Here’s an interesting nugget from Goldman’s David Kostin, from his Weekly Kickstart note:
Conversations with clients this week revealed that many investors are also weighing mixed feelings about valuation and the potential for growth. In last week’s Kickstart we discussed the strong recent performance but poor historical returns of stoc ks with very high expected long-term earnings growth. This week we continue the conversation.
The recent rise in price and valuation of many growth stocks has led investors to ask: “When does the party end?” Growth companies such as Facebook, Yelp, and Alexion Pharmaceuticals have returned more than 30% YTD and trade at high valuations that imply market expectations for strong future growth. With the market at full valuation many investors wonder what amount of growth is necessary to sustain the lofty valuations and fulfil the expectations embedded in premium multiples. To answer the question we analysed the historical performance of stocks across the Russell 3000, examining EV/sales ratios in order to include smaller growth companies.
The note goes on to point out that companies with very high Enterprise Value/Sales ratios rarely rally for long unless revenue growth is truly exceptional.
Bigger picture, more and more people are starting to think the rally feels “late stage-y.” But then, people have been talking about the party being over from virtually day 1 of the bull market.