Table of contents
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
KEYPOINTS
🔑 The PS ratio, a key valuation metric, can help identify overvalued stocks. During the dot-com bubble, many successful companies today traded at high PS ratios, leading to stagnant or declining stock prices for years.
🔑 While avoiding overvalued stocks is important, long-term investing is generally recommended over market timing. Dollar-cost averaging is a good strategy.
🔑 Consider waiting to invest in a company if its PS ratio is above 18X when its stock price reaches a new high, but focus on staying invested in the market overall.
Why is it useful to know the PS ratio of these companies during the peak?
As a long-term investor, we should avoid investing in stocks when they are overvalued.
At the peak of the Dot-com bubble, many stocks were trading in lofty valuations which resulted in a market correction period of up to 3 years.
For many of the stocks such as Microsoft, Taiwan Semiconductor, Adobe & Amazon, their stock prices were moving sideways for up to 17 years.
this means, capitals invested in those stocks at those entry points will take up to 2 decades for them to break-even,
factoring in inflation, that would result in a net loss for the investor.
Dot-com bubble
Top to bottom
Period:
24Mar2000 to 11Mar2003 (3 years)
S&P500 index down by:
49%
Top to Top
Period:
24 March 2000 to 10 Jul 2007 (7.3 years)
PS ratio of popular & successful companies during the peak.
(note): In this list I have only included companies who have survived the dot com bubble and still went on to become successful companies today.
companies which went bust (ie Pets.com, Boo.com, eToys) are excluded.
I have also included the S&P500 companies which are operating in the Information Technology sector which were already listed in year 2000.
Successful present-day companies such as Google, Facebook, Netflix, Tesla and Fortinet are not included because they were not yet publicly listed at 24 March 2000.
the companies are arranged in descending order based on the no. of years it took for their stock price to reach their All-time high level on 24March2000 (3rd column).
Stocks | PS ratio on 24 March 2000 | Years it took for price to surpass all-time high price on 24March2000 |
Juniper Networks | 248 | Yet to surpass as of Nov 2023 |
NetApp | 62 | Yet to surpass as of Nov 2023 |
Cisco | 35 | Yet to surpass as of Nov 2023 |
Intel | 16 | Yet to surpass as of Nov 2023 |
Corning Incorporated | 11 | Yet to surpass as of Nov 2023 |
Verisign | 226 | 22 |
Teradyne | 10 | 21 |
Qualcomm | 22 | 19 |
Microchip Technology | 11 | 18 |
Applied Materials | 14 | 18 |
PTC Inc | 7 | 18 |
Oracle | 27 | 17 |
Texas Instruments | 15 | 17 |
Analog Devices | 18 | 17 |
KLA Corp | 15 | 17 |
Microsoft | 26 | 16 |
Booking Holdings | 34 | 12 |
Taiwan Semiconductor | 21 | 12 |
ASML Holdings | 18 | 12 |
Adobe | 13 | 11 |
F5 Inc | 26 | 10 |
Amazon | 19 | 9 |
IBM | 3 | 7 |
Lam Research | 7 | 7 |
Nvidia | 7 | 6 |
Apple | 3 | 4 |
Walmart | 2 | 8 |
McDonalds | 4 | 6 |
Goldman Sachs | 4 | 5 |
eBay | 171 | 4 |
Amex | 4 | 4 |
Amphenol | 2 | 4 |
Trimble | 2 | 4 |
Autodesk | 4 | 4 |
Monster Beverage | 1 | 3 |
Cognizant | 14 | 2 |
Microchip | 11 | 2 |
Samsung Electronics | 2 | 2 |
Nike | 1 | 2 |
Starbucks | 4 | 1 |
Take-two | 1 | 1 |
Gen Digital | 6 | 1 |
Berkshire Hathaway | 4 | Almost immediately |
The median PS ratio of the companies from Juniper Networks to Apple in the list is 17X
The other companies in the list are excluded from the calculation of the median because:
they were either not really operating in the tech industry (ie Walmart, McDonalds, Goldman, Nike) and/ or
it did not take them very long to get back to their all-time high prices (during the peak) or (ie Berkshire Hathaway)
their PS ratio was at a ridiculously high level and they are not considered to be a fundamentally strong company in today's standards (ie Ebay).
however, if we were to exclude Nvidia & Apple (since they both recovered before S&P500 did- 6 & 4 years respectively, while S&P500 took 7 years),
the PS ratio median will be 18.4X instead.
Disclaimers:
i) 3 companies which are still listed in S&P500's IT sector have been excluded from the median calculation above because their PS ratio is quite low at 3X, hence including them in the calculation will skew the results, these 3 companies are:
Stocks | PS ratio on 24 March 2000 | Years it took for price to surpass all-time high price on 24March2000 |
Motorola Solutions | 3 | 21 |
Jabil | 3 | 21 |
AMD | 3 | 20 |
ii) The author utilizes this method selectively, acknowledging its limitations (ie only using limited sample size of 24 companies) and potential inaccuracies for others. This benchmarking method may be subject to future modifications at the author's discretion.
(Caveat): By no means this post is encouraging our readers to "Time the market".
On the contrary, its the opposite.
It is much better to perform dollar-cost averaging on a consistent basis and stay in the market over the long-run .
in oppose of trying to preserve cash to perform lump-sum investing.
However, it can be wise for investors to:
temporarily withhold from adding more position to companies in their portfolio or to
start a new position in a company
when their PS ratio (when the stock price goes back to all-time high) has exceeded 18X.
For more about Valuations & Price-to-Sale ratio
Read:
To know how much did the companies' stock prices fall during the dotcom burst:
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