The Riskiest Stocks Right Now?

  • The chart below shows that money-losing firms recently generated a 120% return
  • When people double their money buying risky stocks, it is just another sign of the euphoria documented by legends like Galbraith, whose work we review here
  • A post by consultant Marquette Associates discussed the impact of peak earnings on the stock market
  • They suggest that active managers that have struggled to keep up with a “sentiment-driven” market could benefit from company-specific fundamentals starting to drive returns
  • Our empirical research highlights possible stocks to buy for long term investors in reasonably priced firms with healthy businesses and strong balance sheets

Looking at the chart below, KCR agrees with the esteemed consultant: while the returns to novel loss-making stocks are still elevated, they do indeed appear to be rolling over.

Rolling 12m Absolute Return of Money Losing Firms

Considering the trillions of market cap sitting in loss-makers we highlighted in our chart here, the implications could be dire for speculators. As Wall Street has replaced the concept of “growth stocks” with firms sporting high revenue growth in the absence of profits, investors have become infatuated with the world of high-risk high-reward stocks. We believe there has been too much emphasis on the possibility for “high rewards” without much attention to the “high risks” being taken.

Risky Stocks to Invest In – The Case for Caution

The chart below is similar to the one above. The difference is the chart below shows the relative returns of the loss-making firms. So the 12 month return of the loss-makers minus the 12 month return of the S&P 500 index.

The effect is the same. The extraordinary absolute returns generated by the loss-makers have been equally unusual on a relative basis. Looking at the volatility of these lines we would emphasize that the entry points for these risky stock picks looks particularly unappealing to us based on history.

Rolling 12m Excess Return of Money Losing Firms

Believers that history informs the future, the message strikes us as abundantly clear: this will end badly for these firms, in our view. The chart below is the same as the first chart in the missive. The only difference is we have added the losses incurred by investors who bought into the pool of loss-making firms at the prior peak in 2000.

An investment at the peak of the bubble led to an 80% loss of investor capital in just over a year. We have picked up the habit of noting the agonizing implications of geometric returns.

Rolling 12m Absolute Return of Money Losing Firms v2

We do not mean to be pedantic. We believe many investors have forgotten the true nature of risk. In this case, our team offers the gentle reminder that no matter how novel and exciting the stock, if it is exorbitantly priced and makes no money it could be a great way to end up owning a penny stock! If the future were to follow the precedent, $1 invested in these types of stocks would turn into ~$0.20.

Getting back to $1 from $0.20 requires a 400% return. As the chart below shows, at a 10% annual return, with no interruptions or drawdowns, it takes 18 years to breakeven on $1.[1]

At a 10 Annual Return It Takes 18 Years to Recover from an 80 Loss 1

Please click on the button below to see the full list of money losers. We have ranked the stocks from worst to best according to our proprietary US S&P 500 Universe ranking model. The closer a stock is to the top of that list the more caution we urge on investors and speculators.

Year to date, we feel the market has been engaged in a bit of a tug-of-war. Many analysts seem comfortable setting price targets based on Price-to-Imaginary Sales five and even ten years from now discounted back at low rates. We feel positions in the securities being recommended may generate serious losses. Like our piece on Seth Klarman’s legendary Margin of Safety book, this post and many others like it are, at their most basic, an attempt to inspire prudence in some.

KCR does not make forecasts. Instead, we use a robust empirical analysis of history to inform our readers of the odds based on current prices and historical data. In our view this is a market with myriad opportunities for those willing to swim against the herd and hew to the lessons of history.

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  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

[1] Major hat-tip to our new friend and subscriber Scott B. for catching my last rookie mistake in this math!!

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about top growing stocks


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

August 6, 2021 |

August 6, 2021

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