Daily Insight: Different Perspectives
It’s been a bruising few months for growth stocks. While the S&P 500 gained close to 27% across 2021, many of us stock pickers are feeling disheartened by the constant wash of red in our portfolios.
Earlier today, our chief investor Emmet shared this tweet from Charlie Bilello with the rest of the MyWallSt investing team, which seems to sum up the sentiment of the current market nicely:
Listed there are some of the biggest growth stocks of the past couple of years, including Zoom, Lemonade, StoneCo, Peloton, and Teladoc. All of these have seen their share prices crater in the past few months and, in turn, their P/S ratios drop.
Here’s a quick refresher — price-to-sales ratio (P/S ratio) is a method used by investors to measure a company’s share price relative to its sales. It’s calculated by dividing market cap by its total sales/revenue over the last 12 months.
Market Cap/Sales = P/S ratio
So if Acme Bricks had a market cap of $5 billion and made $500 million in revenue over the past year, it would have a P/S ratio of 10.
Generally speaking, the lower the P/S ratio, the more attractive the investment is, because this implies that the valuation the market has placed on a company’s shares is more aligned with its ability to actually earn money.
But back to the tweet.
Like most things in life, investing is a matter of perspective. On one hand, you can look at the drop in P/S ratios above as further indication of how much the market has turned against growth stocks over the past 12 months. Again, if you happen to be an investor in any of these companies, you’re probably already painfully aware of that.
Another perspective you could take is amazement at how overheated the market got in the midst of a crippling global pandemic. Zoom commanding a P/S ratio of 124 means that, theoretically, investors were paying $124 for every single dollar that Zoom was generating at the time. We all know that investing is a forward-thinking game, but that level of expectation is mindblowing.
There is one final perspective to take though.
It might be hard to believe, but twelve months ago, stock pickers weren’t totally happy with heights the market was hitting. Sure, our investments were up and our portfolios looked healthy, but we also knew that things were overheated and, suddenly, it became extremely hard to invest your money because everything was commanding crazy valuations. Some days, you were almost hoping for a drop in share price so that you could invest in companies at more reasonable prices.
Well, now’s your chance.
If you still believe that any of those companies above will continue to grow over the next 10, 20, or 50 years, you might never get a chance to buy them at a price as low as this again. To echo the words of Warren Buffett, be “fearful when others are greedy, and greedy when others are fearful.”