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24/01/20202 mins

Profitless growth of US stocks… is it different this time?

January – what better time to take stock of the forces shaping markets in the year ahead? As contrarians, we’re always on the lookout for stocks that are unloved, while steering clear of companies that everyone wants to buy. One area we’re keeping a wary eye on is the US stockmarket. US stocks have been one of the decade’s big success stories, easily outstripping the gains made by global companies. On closer examination, we’ve spotted a few red flags that we think investors ignore at their peril.

The majority of the gains made by US equities can be traced back to the technology sector, which has seen stellar share price appreciation. Concentration risk aside, is that really such a big deal? Well, yes, because the growth of their share prices is completely out of kilter with some companies’ actual profitability. According to the Wall Street Journal, four out of ten US-listed companies lost money over the last year. As survivors of the dot.com boom-and-bust era will remember, a lack of profitability is not a promising long-term signal. It even became a standing joke, that the dot.coms that started out

For investors today, it’s a salutary lesson, and one that’s recently been learned the hard way. In November 2019, Japanese conglomerate SoftBank announced a loss of $4.6 billion after re-assessing its investment in WeWork, a company that built its brand by providing shared office space for tech start-ups. In the wake of that debacle, sustainable profitability is back in the spotlight, where we believe it belongs. At the World Economic Forum, held this week in Davos, the mood is changing – as one Silicon Valley CEO put it, “there’s going to be a lot more focus on value over growth and seeing who is actually profitable”.

To us, investing capital in loss making companies that have no credible plans to change that, is folly. And some much loved tech unicorns definitely fall into that category. To borrow a thought from Sir John Templeton, a long-term value investor – “the four most expensive words in the English language are ‘this time it’s different’”.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.

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