Tuesday, May 11, 2021

U.S. stock rally pushes ‘ridiculous index’ to dotcom era highs

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This article is part of the FT’s Runaway Markets series.

Soaring stock prices have inflated a measure of Wall Street’s exuberance to levels seen just before the dot-com bubble burst over two decades ago.

The shares of 79 companies listed on the US stock exchanges have more than doubled in the past three months. These companies, with a total value of over $ 500 million, trade at a price-to-sell ratio above 10, more than three times the ratio of the benchmark S&P 500.

Between 2011 and the start of the liquidation in March that preceded the market recovery, that number only reached 13. At the height of the dotcom mania in 2000, 120 companies shared similar characteristics, according to Bespoke Investment Group.

The rise in Bespoke’s “ridiculous index” coincides with growing concern among some investors over what they see as foamy conditions in the world’s largest equity market. The S&P 500 climbed 75% from its March low even as the country battles successive coronavirus outbreaks and a patchy economic recovery.

Well-known investors, including Jeremy Grantham, have warned that a bubble is brewing in U.S. markets, as stocks soar higher and blank check, or Spac, company listings exploded.

David Kostin, chief US equities strategist at Goldman Sachs, said on Friday that one of the most frequently asked questions by Wall Street bank clients is whether US stocks are trading in “bubble” territory .

He said that while the market as a whole appears to be valued “reasonably”, “pockets of the market have recently shown consistent investor behavior with bubble sentiment.”

The list of highly regarded companies that have climbed Bespoke’s ridiculous index includes Farfetch, the $ 21 billion online luxury goods retailer, and Nio, the $ 97 billion Chinese electric vehicle maker which is expected to report a loss of $ 769 million this year on $ 2.5 billion in revenue. Tesla, who has rallied 99% in the past three months, is not making the cut.

Fugitive markets

In a series of articles, the FT examines the exuberant start of 2021 in global financial markets

Investors have justified the evaluations on many fast growing companies on very low interest rates, including negative real returns in much of the developed world. These negative returns made the prospect of distant profits more attractive than it would be if interest rates were higher than they are today.

Howard Marks, the top-tier troubled debt investor, recently told clients that the equations often used to value companies “ weren’t designed to handle double-digit growth as far as the eye can see, so complicates the assessment of fast growing companies. matter. ”

Alex Ely, Macquarie Investment Management’s chief investment officer for US growth stocks, added that selling price metrics have been the way to value faster growing companies for years.

“If you use the price / benefit ratio [ratios] as your only metric, you would never have owned Microsoft or Amazon in the past 30 years, ”he said. “P / E is a dated metric. This has happened in history before, in the 1940s and 1950s the book-to-bill was the only thing you used to value a business. . . then we switched to P / E in the 80s and 90s. “

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