**With Rate Increases Looming, Investors Dump Shares of Money-Losing Companies** **The valuation calculus is changing on companies that don’t turn profits** **by Dave Sebastian and Ardika Singh, The Wall Street Journal, Jan. 18, 2022**
**As the Federal Reserve moves closer to raising interest rates, investors are repricing their bets on one of the riskiest corners of the market: shares of companies that don’t make money. Cash-burning technology firms, biotechnology companies without any approved drugs and startups that listed quickly via mergers with blank-check companies — some of which soared during the pandemic — have dropped sharply....**
**On average, loss-making companies in the analysis slid 25% from the market’s close on Sept. 30 through Friday. Profitable companies in the index, meanwhile, gained an average of 1.4% for the same time frame....Hawkish Fed policy is driving a rotation toward stocks that generate higher-than-average dividend yield, such as areas like banks and insurance...** [end quote]
The fun has just begun. Catch these falling knives? Not on your life. They have a lot more to fall.
Without oodles of free money pouring into the market at zero interest nominal (negative real) interest rates, investors will have to focus on true returns, the old-fashioned way – actual profits and dividends.
Unprofitable company’s? I’m sure they got trimmed good, as one should expect. Here, I’m not a fan of “Yeah, well, they’re not making money NOW, but they have a great future.”
However, comma, today my ‘haircut’ includes (all money makers):
Some of the symbols might be unfamiliar to readers, but Apple, Amazon, and Google are well known. And all are well known dependable money makers, and not going to go away anytime soon.
I am not making any changes, but deep ‘haircuts’ does make one pause.
Denny S. (the captain) wrote some time back about making a distinction between volatility and risk. With the former, expect to see prices up and down. It goes with the territory. With (true) risk, you could be facing drops to zero. It is important to make the distinction.
Denny S. (the captain) wrote some time back about making a distinction between volatility and risk. With the former, expect to see prices up and down. It goes with the territory. With (true) risk, you could be facing drops to zero. It is important to make the distinction.
Denny S. (the captain) wrote some time back about making a distinction between volatility and risk. With the former, expect to see prices up and down. It goes with the territory. With (true) risk, you could be facing drops to zero. It is important to make the distinction.
Buy stocks of companies that will bounce back. Profits sure help! Positive free cash flow is good. Debt and credit risk are red flags.
Fiber optic communications providers were so efficient that prices dropped so fast (Moore’s Law on Steroids) that they were unable to pay off their capital investment. They didn’t bounce back, they went bankrupt. Part of the so called dot-com bubble. Deep pockets bought them out for pennies on the dollar and consumers benefitted greatly. The deflationary force of technology.
Lesson, too good is not good. LOL
Contrast that with Tesla. EVs are battery constrained and automakers cannot keep up with demand. Tesla keeps rising prices to lower demand. Great for profits, great for positive free cash flow. 2021 deliveries up 87% while total car sales dropped. That’s “OPPORTUNITY!” with a Capital ‘O.’ Oh!
When I was working at Colgate-Palmolive in Caracas dinky bodegas had to pay cash, larger businesses got credit, and giant supermarket chains could set their own conditions because sales quotas were imposed by the head office in the US.
Car rental companies buy fleets of cars and get huge discounts. When Hertz wanted to buy 100K Teslas they were told to get in line behind Joe, Dick, and Harry! If that’s not pricing power, nothing is.