Every macro valuation metric available shows the same thing: markets are ludicrously expensive. Stocks are as expensive as they were during the internet bubble.
Every bull has their argument against each macro metric.
One of the better arguments against these metrics is that most of the index is composed of mega tech companies like Amazon, Google, Netflix, and Facebook.
The compounder investors tell us that these companies are growing rapidly and accumulating the market share of smaller companies. As a result, they can grow faster and earn high margins, which justifies higher valuations.
More rational investors agree these stocks are ludicrously valued and will eventually mean revert, but also point out that there are other securities which command more respectable valuations. FANG is not the entire stock market.
For this reason, I took a look at 17 non-tech businesses to get a snapshot at how they have been valued over the last twenty years.
All of these companies are dividend aristocrats. The key criteria for a “dividend aristocrat” is that the company has been around for at least 25 years and has consecutively increased their dividends for the last 25 years.
Naturally, this provides a population of non-tech, high quality companies.
The metric I decided to focus on was EV/Sales.
Here are the 17 companies I looked at and their EV/Sales multiple at different points in time:
Most of these companies are on the expensive end of their history. Even Exxon (during an era of negative oil prices!) is more expensive than it was in 2008 and around the valuation in 2005!
Let’s take a look at the median EV/Sales for this group of stocks:
The group is 16% more expensive than it was in 2000.
If you thought that 2000 was a bubble, then how is this not a bubble?
They’re 65% higher than they were in 2008, which was the last generational buying opportunity. Most are more expensive than they were in 2016, which wasn’t exactly a cheap market.
It’s also worth noting that the economic outlook was a lot better in 2000, 2005, and 2016 than it is today. Hell, by some metrics, the current outlook is even worse than 2008.
It seems absurd to me that anyone thinks there is “blood in the streets” or that this is the beginning of a wonderful bull market. Bull markets begin from cheap valuations. These are the valuations from which bull markets peak.
It seems equally absurd to me that stocks should be priced like this during a global pandemic when unemployment is near 20%, the highest levels we have seen since the Great Depression.
These companies are all going to be adversely affected by double digit unemployment rates and they’re currently more expensive than they were during some of the best economies of my lifetime.
It’s all completely absurd.
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