No. of Recommendations: 22
Remember Cisco in 2000? At its peak it traded at PS multiple of 30. (YES that's PS not PE).
I always loved the quote from Scott McNeely, one time CEO of Sun Microsystems, commenting on the bubble in his firms' stock price.
I think it's probably the most Buffett-like paragraph ever penned by a big tech company boss:
"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight
years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods
sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with
39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on
your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain
the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you
realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any
footnotes. What were you thinking?"
To me, the moral is clear.
When estimating if something is a good investment, always do that specific back of the envelope exercise.
If your own business projections for that firm don't allow a positive ten year return without assuming an implausibly optimistic valuation multiple at the end, don't buy it.
Rather remarkably, on average over time there are around 48 stocks in the main Value Line database that are trading at over 10 times trailing sales, about 3.25% of stocks with the right data.
At the moment it's 86 or 6.0% of the stocks with the appropriate data.
Jim
