Moonshot stocks are coming back to Earth.
As the Federal Reserve moves closer to raising interest rates, investors are repricing their bets on one of the riskiest corners of the market: shares of companies that don’t make money. Cash-burning technology firms, biotechnology companies without any approved drugs and startups that listed quickly via mergers with blank-check companies—some of which soared during the pandemic—have dropped sharply.
A Wall Street Journal data analysis shows that, as Fed officials’ signals and continued high-inflation readouts made it clearer that rate increases were looming, shares of unprofitable companies in the Nasdaq Composite Index have skidded while their profitable counterparts have traded nearly flat. On average, loss-making companies in the analysis slid 28% from the market’s close on Sept. 30 through Tuesday. Profitable companies in the index edged down 0.7% on average for the same time frame.
The Journal’s analysis identified loss-making firms as having earnings per share below zero for at least the past four quarters combined. It excluded blank-check companies that haven’t merged with a target and some companies for which FactSet didn’t identify earnings-per-share figures for the most recent four quarters.
Fed officials have indicated they are speeding up their timetable for raising interest rates, potentially as soon as March, to combat burgeoning inflation. Many investors value stocks based on the present value of companies’ future earnings. When interest rates rise, eating into that future value, it becomes less appealing to make high-price bets on companies that might not be profitable for years to come.
“Within our team, we are considering, ‘Should we be shifting out of some of these high-growth areas that may be susceptible to rising rates and look at beaten down, undervalued sectors of the market?’ ” said
Emerson Ham III,
a senior partner with Sound View Wealth Advisors.
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The performance of riskier growth stocks, which aim to deliver sharp profit growth in the future, also lagged behind broader indexes in the latter part of 2021. The Nasdaq CTA Internet Index, for example, has fallen 18% from Sept. 30 through Tuesday. The Nasdaq Composite gained 0.4% for the same time frame, while the S&P 500 added 6.3%.
Hawkish Fed policy is driving a rotation toward stocks that generate higher-than-average dividend yield, such as areas like banks and insurance, said
Jonathan Garner,
…
Read More: With Rate Increases Looming, Investors Dump Shares of Money-Losing