Live Headline from Briefing.com
12-Feb-02
No Growth Stocks With Growth Stock Pricing [BRIEFING.COM - Robert V. Green] There are still companies around with high multiples that indicate the market expects high growth soon from the company. There are also companies with growth valuations that are not showing any signs of growth. This makes an investment in those companies speculative, despite the size of the company. Here's a list of the 42 top stocks in this category.
How Growth Stocks Are Valued
Growth stocks carry high market multiples because of expected high revenue and earnings growth. The high rate of growth justifies the multiple because the growth carries the company into a "normal" valuation relatively quickly.
The price/earnings ratio and price/sales ratio are the two principal multiples on which stocks are measured. Of these, a high price/sales ratio is the principal indicator that the market expects high growth. High price/sales ratios also can indicate an extremely high operating margin, where more earning dollars are earned for each revenue dollar. Microsoft's price/sales ratio, for example, reflects both expectations of growth, and their unusually high net profit ratio.
But, as a starting point, high price/sales ratios can be viewed as indications that the market expects high rates of earnings and revenue growth.
Growth Valuation - But No Growth
High growth expectations are risky.
The risk is that the growth does not materialize. When that happens, the valuation of the company is viewed as extreme, and the multiples on the stock fall closer to market multiples. If the revenue also falls during that time, the effect on the stock price can be devastating.
A collapse from a price/sales ratio of 20 to a price/sales ratio of 10, combined with a revenue drop of 25% causes a stock price drop of -63%. If the price/sales ratio drops to 5, the stock price drop is -92%. This combination of events is precisely what killed the technology sector in the 18 months of mid-2000 to the end of 2001.
The Risk
Therefore, any stock with high growth multiples which does not show growth eventually carries with it a lot of risk.
This risk is even higher if the stock does not show any evidence of high growth rates currently.
When a stock is actually showing revenue and earnings declines, any assumption that high growth is right around the corner, can only be viewed as speculative.
Are there stocks in this category? Yes, and some of them are well-known, widely held names.
The Stocks
To find stocks in this category: growth rate valuations, but without growth evidence, we ran a stock screen using the following characteristics:
Price/sales ratio greater than 6
Trailing twelve month revenue growth less than 0
Trailing twelve month earnings growth less than 0
This produced a list of 42 stocks, 28 of which have revenues over $50 million. Some are well known names, as shown below.
Stock Company Price/Sales Market Cap (MM) Recent Price
INTC Intel Corporation 8.43 $218,274 $32.52
ORCL Oracle Corporation 8.88 $88,944 $16.18
PIXR Pixar Animation Studios 23.08 $1,525 $31.35
BK Bank of New York 7.74 $27,816 $38.13
ADBE Adobe Systems, Inc. 7.25 $8,491 $35.80
ADI Analog Devices, Inc. 6.52 $14,165 $38.87
In all, there are 10 semiconductor companies, two software companies, 10 financial services companies, three biotech companies. A few closed-end mutual funds also showed up, which should probably be viewed in a different light, but are included in this list for completeness.
For a full view of the 42 stocks created by this stock screen, sorted by market capitalization, along with pertinent metrics such as P/E and P/S, click on these links:
briefing.com
For a spreadsheet version of this lists, which will allow you to sort and search the stocks yourself, send me an email, Robert V. Green, at rvgreen@briefing.com
Note: On some sites where Briefing.com is republished, these links may not be operational. For a free temporary account to access the archives on our subscription service, please send an email to me, Robert V. Green, at rvgreen@briefing.com
What To Do
What if your stock is on this list? The first thing you have to do is verify for yourself that the expected growth is coming. If you have any doubts about the ability of your company to grow into its current high valuation, you should consider the position very risky.
After all, you want your portfolio to grow!
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com |
