Buying Stocks Trading Above 10x Sales–A Good Idea?

Early last week, Meb Faber included me on a conversation on buying stocks trading at 10x their company’s revenue (sales).

Is this a good idea and how did it do in the past?

Given that most “known” factors have underperformed over the past 10 years, I was interested in seeing if a somewhat “crazy” strategy

(1)

–buying stocks trading above 10x sales–worked over the past 10 years. 

Of course–it worked!

However, over the full sample period, this strategy underperformed the universe. 

Needless to say, the results are interesting, especially after examining the current stocks that are trading above 10x revenue.

Below I outline the study, give the results, and look at a few names currently in the “above 10x” category.

Overview and Universe Results

To test how well stocks trading above or below 10x revenue (sales) performed, I formed monthly portfolios examining companies trading above and below 10x revenue (sales). The universe, formed monthly, is the 1,500 largest U.S. stocks excluding REITs.(2) When forming the portfolios, the fundamental data is lagged to minimize look-ahead bias.(3)(4) All data is from FactSet.

The full-time period is from 1/1/1990-3/31/2019.

Below shows the results of the Universe (value-weighted) compared to the Russell 1000 Index (R1K). All results are gross of any transaction costs and fees and reflect total returns, which include dividends.

 

The results above show that the universe is similar to the Russell 1000, with a 99.77% correlation.(5) In addition, the two portfolios have similar CAGRs, Sharpe Ratios, and Drawdowns.

So now that we have confidence in our universe, let’s examine the portfolios trading above and below 10x revenue.

The Results

Below we examine the results to stocks trading above and below 10x sales. Again, the portfolio is formed monthly and held for one month. The time period examined is again from 1/1/1990-3/31/2019. All results are gross of any transaction costs and fees and reflect total returns, which include dividends.

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Performance figures contained herein are hypothetical, unaudited and prepared by Alpha Architect, LLC; hypothetical results are intended for illustrative purposes only. Past performance is not ...

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