<<<I hope other people on this thread are learning something too>>>
You bet! That's what this thread is all about, and why I've come to love it so. Bookmarked stockwerld.com Thank you Julie.
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P/S Ratios and the 24 Riskiest Stocks [BRIEFING.COM - Robert V. Green] In yesterday's Stock Brief, we discussed how the price/sales ratio has become an important indicator in today's marketplace. It is best viewed as a measure of the latent risk in your stock. Every investor should know the price/sales ratio of their stocks, particularly those holding the 24 riskiest stocks in the market, as defined by their Price/Sales ratios.
Price/Sales Defined
The price/sales ratio is:
Market Capitalization / Trailing Twelve Month Sales
The ratio can also be viewed as stock price divided by the sales/share, but sales/share is not a reported figure. It is clearer to view the ratio as total market cap divided by the trailing revenues.
Yesterday's Misunderstanding
Yesterday's Stock Brief repeatedly stated that a high price/sales ratio implied a high expectation of revenue growth.
Apparently, some readers inferred from that statement that the message was "the higher the Price/Sales ratio, the
better," since high revenue growth is a good thing.
Nothing could be further from the truth.
In fact, because a high price/sales ratio implies a high revenue growth curve, any failure to live up to that
expectation is severely punished by a drop in valuation.
Anyone investing in a stock with a high price/sales ratio needs to understand that the rate of revenue growth is more
important than revenue growth. An unexpected slowdown in the rate of growth will cause a sharp drop in the stock, even if the actual growth is positive.
The 24 Most Risky Stocks In The Market
The higher the price/sales ratio, the higher the implied rate of growth.
The following 24 companies have the highest price/sales ratio in the market, for stocks with higher than $35 million
in revenue. (There are many stocks with high price/sales ratios with very little sales; they are in a different category of speculative stocks.)
Any of these companies which fall short of their current or expected rate of revenue growth, risk a sharp mark down in the price/sales ratios, which would result in a sharp drop in the price of the stock, even if the absolute revenue growth is positive.
Stocks with an NA in the 3 year revenue growth column are even riskier, because their revenue history has less data points, meaning greater uncertainty in the projected revenue curve.
Company Symbol Price/Sales TTM Revenue (MM) Market Cap (MM) 1 Year Rev. Growth Rate % 3 Year Revenue Growth Rate %
Infospace INSP 435 36.5 16,067 286 NA
Juniper Networks JNPR 290 102.6 47,695 2,595 NA
Ariba ARBA 270 62.0 24,244 321 NA
Metromedia Fiber Network MFNX 268 75.3 27,309 106 583
Verisign VRSN 235 84.8 19,456 118 297
Inktomi INKT 218 96.6 22,287 234 412
Rambus RMBS 181 44.8 7,666 14.6 56
Next Level Comm. NXTV 179 57.6 11,279 31 NA
Yahoo! YHOO 175 588.6 102,663 154 424
Redback Networks RBAK 159 64.3 12,780 598 NA
Brocade Comm BRCD 148 103.4 18,217 323 NA
Software.com SWCM 145 44.6 6,163 62 76
Tibco Software TIBX 143 120.3 20,445 105 47
BroadVision BVSN 140 115.5 15,118 126 355
eBay EBAY 132 224.7 28,947 200 NA
Digex DIGX 132 59.8 10,696 164 177
Foundry Networks FDRY 127 133.5 17,340 683 NA
PMC-Sierra PMCS 124 262.5 30,043 62 12
Applied MicroCircuits AMCC 120 144.9 16,877 48 28
Vignette VIGN 113 89.2 12,843 450 NA
Exodus EXDS 112 241.6 27,655 358 234
Globespan GSPN 112 56.2 7,176 79 NA
Gemstar Intl. GMST 105 206.2 18,302 33 44
Research In Motion RIMM 105 77.7 8,128 104 NA
Source: Marketguide. Data as of close 3/28/00.
Sycamore Networks (SCMR) deserves an honorable mention, with an estimated price/sales ratio of around 350;
however, with only three quarters of reported revenue, a true comparable price/sales ratio cannot be made.
Earnings Reports
If you own any of these stocks, you should realize that the revenue numbers will be more important than actual
earnings numbers, when earnings season starts next month.
This becomes especially tricky, because while all of these companies have projected earnings numbers, projected
revenue numbers for Q1 from sell-side analysts are not widely publicized.
But revenue will be the first number that money managers look at when the reports come in April, with earnings and
margin trends next. A sharp increase in operating margins won't help these stocks if the revenue projections fall far
short of expectations.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com |
