ADVERTISEMENT

Profitable Companies Are Leaving Money-Losing Stocks in the Dust

Profitable Companies Are Leaving Money-Losing Stocks in the Dust

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 value-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. 

Profitable Companies Are Leaving Money-Losing Stocks in the Dust

“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 value 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.