There’s a huge misconception in the stock market that you should always own “good companies” that earn money and are maybe even growing their earnings.
Nope.
Not true.
Sometimes stocks that represent profitable companies can be a good trade, or maybe even an investment.
But, in many other types of market environments, it’s actually the exact opposite.
It’s not just in this unique type of market we’re in. This strategy of owning unprofitable companies actually works in a lot of markets.
That’s because it’s not companies or their fundamentals that drive prices.
It’s about momentum and relative strength.
There’s a difference.
I encourage you to go back through history and see for yourself.
Non-Profitable Tech
This chart from Bloomberg has been making the rounds across trading desks.
The Goldman Sachs Non Profitable Tech Index is up 66% from its spring lows and is now at its highest levels since 2022:
The Non-Profitable Tech Index tracks the performance of U.S.-listed technology companies that are not yet profitable.
That means they don’t generate positive net income according to Generally Accepted Accounting Principles (GAAP).
These stocks are doing way better than many of the companies that do generate positive net income.
“Fundamentals Matter”
Some people like to tell you fundamentals matter.
Indeed, investors are taught to believe that “fundamental” factors should impact stock prices.
It’s mostly things like revenue and earnings and enterprise value and all sorts of other fancy terms they teach in expensive schools textbooks.
Sometimes those things could potentially play a role in the decision-making process for market participants, but it’s not always the case.
In fact, sometimes it feels like it’s rarely the case.
In bear markets, stocks that lack those good fundamentals tend to get crushed.
But, then, so do the companies that do have those good fundamentals.
During bull markets, companies with good fundamentals tend to do well, and their stock prices go up.
But, then, you see unprofitable companies, like those in the Goldman index, rally even more than the profitable ones.
And you see this scenario all the time.
It’s certainly something you’re seeing now.
The poster child for this sort of thing is the ARK Innovation ETF (ARKK):
We’ve been pounding the table on the ETF for months. And ARKK is also hitting its highest levels since 2022.
We call our basket of stocks “Speculative Growth,” Goldman calls theirs “Non-Profitable Tech.”
It’s the same idea. And the math checks out. The market also treats them the same.
For perspective, ARKK is up 37% this year. The S&P 500 is up 7%. Over the trailing 12 months, ARKK is up 60% vs 14% for the S&P 500.
It’s a bull market. And the player-haters are getting crushed.
We’ve already discussed how the level of short interest in ARKK is also at its highest level ever right now – just as the ETF is making new multi-year highs.
Remember, if you’re long a stock or ETF, you’re only promising to be a future seller. If you’re short, you’re a guaranteed future buyer.
The ARK Innovation ETF has the most guaranteed future buyers right now than ever before.
Goldman’s Non-Profitable Tech Index is hitting new multi-year highs.
Everybody’s wrong.
And you’re seeing it play out in real time.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs