Private money management firms often sell at a multiple of revenue. A frequently talked about metric? Price-to-revenue.
For example, a wealth management company that generated $1,000,000 over the last year might be valued at 2.25x, or $2,250,000. At least in the private world.
In the public stock arena, supply and demand determine the share price. Valuation does not determine share price. (It may or may not affect share price, but valuation has ceased to be particularly relevant to stock market investors.)
In fact, what if I told you that, in the 2021 stock market bubble, the aforementioned wealth manager could be worth $5,500,000,000. That’s $5.5 Billion with an enormous ‘B!’
Sound silly? Take a look at Hometown International (HWIN).
Hometown is a single deli in rural New Jersey. Its trailing 12-month revenue for a two-year period might have been $18,000. If valuation mattered, perhaps the deli would be worth in the neighborhood of 2.25x revenue, or $40,500.
Things are different in stock bubble land, however. Hometown (HWIN) trades in the public arena where its shares are collectively worth more than $100,000,000. That’s 100 million dollars.
All things being equal? If the wealth management firm traded like HWIN? The wealth management company could fetch $5.55 billion rather than a paltry $2.25 million.
Has anyone ever seen demand overwhelm share supply to this extent? And with this degree of price agnosticism? Perhaps when the tech stock bubble burst in the year 2000.
Indeed, stock prices are every bit as insane as they were in 2000. Probably more insane.
Keep in mind, the flow into stock funds and ETFs (a.k.a. demand) is greater over the last five months than over the last 12 years. That kind of demand is darn near insatiable.
On the other hand, some folks are gladly selling their stock shares. Insiders.
Consider the 12-month Insider Sell-Buy Ratio as well as the 3-month ratio. Corporate executives, directors and 10%-plus owners have not been this keen to dump their stock shares in quite some time.