The history of companies with Nvidia-like valuations isn’t a good one
Critical information for the U.S. trading day
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There will be two major drivers of market sentiment this week — the gathering of Federal Reserve officials in Jackson Hole, Wyo., and Nvidia’s set of results — although there could be some fireworks from the Labor Department’s preliminary benchmark revision to the jobs data on Wednesday.
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Expectations for Nvidia’s earnings are massive. Will they even matter?
Jeremy Schwartz, global chief investment officer at WisdomTree, decided to take a look at Nvidia (NVDA), whose stock has rocketed 196% this year on demand for chips that can process artificial-intelligence-related requests. On a price-to-projected sales ratio, Nvidia stands at a lofty 25, and an even steeper 40 when looking at the trailing 12 months, he says.
Nvidia now holds the distinction of having the highest price-to-sales ratio in the S&P 500, a title 99 companies have had since the 1960s. Tech stocks perhaps not surprisingly represent 27% of that group.
Research conducted for ‘Stocks for the Long Run 6th Edition’, Jeremy Siegel with Jeremy Schwartz (2022).
Over the next year, the average price-to-sales champion has seen its stock rise 12% on average, outperforming the broader market’s 11% rise; but over the next three years, the average stock has dropped 4% annually, compared to the market’s 9% rise, and over the next five years, it has fallen 2%, versus the market’s 10% gain. Those figures are taken from a book written by famed investment author Jeremy Siegel with Schwartz’s help.
Research conducted for ‘Stocks for the Long Run 6th Edition’, Jeremy Siegel with Jeremy Schwartz (2022).
The underperformance is even starker for the tech companies that hold the biggest price-to-sales ratios. And the median performance for stocks at these price-to-sales ratios is even worse.
“Our analysis suggests that an overemphasis on high P/S stocks may falter in the long run, as it may prove difficult for these companies to sustain the rapid growth required to justify these valuations and continue their performance trajectory,” says Schwartz.
The markets
U.S. stock futures (ES00) (NQ00) were pointing higher after the S&P 500 SPX shed 2.1% last week. The yield on the 10-year Treasury BX:TMUBMUSD10Yrose 5 basis points to 4.30%.
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The buzz
China reduced its one-year loan prime rate by 10 basis points — less than the 15 basis point move expected in markets — and didn’t change its five-year rate at all. UBS separately joined the growing ranks of banks downgrading their assessment of China’s economy.
Zoom Video Communications (ZM) reports results after the closing bell. Palo Alto Networks (PANW) stock jumped on reporting better earnings and billings than analysts anticipated.
Meta Platforms (META) this week may launch a web version of its Threads app, the social-media network meant to compete with Elon Musk’s X, according to the Wall Street Journal.
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The chart
It’s been a dismal August for stocks, with a 5% slump for the S&P 500 after a 21% rise for the first seven months. But there is some good news. Big institutional investors still have allocations to stocks below historical averages. According to Goldman Sachs, the net leverage of hedge funds is below the average level of the last five years. Mutual funds meanwhile have cash allocations 50 basis points above their all-time low, of 1.5%, in Dec. 2021.
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