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Daily Stock Brief by Briefing.com
Updated: 16-Dec-99
What's Doubling?
[BRIEFING.COM - Robert V. Green] In yesterday's Brief, we examined how the overall market indices returns do not reflect what is really happening in the market; very strong returns are concentrated in just a few stocks. If you didn't own those stocks, it will be extremely hard to beat the market returns this year. So what types of stocks got doubles this year?
More Than Doubling
There were 1,272 stocks which doubled on a 52 week basis. (Data as of the close on December 13, 1999; dividend reinvestment not included.)
Of these, about half (628) had returns between 100 and 200 percent, or between doubling or tripling. Another 231 had returns between 200 and 300 percent, and 124 percent between 300 and 400 percent. After that, it trails off.
But a full 80 stocks had returns greater than 1,000% in the past year.
Returns By Exchange
These stocks were concentrated on the Nasdaq exchange, but all of the exchanges are represented.
Exchange Number of Stocks with Returns >100% Percent of Total Stocks on Exchange
NYSE 132 5.6%
Nasdaq 854 18.2%
AMEX 60 9.1%
OTC 226 13.8%
The Highly Weighted Effect
This well distributed mix of stocks that doubled had a definite impact on the overall market returns.
The entire market capitalization of all of the 9,346 stocks in our database universe is $21.9 trillion.
The 1,272 stocks with returns greater than 100% for the past 52 weeks now have a total market capitalization of 4.7 trillion.
This means stocks with more than 100% returns account for one-fifth of the total market capitalization currently.
Returns By Market Cap
It wasn't just small cap stocks that had terrific returns this year, either. There were plenty of large capitalization stocks.
Market Capitalization Number of Stocks with Returns >100% Percent of 1,272 Stocks
0 - 50 MM 345 27.1%
50 - 100 MM 146 11.5%
100 - 200 MM 144 11.3%
200 - 500 MM 197 15.5%
500 - 1,000 MM 121 9.5%
1,000 - 2,000 MM 105 8.2%
2,000 - 5,000 MM 83 6.5%
5,000 + MM 131 10.3%
Most interesting to us, however, is the 131 stocks in the $5 billion and up category. It is not easy to double shareholder value in a year when a company is worth that much.
The total market capitalization of the 131 companies over $5 billion in market capitalization is $4.2 trillion.
Since the entire market capitalization of these 131 stocks accounts for nearly all of the $4.7 trillion in the "two-bagger or more club," they bear a little closer examination.
The 131 Stocks
This group of stocks, the 131 stocks with greater than $5 billion in market capitalization, and greater than 100% returns is a stellar group of companies. Here is the "top ten" list of the biggest companies in this elite group.
Stock Company Market Capitalization (Billions) Return Sales Growth Rate
CSCO Cisco 333.7 151.8 46.7%
NTT Nippon Telephone 267.3 125.5 NA
AOL America Online 210.0 321.0 47%
NOK Nokia 191.8 213.4 52.3%
SUNW Sun Microsystems 125.7 322.0 21.3%
NT Nortel 121.1 299.1 26.3%
ORCL Oracle 113.6 222.5 20.5%
ERICY Ericsson 107.6 169.7 NA
EMC EMC Corp. 98.7 148.7 35.2%
YHOO Yahoo! 92.4 267.1 160.1%
Aside from the observation that half of these are NYSE stocks, and half Nasdaq, the global representation is impressive. Four of these companies are foreign companies.
It is, of course, no surprise that they are all technology stocks. Of the 131 stocks in this category, only 19 are non-technology stocks (assuming you count eBay, Amazon.com, and Doubleclick as technology stocks).
But all of these extremely large companies saw their market price increase at rates 4 to 10 times their sales increase. Is it really fair to expect these companies to grow at a higher rate into the future, than they were growing at this time last year? That's what the much higher Price/Sales ratios imply.
Did They Grow?
So is this new market value justified? How did these companies actually perform over the past 52 weeks?
Of the 131 large cap stocks with price increases greater than 100%, only 23 actually had sales increases greater than 100%.
In fact, only 4 stocks, in this group of 131, had Sales percentage increases greater than their share price increases. This four were Amazon.com (AMZN), eBay (EBAY), Inktomi (INKT), and Qwest Communications (QWST). This means, that on a Price/Sales basis, these stocks actually got cheaper this year.
But the other stocks have gotten more expensive, on a Price/Sales basis.
For all of the 1,272 stocks that doubled this year, only 51 had sales that more than doubled.
In fact, there are stocks that have negative revenue growth curves, but still doubled. Of the 1,272 stocks with returns greater than 100%, there are 348 of them with negative revenue growth (TTM versus PTM).
The Return Is In Valuation
So how much more expensive have the high-flyers become?
Using Price/Sales as the measurement, the 1,272 stocks that doubled had a market-cap weighted average Price/Sales ratio of 15 at this time last year. Today, they have a Price/Sales ratio of 34.
For the 131 large cap high flyers, the gap has gotten even greater. A year ago, these stocks had a market cap weighted average Price/Sales ratio of 12.8. Today, the same average is 27.9.
In other words, the highest flyers were expensive last year, but they are even more expensive now.
But it also means that the reason the stocks doubled isn't due to the fact that the companies grew. The higher stock price is due almost entirely to investor willingness to pay a higher price for growth.
Analysis
When a stock price doubles because a company's revenues have doubled, the valuation of the company hasn't changed.
That's not what happened this year. While many of the high flyer's grew, the revenue growth does not correlate to the stock price growth. Most of the high flyers got bigger, but primarily their valuations increased.
Normally, as a company grows in revenues, the Price/Sales ratio starts to go down. The reason is that strong growth gets harder as you get bigger. It is much easier for a company with $10 million in sales to double, than it is for a company with $1 billion in sales to double.
But the trend is clearly in the other direction. Even companies which have already grown quite large are becoming more expensive. The higher Price/Sales ratio implies that the growth curve will actually accelerate over time.
Do investors actually think that America Online will grow at a faster rate of growth into the future than it has in the past? That's what the higher valuations imply.
Or is it that there is simply more demand for America Online stock this year than there was last year?
These are thoughts you should ponder before putting new long term money into any of 1999's highest performing stocks.
Comments can be emailed to the author, Robert V. Green, at rvgreen@briefing.com.
*Source for data: Market Guide, Inc. Data for stock returns as of close on Monday, December 13, 1999. Dividend reinvestment not included in return calculations. Market Guide and Briefing.com have a business relationship.
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