The Cheap, Expensive and Unfortunate (Stocks

History rhymes. Doesn’t repeat. Valuation doesn’t matter until it is all that matters.

Stocks valued at 10x price to sales (P/S) are difficult to justify. The CEO of Sun Microsystems made the merciless math of 10x P/S easy to understand after the dot.com bubble imploded. We have reprinted his quote here again for the sake of convenience.

‘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?’ — Scott McNealy, Business Week, 2002

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Mr. McNealy’s quote makes it very clear that markets are inefficient, human beings prone to herding, and FOMO continues to drive a cavalcade of financial follies. The chart below shows what percent of the S&P 500’s market cap is valued over 10x price to sales. Despite the fastest rate hikes in history, the AI hype cycle has made the countertrend rally in glamour stocks far more violent than any seen as the dot.com bubble collapsed.

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