Are the Most Valued Companies in the World this Valuable?

  • In March, we published a chart showing the market capitalization of firms over 10x price to sales hit $10 trillion
  • The navy blue line updates that chart: today there are nearly $14 trillion worth of stocks valued over 10x sales, a number far exceeding the dot com bubble
  • The light blue line shows the total market cap of the 20% of firms in the cheapest quintile of price to sales sum to only $3.8 trillion in market cap

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Today, like the peak of the dotcom bubble, the market is so euphoric that stocks priced for the impossible (navy blue line) are now worth 3x more than the cheapest stocks in the market. KCR is incredibly grateful for how Scott McNealy converted Sun Microsystems historical stock price collapse into timeless and simple investment advice with one of the greatest quotes of all time.

Below we provide a simple and staccato burst showing how the market’s greed for speculative fast growing tech stocks is creating fantastic opportunities for long-term investors. We believe today is one of the most exciting times since before the bubble burst in tech companies on March 10 of 2000.

Stocks Priced for the Improbable Stocks greater than10 P to S vs The Cheapest Stocks in the Market

Click below to read why we think avoiding some of the largest companies and shopping among smaller, proven and profitable companies today feels a bit like “shooting fish in a barrel.” See our piece on GARP investing for what we believe are some of the market’s most mispriced growth stocks.

We published Scott McNealy’s quote in our original 10x P/S piece warning of the epic folly embedded in such a multiple. In that quote, McNealy absolutely SHELLS investors and analysts for the obvious error embedded in their avarice. Today we believe low-interest rates, aggressive venture capitalists and retail speculation have conspired to send tech companies (and clean tech shares) to untenable highs just as these same forces did 20 years ago.

We recently published a chart showing the market cap of stocks trading over 20x Price to Sales. We could have titled that “stocks trading at 2x the absurd, unlikely and impossible.” We update the chart below for those trading on a bear market. Like the 10x price to sales chart above, we have seen the market cap of stocks over 20x sales gap higher as well.

Let’s be blunt: history tells us that what you pay matters and a company with a market cap greater than 10x sales, much less 20x sales, well that is too much. You are likely to get shot to pieces in such investments over time.

In the speculative chart of our 20x P/S piece, we showed that investing $1 in companies at 20x sales over the last 30+ years left you with about $2 today vs over $30 in the broad index!

The fundamental table below shows the type of securities various types of investors own.

  • The first row, 20x sales, shows what investors who are speculating aggressively might own
  • The second row, 10x sales, shows what investors who are merely speculating might own
  • The third row, “Cheapest Quint,” shows what the much disdained and increasingly rare species of value investors might own

Look from left to right at the three groups.

The stocks at 20x and 10x sales (top two rows) look atrocious in our view. Here is what we see:

  • They generate virtually no profits.
  • Trade at outlandish multiples of sales and comically high to negative P/E ratios
  • Have negative margins
  • Have negative yields – you pay to own them because they need to issue equity to pay their bills
  • Their one redeeming feature is fast sales growth.

This market has ascribed massive valuations to stocks with fast top-line growth subsidized by munificent debt markets and complacent equity holders. We believe this ends badly. We encourage readers to consider the stocks that make up the third row (Cheapest Quint). It is here that valuable companies trading at reasonable valuations can be found, in our view.

Fundamentals of Firms with 20x P to S or Higher 10x P to S or Higher and Cheapest Quintile P to S

Look at that bottom row. Without doing any work, if you just bought the 20% of firms that are the cheapest in the universe, that’s what you would own. Cheap stocks that:

  • generate FREE CASH FLOW of 5%
  • trade at 1x sales and a P/E ratio of 22x
  • have nearly 10% operating margins
  • pay owners a yield of 3% – nearly 100% more than a 10 year Treasury Bond

Even more impressive in our mind – they have more sustainable business models, having grown revenues by 24% over the last three years. One could almost suggest the cheapest stocks in the market now offer….growth at a reasonable price and a way to slash equity duration risk.

20x P/S Firms are More Prevalent Today than in the Dot.Com Bubble

As noted above – we have reproduced the market cap of stocks over 20x price to sales. The market cap is now just shy of $5 trillion. Below this chart we have produced a list of the top-ranked Small & Mid Cap and Large Cap Companies in the cheapest decile of Price to Sales.

Market Cap of Firms at 20x Sales has Risen to Nearly 5 trillion

Post-publication we had a number of requests to scale the above charts by GDP. The charts below were added on September 13, 2021.

Stocks with P to Sales Greater Than 10x vs Cheapest Quintile of P to Sales as percent of Total GDP

Stocks with P to Sales Greater Than 20x vs Cheapest Quintile of P to Sales as percent of Total GDP

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

September 10, 2021 |

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