VALUE: After Hours (S08 E13): The Most Overvalued Stocks Since the Dot-Com Bubble? A Data-Driven Warning

During their recent episode, Taylor, Carlisle, and Mark Cooper discussed The Most Overvalued Stocks Since the Dot-Com Bubble? A Data-Driven Warning. Here’s an excerpt from the episode:

[Jake] Mark, does that end up being a lot of science fair projects and stuff that are in the Russell 2000 today?

[Mark] Some of that stuff, yeah. Companies that have never earned their cost of capital that trade crazy valuations. By our estimation, there were about 400 companies that traded over 10 times enterprise value to sales in March of 2000.

Now, when the bubble burst, the median return on those the next year was down about 79%. Today, there’s only 300 companies that are over 10 times enterprise value to sales, last time we looked at it. But as you probably well know, there’s only about half as many public companies today as there was in 2000, so the percentage is higher.

But the other interesting nuance is, so that’s just the cutoff level at 10 times enterprise value to sales. The valuations today and the leverage, number one, the companies have much more leverage today than they had then, so they’re substantially more leveraged. But number two, the average valuation is about 3x what it was then.

So we look out there and there’s a lot of companies that traded 50, 100 or more. And yeah, some of them probably qualify as science projects. But historically, they probably haven’t earned their cost of capital or generated any free cash flow and don’t have, in our opinions, necessarily any sustainable competitive advantage.

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