Goldman Sachs warns of a dangerous bubble, particularly in these 39 stocks:
Goldman Sachs isn’t yet ready to state the euphoric stock market is one big bubble nearing an epic pop all over the faces of Wall Street bulls, but it is warning investors about some stocks.
“Equity valuations are extremely elevated on an absolute basis. But after taking low interest rates into account, the aggregate index actually trades below average historical valuation,” Goldman’s U.S. equity chief David Kostin says.
Despite Goldman’s research showing that U.S. stocks currently trade at the upper-end of historical metrics for price-to-earnings, price-to-book, enterprise value-to-sales, enterprise value-to-EBITDA and market cap to GDP, Kostin is staying firm on his 2021 S&P 500 price target.
“We expect modestly higher rates will be offset by a declining equity risk premium, leaving the S&P 500 P/E [ratio] effectively unchanged and allowing strong EPS growth to drive the market towards our end target of 4,300,” adds Kostin.
But it’s not all sunshine and rainbows on the Zoom calls with Kostin’s equities strategy team. Kostin’s group of financial modelers is sending a warning to investors in the tech space that continue to blindly trade momentum instead of paying any attention to fundamentals.
“One part of the market that appears frothy and may pose a broader risk is extremely high growth, high multiple stocks,” Kostin says. He singles out stocks with enterprise value-to-sales ratios above 20 times as riddled with froth.
A total of 39 stocks (see below) currently boast such valuation criteria, Goldman found, mostly a litany of tech stocks that seemingly appear daily on Yahoo Finance’s Trending Ticker page. Some notable names called out by Kostin as possibly too pricey includes: Snowflake, c3.ai, Plug Power, Crowdstrike, Cloudflare, Zoom, DataDog, Shopify, DocuSign and Palantir.
Collectively, this list of 39 stocks has gained 6% year-to-date versus a 2% lift on the S&P 500. They sport a trailing-12 month enterprise value-to-sales ratio of 54 times, nearly 15 times the S&P 500 median. On a forward basis, the cohort trades on an enterprise value-to-sales ratio of 29 times, compared to four times for the S&P 500 median.
Kostin stops short of saying these 39 stocks are headed for a crash. Instead, he thinks they could relatively underperform over the next 12 months likely as the financial results of the companies fail to live up to the market hype.
“Since 1985, the median stock trading at an enterprise value-to-sales multiple above 20 times has garnered a subsequent 12-month return of -1%, compared with 6% for the median U.S. stock,” Kostin notes.
Note: More precisely, hundreds stocks have been in the bubble for some time.