Back to the Days of Pets.com?

Money-losing companies in the Russell 2000® Growth

Money-losing companies in the Russell 2000® GrowthSource: Jefferies, FactSet Research Systems Inc., and FTSE Russell, 12/31/1984 to 12/31/2019
This chart shows the total number of companies in the Russell 2000® Growth Index that did not earn money as a percentage. Weight is calculated taking these stocks
and summing their weight in the index. All indices are unmanaged. It is not possible to invest directly in an index.
Past performance does not guarantee future results.

It’s been two decades since valuation metrics such as eyeballs, page-views-per-quarter or price/click metrics have been used. Yet, just because those dotcom-era terms have disappeared from the investment landscape doesn’t mean the flawed thinking behind them has gone away. After all, the basic premise of the internet bubble of the late 1990s was that growth, not profits, was what mattered. 

The thinking went that a company needed to be fast out of the gate in building an audience for its brand and that pesky details like profits would eventually follow. Fast forward 20 years and as the chart above shows, the percentage of money-losing companies that make up in the Russell 2000® Growth Index is beginning to nudge near levels not seen since the days of Pets.com. 

Unfortunately for growth-first investors, history has been unkind to money-losers over the long haul. The messy reality of economic uncertainty has a way of derailing lofty projections of future earnings. As the major indices continue to reach new highs, we believe investors will be better served by focusing on money-making companies trading at compelling valuations rather than tales of future windfalls that may never appear.  
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Author

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Opportunistic Value Equity Strategy, as well as the Mid Cap Value Fund, the Value Fund, and their corresponding Mid Cap Value and Small Cap Value Strategies. He also is President and Director of Heartland Funds. He has 20 years of industry experience, 16 at Heartland.

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