(Bloomberg) -- Making a profit is really paying off again.
Investors are rewarding companies that make money at the highest rate in almost two decades when compared to their money-losing peers, propelled by Wall Street strategists who see the latest wave of Covid-19 cases as a reason to own more -oriented firms.
The average return for profitable members of the Russell 3000 Index is 36% this year, about triple the gains for unprofitable companies, data compiled by Bloomberg show.
“Unprofitable stocks don’t really have an easy road ahead of them,” Callie Cox, senior investment strategist at Ally Invest, said in a telephone interview. “Younger concept stocks can have a place in your portfolio, even if the next year could be rough for them, but it really depends on your time line.”
The spread is a reversal for unprofitable companies that have outperformed their money-generating peers at this point in three of the four years prior to 2021. The group had returned about 20% this time last year, beating profitable companies by more than 7 percentage points over that stretch.
Strategists point to investors seeking safety amid Covid-19 surges and higher bond yields as reasons for the return to profitable companies. Some also warn of bubble valuations on shares of money-losers.
That may be because the last time profitable companies outperformed money-losing stocks by this level was 2002, when the tech bubble popped.
Technology-driven companies have slumped this month, with the likes of Peloton Interactive Inc., DraftKings Inc. and Beyond Meat Inc. shedding a quarter of their or more.
Newly-public money-losing companies are also lagging their profitable peers. This year’s profitable U.S. IPOs are up an average of 16% from their offering price compared to a gain of 12% for their counterparts.
Robinhood Markets Inc. -- a favorite of retail investors who made day-trading a pandemic-era pastime -- has slumped almost 30% from a July debut. Oatly Group AB, the maker of vegan food and drink, is down about 46% from its May IPO.
“If you’re investing in these concept stocks you have to think long-term and understand that compelling concepts don’t always turn into a viable business,” Cox said.
©2021 Bloomberg L.P.
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