Avoid Investing in Stocks with PS Ratios Above 18X (when stock is at all-time high level).

Table of contents

1. Why You Should Avoid Investing in Companies with PS Ratios Above 18

   1. Why 18X?

2. Reasons for Using the Dot-Com Bubble as a Gauge

   1. Why not use the other previous stock market crashes as gauge too?

3. Decision Tree: What to do when the stock's PS ratio is >18X?

4. Important: Find out what is the PS ratio of the Stock when it goes back to All-Time High level.

   1. Formula for PS ratio when the Stock goes back to All-time High

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

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Why You Should Avoid Investing in Companies with PS Ratios Above 18X.

In the world of investing, it's crucial to identify and avoid potential pitfalls that could lead to financial losses. 

One such pitfall is investing in companies with excessively high price-to-sales (PS) ratios. 

• For more on PS ratio, read

  • Why Price to Sale ratio is the one of the best valuation ratio for finding great stocks.

  • Why stocks' valuation should never be compromised (Lessons from 2020-21 bull run).

A high PS ratio indicates that investors are paying high premiums for each dollar of revenue generated by the company. 

This can be a red flag, as it suggests that the company's stock price is inflated and may be due for a correction.

Be fearful when others are greedy (image source: silkinvest.com)

Why 18X?

The number 18X is not arbitrary. 

It represents the median PS ratio of popular companies during the peak of the dot-com bubble in 2000. 

The dot-com bubble was a period of widespread speculation and overvaluation in the stock market, and many companies with high PS ratios ultimately experienced significant price declines.

Read: What were the PS ratio of popular stocks at the peak of the Dot-com bubble for more.

Reasons for Using the Dot-Com Bubble as a Gauge

While there have been other stock market crashes and corrections throughout history, the dot-com bubble stands out for a few reasons: