Kevin Smith, chief investment officer at Crescat Capital, says the bear case for U.S. stocks has never been stronger” and it’s time for investors to be aware of the “gravity” of the current situation.
“We certainly did not predict the Coronavirus, but it may prove to be the catalyst to tip this market that is trading at truly historic valuation levels after a record long U.S. economic expansion,” he told clients in a note this week. “Median EV-to-sales for the S&P 500, based on our work recently reached an insane, euphoric level of 3.6 times, two times than the tech bubble peak.”
He used this chart to tell the story:
“A top this month would certainly make sense to us given the recent overbought conditions, unsustainably high bullish sentiment levels, bear capitulation (not Crescat), and deteriorating macro indicators,” Smith wrote.
He said the median enterprise value-to-sales is one of the best ways to understand just how inflated the current stock bubble is. The ratio is seen by many, including Smith, as more accurate than other more commonly cited valuation metrics in part because it takes company debt into account.
“Investors will need a good grounding in valuation and business cycle analysis to reject the common buy-the-dip advice that is soon to become prevalent in the still early stages of what is likely to become a brutal bear market,” he warned.
Crescat portfolio manager Tavi Costa, who co-wrote the note with Smith, tweeted that valuations are “truly insane” at this point and offered up another chart:
Truly insane.— Otavio (Tavi) Costa (@TaviCosta) January 30, 2020
The median EV to Sales ratio for the stocks is now 3.6x.
Twice as high as it was at the peak of the tech & housing bubbles.
The breath of valuations has never been so frothy.
Our in-depth research below:https://t.co/WIzrfdEDDP pic.twitter.com/erTc2BuE4g