Broken Business Models

  • Our recent paper on Small Caps, The Low Price of High Quality, identified the market’s highest quality firms trading at reasonable valuations
  • That work also documented the dangers of cash burning firms trading at nosebleed valuations that were little more than rank stock speculation
  • The first graphic below shows the total issuance of firms that are in the bottom quintile of buyback yields has just hit $65bn, a level last seen at the peak of the internet bubble
  • The second chart shows that the valuation of these firms is at 4x sales or a 60% premium to the peak of the internet bubble!
  • We believe the risks to owning such firms are substantial and urge caution

Running Out of Money

Summarily, investors are now paying record prices to own firms that lose money. The history books are full of the disasters that follow periods of such epic folly. For investors seeking to own profitable firms with defensible moats that pay dividends and grow, please reach out to

The Internet Bubble

The stocks that make up the brutal charts above are very much like the internet companies and technology stocks that dominated the stock market during the mania. These firms today, like their predecessors in the dot com bubble, required substantial capital investments as they developed exciting new products and services. In the thrall of Wall Street analysts, venture capitalists, and the seeming ease with which investors were making money, cash flow statements were thrown to the wind.

Share prices today, as in 1999, seemed destined to march forever higher. All of these novel and new firms, like clean technology stocks, brought with them great promises of taking market share from companies that were no longer “with it.” When the profits are rolling in like today, speculating is an enormously rewarding experience.

Having lived and invested through many bubbles the KCR research team understands this phenomenon all too well. We highlight these risks in the hope that we can encourage a few investors to contemplate the risks they are taking.

Everyone knows that on March 10, 2000, the entire charade came crashing down. Investors would be decimated as the Nasdaq plunged a staggering 80% and the broad market fell nearly 50%. Our research provides a potential alternative.

For those seeking quick riches and promissory research, KCR is not for you. Denizens of behavioral finance, we believe in the importance of paying reasonable prices for high-quality firms with healthy balance sheets.

The good news, in our view, is that the frenzy for stocks that are little more than variants of the now-infamous Enron or, has left many blue-chip companies trading at discounts. In that light, we hope investors interested in compounding capital safely will read some of our work on the remarkable opportunities available today.

In our piece What Does Volume Mean in Stocks, we demonstrate that there are terrific opportunities in stocks that are not part of the speculative fervor underway. That piece also identifies and flags investors about the risks in some of the most popular stocks in the market.

For those looking for the, few truly cheap stocks left and willing to do some research check out Cheap Stocks are the Exception Not the Rule. In that piece, we document the rare firms with big profits that are trading at low prices and, historically, prone to going higher.

In over a decade, KCR has published a large and ever-growing collection of White Papers, Quick Takes, and simple (if often brutal!) Charts for the Curious. All our work is designed to help investors interested in compounding wealth safely. Our work seeks to exploit the behavioral errors of others and help those with patience and discipline.

To see a group of stocks that have positive earnings but many of the fundamental factors like those found in some of the most dangerous stocks, please visit our post, Enron Hat.

Thank you for your interest!

  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.


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.

February 12, 2021 |

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