To Our Business Partners

WHAT WERE YOU THINKING?! – PART 2

A topic we covered three years ago has again come to the forefront of market valuation, that of price to revenues.  Back in the year 2000, one of the most richly valued stocks was Sun Microsystems, trading at 10 times revenues.  In the subsequent bear market, the stock lost 98% of its value, and prompted Scott McNealy, the founder and CEO, to ask investors,” What were you thinking?”.  Paraphrasing McNealy, “at ten times revenues, to get a 10–year payback requires paying shareholders 100 percent of revenues, eliminating all expenses, including R&D, and paying no taxes on dividends”.  None of these are remotely possible.  The markets eventually came to realize this, and these stocks dropped significantly. 
 
In 2000 there were 29 stocks in the S&P 500 selling at over 10 times revenues, today there are 43, with another 31 selling at 8-9 times revenues.  Additionally, five stocks trade at over 20 times revenues. 
 
We have long talked about top-heavy markets, and we got an indication of the risks of such markets in 2022.  But that was short-lived, as new fiscal and monetary stimulus continued to propel markets.  In such an environment we remain cautious, committing capital only where our prospective returns are adequate.  While there are few attractive values today, the lack of broad participation does have a silver lining in that there are some stocks moving toward attractive while the indexes continue to be driven by a handful of stocks.  

PORTFOLIO VALUATION 

Stock prices are generally high and fully valued, while bargains are scarce.  The price-to-value ratio of our group* is historically high 96%.  It feels like one should be more “fearful.” 

RECENT RESULTS

Market indexes were again mixed in August, with the small indexes producing negative returns of around 1.5%, while the larger cap indexes produced positive returns of 2-3%.  Year to date, large cap indexes continue to lead, with the S&P 500 and the NASDAQ Composite up 13-16%, while the small/midcap indexes have gains of 10-12%.  Over the last twelve months, the large cap indexes continue to dominate, up 23-27%, while the smaller company indexes are up 17-18%.  Over the past year, the capitalization-weighted S&P leads the equal weighted index by over 8%.  The lack of broad participation by most stocks continues to be a concern.  Our group* of portfolio stocks compare favorably to most of the indexes over the periods discussed.

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.