Money-Losing Companies Now Comprise 40 Percent of Market, but Investors Seem Unfazed

By:
Chris Gaetano
Published Date:
Jan 10, 2020
The Wall Street Journal is reporting that 40 percent of all public companies ended 2019 in the red, and 27 percent of public companies have closed out the last three years in the same way, but investors seem untroubled, as some of these money-losing firms are also some of the hottest stock buys on Wall Street. For example, while both Tesla and General Electric both lost money this year, Tesla's stock value has doubled in three months while GE's has gained 44 percent.

Some of this counterintuitive investment activity exists because, as in the case of Tesla, investors tolerate losses on the expectation that the firm will eventually lead a major industry disruption that will allow them to make all their money back and more. Amazon is a (ahem) prime example of this type of company: founded in 1994, it operated at a loss until 2005, when it posted its first net profit of $5 million. Similarly, it took Twitter 10 years to finally become profitable. 

In the case of firms like GE, which has actually taken a beating over the past few years, the sudden rise in stock demand can be laid at the feet of bargain hunters who can, for the first time, afford stock in the company that they believe is down but not out. 

Another factor one might wish to consider, though, is the availability of cheap credit. With interest rates at historic lows for historic lengths of time, companies have found borrowing easier than ever. This has led to a state where, according to the Swiss Bank of International Settlements, 12 percent of public companies worldwide can be categorized as "zombies," that is, companies that by all rights should be out of business but are propped up by continual access to cheap credit offered by banks who would prefer to keep shoveling money into losing ventures than write off the loss. 

These zombies are proliferating amid a surge in corporate debt levels worldwide. The International Monetary Fund warned that while this easy-credit environment has allowed companies to maintain business as usual, even in these conditions, "in a material economic slowdown scenario, half as severe as the global financial crisis," the amount of debt-at-risk (defined as debt owed by companies whose earnings are insufficient to cover interest payments) would amount to $19 trillion, or roughly 40 percent of all global corporate debt. When aggregated down to individual countries, the IMF said that certain areas have at-risk debt levels equal to, or even beyond, those prior to the financial crisis. 

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