investors when Treasury rates are 0% or 1%.

By Jeff Weniger

In part 1 of this two-part blog series, "The Bond Market's Sell-Off Is Taking Out the Stock Market's Leaders," I discussed the trouble currently confronting several mega-cap growth companies. Now let's look across the entire S&P 500.

Last year, I penned a piece called "The Ghost of Sun Microsystems," digging into the history of one of the tech bubble's most legendary computer company's stocks.

The post-dot-com-crash reflection of Sun Micro's CEO, Scott McNealy, is legendary:

Two years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?

I guess we could say that Sun Micro had plenty of price, but not much sales.

Today, there are 59 stocks in the S&P 500 that trade at 10 or more times revenue.

Figure 1: Members of the S&P 500 with Price/Sales Ratio > 10

Such valuations are likely a by-product of the "TINA" trade - own stocks because "There Is No Alternative" in a low-rate world. It worked famously when

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Comments (4)

Thanks for the article, pretty sobering as a lot of the supposedly "great" companies are on the list. But the trend is your friend until it ends, party like it's 1999.
@fujilomi And when the trend ends, rolls over and correlated selling begins, Cramer and the rest of us will have difficulty finding a "bull market somewhere".
It’s certainly happened before. Remember Yahoo, Corning Glassworks, Lucent Technologies, Cisco Systems, and even Intel.
TDune75 profile picture
20% of the S&P500 by market capitalization has Price to Sales ratios >10? If the table presented by the author doesn’t tell you we’re in an equity bubble, I don’t know what will.

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