We have been noticing a trend not unlike the one we saw
during the late 1990’s market run-up: an increasing number of publicly-traded
companies reporting losses quarter after quarter, while their stock prices soar.
This disconnect of losing money – while enjoying strong stock appreciation – should
have investors treading carefully in the 11th year of this bull
market, in my view.
Here are some of the eyebrow-raising statistics that
investors should be aware of:1
- Nearly 40% of listed companies in the U.S.
reported losing money over the last 12 months. This is the highest percentage
of loss-makers we’ve seen since the late 1990’s (and excluding recessions like
2001 and 2008).
- Of the largest 100 companies that reported
losses, approximately 75% of them saw their shares go up over the last 12 months.
- Of all the money-losing companies in the U.S.,
41% of them saw their shares go up last year. (Takeaway: smaller companies are
not getting the same treatment as large-caps)
- Categorically, the largest percentage (42%) of
companies losing money are in the healthcare sector, mostly in biotech. 17% of
them are tech stocks, mainly the flashy IPOs like Uber and Pinterest.
Investors are placing a huge premium on disruptors and future
growth, but the question remains – is it
too much of a valuation premium?
_____________________________________________________________________
Does this Mean the Bull is Running Out of Steam?
While the Bull is in its 11th year, it is not dead yet! Instead of letting these statistics fill you with fear, I think it is best to continue to monitor earnings, focus on the hard data and stick to a well-diversified portfolio. To help you do this, we are offering all readers a look into our just-released February 2020 Stock Market Outlook report.
This report will provide you with our forecasts along with additional factors to consider:
- U.S. returns expectations for 2020
- What Produces 2020 Optimism?
- What of U.S. GDP Growth?
- Is it time to buy U.S. stocks in January?
- Will the “U.S. China Trade War” remain a stumbling block in 2020?
- Small-cap vs. large-cap returns
- And much more.
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released February 2020 Stock Market Outlook2
_____________________________________________________________________
Then There Are the IPOs
About 75% of IPOs last year were by loss-making companies,
but I was encouraged to see that investors proceeded with a bit more caution in
this space. In 2019, the class of IPOs underperformed the S&P 500 by more
than 50% – a sign that investors aren’t getting too exuberant over the flashy
new players in the market. It’s been this way for the entirety of the bull
market for IPOs – over the last 10 years, the class of new companies that have
listed are trading on average about 70% above their IPO price, trailing the
S&P’s 190% rise over the same period.3
Investors can look at this market scenario in a couple of
ways. On the one hand, we have investors skittish about flashy, high-growth but
no-profit IPOs – a good sign that we are not seeing the type of exuberance that
led to the tech bubble in the late 1990’s. On the other hand, we have an
unusually large percentage of listed companies in the U.S. that are currently
losing money, while the broad stock market continues to reach new all-time
highs. Losing money while delivering rapidly growing sales and revenues is certainly
an acceptable proposition, but the question is how long can it last and how
high of a premium are investors willing to continue paying?
Bottom Line for
Investors
Investors
should proceed with caution and be mindful of the premium you might be paying
for loss-making companies. Rising share prices have given many of these
loss-making companies the ability to finance even more losses, which is a
slippery slope particularly if we start to see a marked slowdown in economic
growth. In the current environment, keep these two principles in mind:
- Statistically, over historical periods
of time, we find that stocks that are expected to report positive earnings per
share have generated higher returns than stocks that are expected to report
negative earnings per share.
- In my view, the market is pricing many
loss-making stocks on the expectation
of future earnings growth. What we’re often left with are major assumptions
about the business prospects of a company, as opposed to whether quarterly
earnings are evolving (and growing) relative to expectations.
At Zacks Investment Management, earnings remain our core
focus in portfolio management and investment decision-making. We have a long
history of earnings forecasting with proprietary processes in place that help
us monitor earnings and earnings estimates – which in turn drive our
decision-making. With the bull market now in its 11th year, these
processes will become ever-important, in our view.
To help you get a deeper insight into earnings and other key economic indicators, check out our Just-Released February 2020 Stock Market Outlook Report.
This Special Report is packed with newly revised predictions to consider for 2020 that can help you base your next investment move on hard data. For example, you’ll discover Zacks’ view on:
- U.S. returns expectations for 2020
- What Produces 2020 Optimism?
- What of U.S. GDP Growth?
- Is it time to buy U.S. stocks in January?
- Will the “U.S. China Trade War” remain a stumbling block in 2020?
- Small-cap vs. large-cap returns
- And much more.
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report on fundamentals, earnings, growth, and innovation today!4
Disclosure
1 The Wall Street Journal, January 9, 2020. https://www.wsj.com/articles/money-losing-companies-mushroom-even-as-stocks-hit-new-highs-11578608209?mod=djemDailyShot&mod=djemDailyShot
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 Los Angeles Times, December 30, 2019. https://www.latimes.com/business/story/2019-12-30/ipos-underperform-for-investors
4 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.
This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.