I’ve talked a lot about how the current market environment has a lot of similarities to the Tech Bubble. I just wanted to share an interesting chart I found. September has been a pretty good month for value so far, as it has outperformed growth by over 5%. Obviously that isn’t a big deal given how this year has been thus far, but you can see that this type of disparity is fairly rare. They did occur frequently though when the Tech Bubble busted as you can see by the cluster for red lines in the chart.
It is shocking at how many stocks are trading at 10, 20, 30, and even 40 times sales. Remember, that isn’t earnings it is sales. It looks smart now because it has worked, but when that bubble bursts, the downside potential to these stocks is absolutely stunning. It reminds me of the quote by former CEO of Sun Microsystems Scott McNeely listed below, a few years after the peak of the Tech Bubble.
“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?”
Remember that investing is a multi-year endeavor. We always feel like current trends will last forever, but of course that isn’t the case and sentiment can change in an instant. As I’ve harped on, the valuations spread is even wider than during the Tech Bubble, which most people thought was impossible. This means that the potential mean reversion could be even more dramatic as well, which is just one reason I’m extremely optimistic on future returns.