Backwards Capitalism: Unprofitable Companies Outperforming For Last 15 Years

Featured in Zero Hedge

Daniel Drew,  10/12/2015


Many portfolio managers have spent hours backtesting numerous variables looking for the holy grail of capital markets. Theoretically, profit margins should be the ultimate driver of returns. Indeed, they are. However, which direction the profits are driving the stock price is another matter.

Zero Hedge recently featured a study by Convergex' Nick Colas that showed how the most unprofitable biotech companies had the highest returns.

Biotech Returns

This got me to wondering if biotech was a special situation or if this kind of backwards capitalism applied elsewhere. Unfortunately, it applies to the entire market. Rather than rewarding companies with the highest profit margins and punishing companies with the lowest margins, the capital markets do the opposite: stocks of successful companies underperform, and stocks of losing companies surge. If you bought the 100 companies in the S&P; 500 with the highest profit margins and shorted the 100 companies with the lowest profit margins, you would have lost half your capital in the last 15 years.

Backwards Capitalism

Perhaps we've been doing it wrong all these years. Capitalism isn't about making money. It's about who can blow through money the fastest. When it comes to increasing shareholder value, there is, quite simply, no better way to do it.