Facebook Inc (FB), Tesla Motors Inc (TSLA), Yelp Inc (YELP): All In Bubble Territory
Billionaires Portfolio: There is a serious bubble in internet stocks again, just like 1999. We all know how that ended — internet stocks dropped 70% to 80% in less than 2 years.
I’ve done studies on the last 2 bubbles — The Internet Bubble 1998-2000 and The Great Recession 2007-2009. The one valuation measure that I found to have the most predictive ability is price-to-sales.
Price-to-Sales is the cleanest measure of company’s performance. It can not be manipulated through creative accounting like earnings or cash flow. It’s not a lagging measure like Price-to-Book (which carries assets at historical prices). In fact, I’ve found, in looking over 50 years of data (not just in bubble times), P/S to be the most reliable indicator of whether a stock is overvalued or undervalued.
Stocks with P/S over 10 has historically been the level where even the hottest growth stocks and bubble stocks have reached their peak and eventually crashed.
There has never been a stock that has had a P/S over 10, coupled with a multi-billion dollar market cap, that has produced a positive return over a 3-year period.
The average P/S of stocks in the S&P 500 (NYSEARCA:SPY) is 1.46. The average P/S of stocks in the DJIA is 1.33.
Now, take a look at the 5 stocks with the highest market caps with price to sales over 10.
1) Facebook Inc (NASDAQ:FB) has a market cap of $92 Billion and a Price to Sales of 14.76
2) Linkedin Corp (NYSE:LNKD) has a market cap of $26 Billion and a Price to Sales of 20.5