LARGE PERCENTAGE OF PUBLIC COMPANIES ARE UNPROFITABLE
On 01/09/2020 the Wall Street Journal reported that 40% of listed U.S. companies (publicly traded) are losing money. James Mackintosh wrote the article ‘Money-Losing Companies Mushroom Even as Stocks Hit New Highs’.
This has happened before, in the 1999 melt-up to extravagant new high before the over-valued stock market bubble burst.
Mr. Mackintosh observes that “A shockingly high proportion of listed companies that have been losing money—despite, or perhaps because of, the long bull market. The combination of forces has pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%, its highest level since the late 1990s outside of post-recession periods.”
History doesn’t repeat itself but it does rhyme.
The graph ‘Money-Losing Propositions’, outlines the percentage of ‘all stocks’, ‘larges 20% of stocks by value’, and ‘smallest 80% of stocks by value’ outlines the history of money losing stocks, as a percentage of all stocks, over the past 20 years. This is a substantial period, the graph also has the recessionary periods highlighted in grey. Observers can see that these money losing percentages are higher today than in 1999 in 2 of those three categories and higher than 2008 in all three categories.
The article points out that “The proportion of U.S.-listed companies losing money for three years reached its highest last year in data stretching back to the late 1990s, according to calculations by Andrew Lapthorne, global head of quantitative research at Société Générale.”
A market where investors feel that the market will never go down is easy prey for Wall Street Investment Bankers who push money losing Initial Public Offerings out to an unsuspecting public, which is great for their rick private equity clients but in many cases a likely sure loser for the buyers of these IPOs.
Mackintosh observes that “Investor tolerance of losses shows up most obviously in new issues, where about three-quarters of IPOs were made by loss-making companies last year, according to University of Florida finance professor Jay Ritter.”
The graph ‘Proportion of U.S. IPOs that are lossmaking’ points out this problem, about 75% of IPOs are losing money. Wall Street could only pull this off in a market where investors are ignoring valuations and failing to stick to a sound investment discipline.
Mackintosh emphasizes this point: “Investors should also worry that their willingness to tolerate losses at companies promising growth has allowed many new businesses to finance losses well beyond what’s justified.”
In my opinion, this is a function of human nature where people will pile into something without thinking big picture; whether that be the Tickle Me Elmo craze where shoppers paid hundreds for an item worth $20 or the ‘New Economy’ craze of 1999 where investors paid any price for the future.
Investors should carefully think through where they are at currently, especially if they are in the retirement red zone.
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DEFINITIONS
Dow Jones Industrial Average - The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA is named after Charles Dow, who created it in 1896, and his business partner, Edward Jones.
S&P 500 Index: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ). The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global. The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market.
IMPORTANT DISCLOSURES
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