| | | | Federal Holiday = Crypto Day for Us!
I know it’s a holiday, but the crypto market never sleeps! So I’ll be live at my usual time, 9:15 a.m. ET, for Morning Monster to talk all things crypto!
Come join me as we dive in and see what’s moving!
Plus, as always, we have stocks popping and dropping so come find out what is moving this morning as I look for stocks and do some live premarket analysis on SPX, SPY, NDX, QQQ, Russell, IWM and other stocks that are potential plays for the day.
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How I Shop for Value Using a Metric Most Traders Ignore
Something's been bothering me about how most traders evaluate stocks these days. Everyone's obsessed with price-to-earnings (P/E) ratios, but here's what they're missing — companies can manipulate earnings by moving costs around, pulling forward expenses, or realizing gains.
But there's one metric they can't fake: sales.
And that's exactly why I rely heavily on price-to-sales (P/S) ratios when I'm shopping for value or hunting for overextended names ready to get crushed.
Let me walk you through how this works and why it's become one of my go-to tools for making sense of this wild market.
Why Sales Don't Lie
The beauty of P/S ratios is their simplicity and honesty. While companies can play accounting games with their bottom line, they can't fake their sales numbers.
Revenue is revenue — it's either there or it isn't.
Take a look at some current valuations to see what I mean. Google parent Alphabet (GOOG; GOOGL), in the Communication Services (XLC) sector, trades at about six years of sales. Apple (AAPL), in the Information Technology (XLK) sector, trades around eight years.
From a pure valuation standpoint, that makes GOOGL the better value play between these two tech giants.
But then you've got names like Nvidia (NVDA), also in the Technology sector, trading at nearly 30 years of sales — that's getting into dangerous territory.
And don't even get me started on some of the meme stocks and speculative growth names I've seen trading at over 1,000 years of sales.
The 30x Rule for Finding Short Targets
Here's where this gets practical for your trading. I've noticed a pattern over the years…
Anything trading over 30 times sales becomes a prime target when we hit any kind of financial hiccup. These are the stocks that get absolutely gutted when sentiment shifts.
It makes sense when you think about it. If a company would need three decades to generate revenue equal to its current market cap, that's pricing in a lot of perfect execution and growth.
When reality sets in or the market gets nervous, these high-multiple names have nowhere to hide.
The strategy isn't complicated. I scan for companies trading at extreme price-to-sales multiples, especially anything north of 30x. When market conditions get choppy, these become my short candidates.
However, it should be applied thoughtfully within a broader analytical framework, considering the limitations of relying solely on sales figures and the P/S ratio.
This isn't just about finding expensive stocks. It's about understanding the difference between price and value. Companies with reasonable sales multiples often represent better long-term opportunities, while the extreme multiples signal potential trouble ahead.
The next time you're evaluating a stock, skip the earnings manipulation and look at the sales multiple. It might just save you from buying into a bubble or help you spot the next big short opportunity.
Now be sure to join me live at 9:15 a.m. ET for “Morning Monster,” my market-open livestream on YouTube!
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