The Lunacy of Chasing Stocks at 100 Times Sales
Posted: February 16, 2021
February 15, 2021 (Maple Hill Syndicate) –- Is any price too high to pay for a sizzling stock?
The denizens of Wall Street Bets (a hot-stock group on the Internet), might say no. They’re wrong. Price still matters, no matter how sexy a stock’s concept.
My favorite example of stock market lunacy is chasing stocks that sell for 100 times revenue. For 16 years (February 2000-2006 and 2011 to the present), I’ve put together a warning list of some stocks selling at that rarified height.
The average stock on my warning list has fallen almost 26% in 12 months. Meanwhile, the Standard & Poor’s 500 Index has averaged a 10% gain, including dividends.
In 16 columns on this subject, I’ve discussed 73 stocks. If you bought one of them, you had a 71% chance of losing money, and an 85% chance of doing worse than the S&P 500.
Bear in mind that my column recommendations are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future returns.
Here are some new warnings.
Would you pay $250,000 to become a passenger in outer space? Virgin Galactic Holdings Inc. (SPCE), founded by Sir Richard Branson, hopes you would. But if not, no worries: Justin Bieber, Leonardo DiCaprio and some 600 other people have already signed up.
The trouble is, everything is on the come. So far there have been only test flights. The stock fetches 4,600 times sales.
There’s a sizzle to this story, and Wall Street likes it. Nine analysts follow Virgin Galactic, and eight call it a “buy.” However, my research suggests that unanimous or near-unanimous buy ratings often precede disappointing performance.
Want a fleet of electric-powered trucks and a monitoring system to track them? Workhorse Group, based in Loveland, Ohio, would like to accommodate you. It is also working on electric-powered delivery drones.
Pretty cool stuff, you say? Investors agree, and the price/revenue ratio is 5,170.
Fans figure that Workhorse has a good shot at a contract to upgrade the U.S. Postal Service fleet of mail-delivery trucks. President Joe Biden has said he wants the Federal government to use American-made electric vehicles.
If I had to bet on who will win this contract, I’d put my money on the team of Oshkosh Corp. and Ford Motor Co. They haven’t done much with electric vehicles, but have expressed willingness to try.
Based in Las Vegas, Nevada, Marathon Patent Group mines digital assets, in other words, cryptocurrency. It has posted losses every year from 2012 to the present, but the losses have narrowed lately; the company is approaching breakeven.
Last month, Marathon Patent bought $150 million in bitcoin, making it a cryptocurrency owner as well as miner. CEO Merrick Okamoto said he wants his company to be a “pure-play bitcoin investment option.”
The stock goes for 260 times revenue.
From Miami Beach, Florida, comes Blink Charging Co. (BLNK), which owns and operates charging stations for electric vehicles. The company has posted losses each year since 2009, but the losses have narrowed recently.
Blink shares go for 321 times revenue. My main objection: I just don’t see the barriers to entry. I can well imagine the big oil companies adding electric-vehicle charging stations to their gas stations.
I’m grateful to Moderna Inc. (MRNA) for developing one of the two Covid-19 vaccines now in widespread use in the U.S. It’s a miracle that could save tens of thousands of lives.
But I wouldn’t buy the stock at 287 times revenue. If Moderna grows as analysts expect, the stock is reasonably priced. But whenever you pay high multiples for a stock, you are exposing yourself to what one-time Defense Secretary Donald Rumsfeld called the “unknown unknowns.”
Will a competing vaccine emerge that requires less refrigeration or fewer doses? Will variants of the virus defy the vaccine, sending scientists scurrying back to the drawing board? Those are some of the many questions.
My warning list from a year ago was one of my three flops (out of 16 tries). The stocks I panned rose almost 35%, beating the S&P 500 at about 19%.
I said to avoid Forty-Seven Inc. (FTSV), but that biotech stock rose 114% as it was acquired by Gilead Sciences Inc. (GILD). I was also skeptical of Adverum Biotechnologies Inc. (ADVM). It rose 14%,
My only successful warning was on Homology Medicines Inc. (FIXX), which fell 24%.
Disclosure: One or more of my clients owns shares of Oshkosh Corp. I have no personal positions, long or short, in the stocks discussed today.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.