Are You Investing or Speculating?
On Friday, our research team published a Charts For the Curious that triggered a good deal of feedback. The chart made it clear that firms with the highest future expectations from Wall Street have performed better than any time since the dot.com bubble. This is a topic we are very familiar with and have written about for a decade.
In 2012 our research team penned The Siren Song of Growth explaining why people “reach for the stars.” In our later piece, The Persistence of Profits, we document that growing at high rates for long periods of time is impossible. We followed that up with numerous other pieces of research around quality investing, among other topics, demonstrating that capitalism is pretty effective. Over time competition takes its toll.
In this Quick Take we focus on what we believe are the lowest quality firms in the group of companies with the highest expectations. The chart below shows the returns to:
- The 10% of stocks with the highest expectations from Wall Street and…
- …are also in the bottom 20% of the scores from our Large Cap and Small & Midcap screening tools
These companies have the highest expectations and the least financial resources to meet them!
The exhibit below shows the fundamental traits of Kailash’s proprietary All-Cap universe in the first row. The second row are those firms that have the highest expected long term growth that also fall into the bottom of our equity screening tools. The contrast is astonishing.
The Universe trades at only 1.9x price to sales (P/S) while the firms with the highest expectations, that our ranking tools dislike, trade at 6.2x sales – a terrifying multiple. Keep moving from left to right and the data is unforgiving. The column “Total Yield” shows the amount of dividends and share repurchases or issuance. A negative number means that firms are diluting owners. Incredibly, the firms with the highest expected growth, those that have to achieve the most in order to keep investors happy, are charging investors 5% a year to own them. The number is plain in its meaning – these firms cannot fund their operations without constantly selling stock.
For stocks that have the highest expectations and are disliked by our models, the conclusions are clear:
- They are dangerously valued base on historical precedent
- They lose money at an alarming rate
- They are charging people who invest in their stocks for the right to own them
Our team believes this is a recipe for disaster. Before you look at the names, would you disagree?
Our research team has written extensively about the degree of the mania underway today. In some of our other Charts for the Curious and Quick Takes, we have noted the abuses in stock compensation, the systematic overvaluation apparent in certain stocks, the collapse in the reliability of widely accepted risk metrics and the explosion in valuation ascribed to companies that lose money.
Our team of professionals has also done much more detailed research on where today’s bubble is concentrated. This research can be found in our pieces around growth and value, the Nifty-Fifty mania today, and the risk to trying to time markets in periods like today. We have also brought compelling evidence to the “other side of the coin.” For those willing to avoid the herd, hew to common sense and invest in profitable firms at reasonable to cheap prices we believe there are terrific opportunities in high quality midcaps, small caps and staples.
Please find below a list of the firms with the highest expectations that score in the bottom of our S&P 500 and Small & Midcap ranking models. We believe the firms below have the highest probability of disappointing investors.
We understand many of these names are popular but encourage readers to remember the lessons of history. Preserving and growing wealth responsibly requires patience, common-sense and a willingness to learn from the lessons of history. These are the things Kailash is dedicated to doing.
We strive to help our readers find stocks that we believe, based on historical empirical research, offer better returns and lower risk over the long-run. We are not speculators. You will not find us claiming we can tell you what the “next Amazon” is going to be. We stick to the facts, use data and history to inform our views, and present the information in an impartial and honest manner. Click here to get to know our team.