The Rise of the Reckless – Market Cap of Dangerously Valued Firms

The Rise of the Reckless – Market Cap of Dangerously Valued Firms:

  • Market cap of firms trading > 10x price to sales is now +$10 trillion
  • Investors who paid 10x P/S to buy Sun Micro lost 95% of their money
  • Sun Micro’s CEO explained the foolishness of paying 10x P/S for stocks:

‘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

If you are interested in finding high quality Midcap firms that make money, pay dividends and are reasonably priced click here.

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