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Profit Is So Last Year


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What's going on?

This year, “growth” stocks have risen by about 12.5% more than their often-cheap ‘n’ cheerful friends, “value” stocks, according to The Wall Street Journal.

What does this mean?

Companies that are investing a lot for the future are typically known as “growth”. They’re often tech companies, and thrive in bull markets when the economy’s growth prospects are good. “Value” stocks are typically cheaper when comparing the price of a share relative to a company’s profit (a.k.a. the price-to-earnings ratio). Towards the end of an economic cycle, investors sometimes prefer them, seeking out bargains as growth begins to cool.

However, this year’s been a little funky. Growth stocks are crushing it but the ones that don’t actually make any money are doing the best. Say wut?! (tweet this)

Why should I care?

For markets: The tide might be turning on growth.

Despite a record bull run, investors still aren’t shouting from the rooftops. A weekly survey showing those who are positive about markets vs. negative is currently at zero for the second week in a row. Plus, Goldman Sachs thinks things might be taking a turn for the worse. In September, stocks in more stable and predictable sectors like utilities and consumer staples have also started to do better than some sexier alternatives – like tech – so investors may be hitting pause on growth in favor of value.

The bigger picture: Booming stocks but no profit is a warning sign.

When stocks are rising but not producing any profit, it can be a warning sign to some investors that markets are getting ahead of themselves. Investors may argue that they expect big profits in the future (think: Amazon, Uber). But in 2017, 76% of companies that “went public” were unprofitable – not far off the 81% seen in 2000 around the dot-com bubble. Some investors think the recent boom in marijuana stocks is a prime example of history repeating itself.

Originally posted as part of the Finimize daily email.

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