The hottest stocks now are unprofitable companies
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Screenshot: @elerianm/X
Companies with negative earnings, or losses, are outperforming firms with positive results, according to a chart from Apollo Global Management chief economist Torsten Slok. If you think that's unusual, it is, and it shows the lengths that investors will go to find greater returns.
Why it matters: Unloved corners of the market tend to be that way for a reason. Investors piling in there could signal froth in the market.
What they're saying: "Something remarkable is going on in the equity market," Slok wrote in a note, citing recent outperformance of stocks in the small-cap Russell 2000 index that have negative earnings per share.
- "Some investors are reaching further and further for returns, pushed there by the widespread compression in risk premiums," Mohamed El-Erian, former Pimco CEO and president of Queens College at University of Cambridge, wrote on X.
Between the lines: The surge in performance — which is not driven by the fundamentals — seems to show investors are trying to find pockets of value in a heavily bought market.
- Morgan Stanley notes stock picking is back, with single-name activity seeing a significant rise in recent months. For newer retail investors, individual stocks are the most commonly held asset, a survey by the BlackRock Foundation and Commonwealth Research found.
Yes, but: Small-cap companies — often technology or biotech startups — are more likely to have losses than large-cap stocks as a feature rather than a bug.
- Their promise of growth may be more compelling than their current bottom line. If and when these companies do grow, they are no longer small, and are typically picked up by larger, more prominent indexes.
What to watch: Strength in riskier, speculative corners of the market.
- If the concentration of market gains has left investors looking to unprofitable companies, that could be a bubbly signal to watch.
