Money-losing companies are flooding the market with new shares—and risk-hungry investors are buying them.
Over the past 12 months, about 1,000 companies issued secondary or add-on shares in the U.S., and nearly 750 of them weren’t making a profit, according to Jason Goepfert at SentimenTrader, citing Bloomberg data.
The shift has taken place since the financial crisis. Before then, with the notable exception of the dot-com bubble in the late 1990s, there were more profitable companies raising money on the secondary market than money-losing ones.
What pushed the change was the public market itself. Wall Street became more tolerant of negative earnings and focused on growth prospects instead. The number of unprofitable firms raising money started to grow until finally they outnumbered the profitable ones. Then, the gap just kept widening.
Still, the profitable firms—usually larger and more established in business—were able to raise more money than their unprofitable counterparts. That gap, though, has been narrowing, and the unprofitable ones have taken over in the past year.
The money losers raised $27 billion more than the moneymakers since last June—something that hasn’t been seen in at least 40 years, surpassing even the gap during the dot-com bubble.
That’s just a tiny amount compared to the entire U.S. equity market, yet still worth noting. “It’s not about the amount of issuance,” wrote Goepfert, “It’s about a market environment that allows this to happen.”
The market has been in what Goepfert calls the “enthusiasm phase” of a sentiment cycle for more than six months now. The characteristics of this phase include high optimism, easy credit, a rush of initial and secondary offerings, risky stocks outperforming, and stretched valuations.
“We need to be on the lookout for internal divergences and warnings among technical indicators during and after these phases,” Goepfert wrote.
The frenzied stock-issuing and stock-buying activities are supporting the lifeline of many companies that otherwise would have sunk a long time ago.
One poster child is
(ticker: AMC). The movie-theater chain teetered on the edge of bankruptcy during the pandemic, but came roaring back this spring as Reddit investors pushed its stock higher and allowed the firm to issue more new shares. The meme stock is up by 2,642% year to date.
Write to Evie Liu at firstname.lastname@example.org