Shares of companies in the Russell 1000 Growth index with zero earnings are outperforming index overall, a sign of market distortion
Analysts say it makes sense, and is indeed positive, that the Russell 1000 Growth index is up more than its value counterpart, which features stocks that are considered bargains and are often deemed attractive in the later stages of an economic cycle.
What’s problematic, however, is that companies in the Russell 1000 Growth index without steady profits have returned 18% in 2018 through August, compared with the 16% return for the whole index, according to data from FTSE Russell.
Jason Pride, private wealth chief investment officer for Glenmede, says he views that disparity as a warning sign and notes it was even more pronounced in August.
Glenmede data show the unprofitable Russell 1000 companies returned 13.5% last month, compared with a 5.5% return for the broader index.
“We’re getting a little worried that equity markets are showing some unnatural distortions,” including the amount of money rushing into companies posting losses, Mr. Pride said.
Major U.S. indexes ended August near all-time highs and have hovered near those levels so far this month. Despite worries about trade tensions, a currency crisis in emerging markets and the Federal Reserve’s pace of interest-rate increases, the nine-year bull run doesn’t appear to be slowing.
Among the unprofitable companies whose shares have surged this year are Sarepta Therapeutics Inc. and enterprise software company Okta Inc., which have both seen their stock prices more than double. Sarepta got a boost after an early-stage trial of a gene therapy drug showed promise in treating Duchenne muscular dystrophy, while Okta has rallied after posting big revenue gains.
Sarepta has reported only one quarterly profit since the beginning of 2016, yet 20 of 22 analysts polled by Factset have a “Buy” rating on the stock. Okta, meanwhile, went public in April 2017 and hasn’t yet posted a quarterly profit as a public company. Eleven of 13 analysts have a “Buy” rating on its shares.
Also worrying some analysts: Companies in the Russell 1000 Growth index with the lowest trailing price-to-earnings ratios are underperforming this year. Those with price-to-earnings ratios between zero and 15 have returned 1.5% so far this year through the end of August, according to FTSE Russell.
That shows investors are more interested in companies they view as having big future earnings potential—such as biotech companies betting on new drugs or technology startups pouring revenue back into development—compared with companies with a record of posting profits.
“Investors are very willing to pay up for future profits in interesting stories,” Mr. Pride said. “To a certain degree, that’s OK. It creates entrepreneurship within companies. But at some point the market takes it too far, and I wonder if we’re close to pushing that limit.”
Source: The Wall Street Journal
Analysts say it makes sense, and is indeed positive, that the Russell 1000 Growth index is up more than its value counterpart, which features stocks that are considered bargains and are often deemed attractive in the later stages of an economic cycle.
What’s problematic, however, is that companies in the Russell 1000 Growth index without steady profits have returned 18% in 2018 through August, compared with the 16% return for the whole index, according to data from FTSE Russell.
Jason Pride, private wealth chief investment officer for Glenmede, says he views that disparity as a warning sign and notes it was even more pronounced in August.
Glenmede data show the unprofitable Russell 1000 companies returned 13.5% last month, compared with a 5.5% return for the broader index.
“We’re getting a little worried that equity markets are showing some unnatural distortions,” including the amount of money rushing into companies posting losses, Mr. Pride said.
Major U.S. indexes ended August near all-time highs and have hovered near those levels so far this month. Despite worries about trade tensions, a currency crisis in emerging markets and the Federal Reserve’s pace of interest-rate increases, the nine-year bull run doesn’t appear to be slowing.
Among the unprofitable companies whose shares have surged this year are Sarepta Therapeutics Inc. and enterprise software company Okta Inc., which have both seen their stock prices more than double. Sarepta got a boost after an early-stage trial of a gene therapy drug showed promise in treating Duchenne muscular dystrophy, while Okta has rallied after posting big revenue gains.
Sarepta has reported only one quarterly profit since the beginning of 2016, yet 20 of 22 analysts polled by Factset have a “Buy” rating on the stock. Okta, meanwhile, went public in April 2017 and hasn’t yet posted a quarterly profit as a public company. Eleven of 13 analysts have a “Buy” rating on its shares.
Also worrying some analysts: Companies in the Russell 1000 Growth index with the lowest trailing price-to-earnings ratios are underperforming this year. Those with price-to-earnings ratios between zero and 15 have returned 1.5% so far this year through the end of August, according to FTSE Russell.
That shows investors are more interested in companies they view as having big future earnings potential—such as biotech companies betting on new drugs or technology startups pouring revenue back into development—compared with companies with a record of posting profits.
“Investors are very willing to pay up for future profits in interesting stories,” Mr. Pride said. “To a certain degree, that’s OK. It creates entrepreneurship within companies. But at some point the market takes it too far, and I wonder if we’re close to pushing that limit.”
Source: The Wall Street Journal
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