Here are the extremely valued stocks Goldman Sachs is worried about

Published Mon, Jan 25 202111:48 AM ESTUpdated Mon, Jan 25 202112:45 PM EST

Goldman Sachs is waving a flag on certain bubble-like parts of the market that could burn investors if they're not careful. The one group that the firm is particularly worried about is stocks trading at very high levels relative to their sales. Share prices of equities with enterprise value-to-sales ratios over 20 times have soared recently. Goldman names these stocks and ran the numbers showing once stocks reach that kind of valuation, they tend to decline in the future. "One part of the market that appears frothy and may pose a broader risk is extremely high-growth, high-multiple stocks," David Kostin, Goldman Sachs chief U.S. equity strategist, told clients. Names like CRISPR Therapeutics , Slack , and Palantir are garnering investor attention that seems unstoppable during these speculative times. Collectively, the group of stocks with these high sales multiples account for 23% of trading volumes during the past month and 9% of market cap, Goldman notes. Some of this appreciation is appropriate given record low interest rates, Goldman noted, but this might be getting out of control relative to history. Firms with EV/sales ratios greater than 20x accounted for 2% of trading volumes in 2019, and then rose to 10% in August 2020 as interest rates fell. However, Goldman said the highly-valued group's share of volumes has doubled again during the most recent market rally. "History shows investors face long odds of outperforming when buying the most extremely-valued firms," added Kostin. Since 1985, the median stock trading at an EV/sales ratio above 20x has decline 1% one year later, compared with a gain of 6% for the median stock, the firm noted. Goldman made a list of stocks to watch out for that might follow this trend. The U.S. stocks all have a market cap above $10 billion, with consensus 2022 EV/sales ratios above 20x. CRISPR Therapeutics is the most extremely valued stocks on Goldman's list with a consensus 2022 EV/sales ratio of 222x. The Swiss-biotechnology company is up nearly 250% in the last twelve months. CRISPR also holds an exclusive spot in the top 10 holdings of Cathie Woods' Ark Invest's flagship fund, which became the largest actively managed ETF in 2020 . Wood's funds have seen inflows balloon; however, some investors are worried about the speculative nature of the ETFs and their top constituents. Software company Snowflake is another company Goldman is warning about. One of the most highly anticipated IPOs of 2020, Snowflake soared 111% in its market debut on the New York Stock Exchange in the largest ever software IPO. The cloud company even got a vote of confidence from Warren Buffet's Berkshire Hathaway and Salesforce . However, Goldman warns an EV/sales ratio of 71x could leave investors with losses. Pandemic winners Zoom Video , Slack and DocuSign also make Goldman's list. The pair of technologies companies soared in 2020 as their infrastructure helped consumers and businesses navigate the work-from-home environment. Shares of Zoom are up more than 425% in the last year. Slack and DocuSign have rallied 107% and 243% in the past 12 months, respectively. Palantir is another extremely valued stock on Goldman's list, with consensus 2022 EV/sales ratio topping 25x. Palantir , which develops data analysis software for government agencies and large companies, went public in September of last year and has rallied nearly 350% since then. — with reporting from CNBC's Michael Bloom.

A banner for Snowflake is displayed on its IPO day at the New York Stock Exchange on September 16, 2020.

Brendan McDermid | Reuters

Share prices of equities with enterprise value-to-sales ratios over 20 times have soared recently. Goldman names these stocks and ran the numbers showing once stocks reach that kind of valuation, they tend to decline in the future.