Bill that's good news on the earnings front for onis.
Bill something to really ponder here :
[BRIEFING.COM - Robert V. Green] As we head into the third week of earnings, it
is worth reflecting on valuation. There are still stocks with hefty valuations, that
now place them in the "red zone." Here are fifty.
Return to Traditional Valuations
One of the largest trends in the marketplace, which has been playing itself out
for more than 2 years now, is a return to traditional valuations for stocks.
While the media has focused on the collapse of the dot-coms and the slowdown
in tech, little attention has been placed on the larger trend, which will take
longer to reverse. After nearly five years of expanded market multiples, the next
five years are more likely to see downward pressure on multiples instead of
increased upward pressure. The memory of tremendous losses associated with
stocks that attained high valuation multiples will keep multiples from reaching
those levels again.
With that in mind, we set the following upper limits for the two principal valuation
metrics:
Price/Sales: 10
Price/Earnings: 40
Stocks with multiples in this area aren't necessarily overvalued. They are running
in the "red zone," the danger area where any erosion of belief in the growth or
profitability factors of the company will have harsh consequences in the stock
price.
Price/Sales Greater Than 10
The Price/Sales ratio is a measure of the company's worth, compared to the
revenue it produces:
Market Capitalization / Trailing Twelve Month Revenue
Any stock with a price/sales ratio greater than 10 is in the red zone.
A high price/sales ratio implies strong growth in revenues. In theory, you are
paying more than you really should now, for revenue, because the revenue
growth in the future will make up for the "overpayment" today. But the minute
the future revenue growth fails to materialize, the current price of the stock
drops, erasing the current "overpayment."
There are 101 stocks in the market today with price/sales ratios greater than 10,
with revenues exceeding $50 million. (Companies with revenues of less than $50
million should be judged by different standards, because strong growth is easier
when a company is small.)
Price/Earnings Greater Than 40
The Price/Earnings ratio is a measure of the company's worth, compared to the
earnings it produces. Extraordinary earnings items, either positive or negative,
should generally be excluded. The company's earnings "engine' is what is
important.
Market Capitalization / Trailing Twelve Month Earnings, Excluding
Extraordinary Items
Any stock with a price/earnings ratio greater than 40 is in the red zone, and
vulnerable to market multiple compression. High price/earnings ratios imply that
the earnings of the company will grow strongly. As with the price/sales, paying
$40 today for $1 of earnings is "overpayment," compared to what can be earned
with other stocks. The "overpayment" is justified, because in a short period of
time, in theory, the increased earnings of the company will make today's
overpayment seem reasonable.
Any
There are 494 stocks in the market today with price/earnings ratios higher than
40, with sales greater than $50 million.
Stocks With Both
There are 50 stocks with revenues greater than $50 million and both price/sales
ratio higher than 10 and price/earnings ratio higher than 40. These stocks are
deeply in the red zone of risk. Disappointment of any kind going forward may
cause these stocks to drop substantially. Even a hint of future difficulties going
forward will make it difficult for the stock price to climb. Microsoft, the top
company on this list, has already proven that with its warning about a slowdown
in upcoming quarters. |
