Editor’s note: This article was first published in September 2014. Wall Street at record highs, Robert Shiller’s pre-crash warning, the share of loss-making companies, and Twitter and Groupon described as not yet profitable all reflect 2014.
With Wall Street hitting record highs and optimism settling over European stock markets, a look at how many companies are not making any money adds another worry to the view of Robert Shiller, who believes the stock market is at a pre-crash level.
Of course, the situation of listed companies merely reflects what is happening to the vast majority of unlisted ones.
Many companies go public with a highly innovative business but no profits, and that is one of the main reasons they list in the first place: the hope of raising money from investors, who in exchange take a piece of the company before it starts making money.
According to the report prepared by Societe Generale, most of these “unprofitable” companies tend to be internet startups and biotechnology firms.
Business Insider’s analysts are even blunter: many of these companies are already losing money when they go public in their IPO, simply because their business stinks.
In places where the economy has contracted, banks, construction companies and commodity suppliers would be the main companies not making money. According to the authors of the report, the number of loss-making public companies would also be surprising.
Andrew Lapthorne of Societe Generale has tracked the percentage of unprofitable companies in the United States, Europe and Japan. While the number of loss-making companies in Europe and the US is striking, the most surprising thing is the rise in loss-making companies in Japan, especially at a time of optimism on the Nikkei. Remember that every market has risen over the long term, except the Japanese market, which has still not recovered from its last enormous crash in 1990.
The report notes that the companies with doubtful growth that generate no profits tend to come from speculative growth sectors, while in the eurozone, after biotech, the biggest loss-makers are mostly banks and companies tied in one way or another to bricks and mortar and real estate.
Business Insider published a chart showing the percentage of listed companies in Europe, Japan and the US that consistently generate losses instead of profits.
And the thing is, many of these companies tend to be very attractive to investors, because they look innovative and seem to be driving change towards a very different future.
Twitter and Groupon are good examples of very attractive companies. Groupon leads its market and yet it has still not managed to become profitable, despite its high revenue and business volume. Meanwhile, the market’s expectations for Twitter are, for now, very optimistic for a company that has not yet turned a profit, even though it is very well positioned as a social media company.
Those are just two giants, but in the market investors bet on hundreds of companies, a high percentage of which will end up disappearing over the years.
Meanwhile in Europe, Spain included, some companies whose only achievement has been to swell their losses keep trading higher, and they manage to shed debt by selling assets, which lowers the debt but weakens the business.
That is why, at this difficult moment for making stock market decisions, the simplest advice is that anyone who is out of the market should stay out. If you ignore that advice, then more than ever you need to invest in strong, solid companies with little debt and recurring profits.
See also: 8 books Warren Buffett thinks everyone should read
Featured image: Jon Baldock, CC BY 2.0, via Flickr.
