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A Behavioral Approach to Investing

Using Scientifically Engineered Models

Price/Sales & 10 Year Predicted Returns

Earnings are again in focus as companies report their latest quarterly results.  Long-time readers know that I come from an accounting background & have been a critic of the reporting methods used by these companies.  Even more aggravating is the fact Wall Street is not only allowing it, but utilizing non-GAAP compliant earnings in their own valuation models.  This does not mean earnings do not matter, but it is more difficult to determine how healthy a company or the overall market really is.  Thankfully, there are a few numbers that are still useful as they are difficult to manipulate.  One of those numbers is Revenue or Sales.

 

Unfortunately for investors, the Revenue of the S&P 500 companies has not kept pace with the growth of the market, causing the Price / Sales ratio to reach extreme levels.  Even more unfortunate, the starting Price / Sales ratio is one of the best determinants of long-term (10 year) returns for investors – far better than the P/E ratio is in predicting returns. 

 

What does the current Price / Sales ratio tell us we should expect?  Look at the chart above & come up with your own conclusion.

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New Kent, VA
Jeff joined SEM in October 1998. Outside of SEM, Jeff is part of the worship team at LifePointe Community Church where he plays the keyboard and bass guitar. He also leads a small group Bible study.