Backwards Capitalism: Unprofitable Companies Outperforming For Last 15 Years

Tyler Durden's picture

Submitted by Daniel Drew via,

Many portfolio managers have spent hours backtesting numerous variables looking for the holy grail of capital markets. Theoretically, profit margins should be the ultimate driver of returns. Indeed, they are. However, which direction the profits are driving the stock price is another matter.

Zero Hedge recently featured a study by Convergex' Nick Colas that showed how the most unprofitable biotech companies had the highest returns.

Biotech Returns

This got me to wondering if biotech was a special situation or if this kind of backwards capitalism applied elsewhere. Unfortunately, it applies to the entire market. Rather than rewarding companies with the highest profit margins and punishing companies with the lowest margins, the capital markets do the opposite: stocks of successful companies underperform, and stocks of losing companies surge. If you bought the 100 companies in the S&P 500 with the highest profit margins and shorted the 100 companies with the lowest profit margins, you would have lost half your capital in the last 15 years.

Backwards Capitalism

Perhaps we've been doing it wrong all these years. Capitalism isn't about making money. It's about who can blow through money the fastest. When it comes to increasing shareholder value, there is, quite simply, no better way to do it.

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Devils Advocate's picture

The reason for this is 99% of the time the most profitable companies trade at too high a premium and thus you over pay for those companies getting an inferior return in comparison to the overall market.

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) Ghost of PartysOver Oct 12, 2015 2:06 PM

Seriously.  Amazon is still booming yet has NEVER made a profit.

abbottmd's picture

that's not entirely true. they made like 3 cents a share in one of the recent quarters. And the other quarters were only losing 25 cents a share. They're almost breaking even. Close enough. GO LONG

Squid-puppets a-go-go's picture

we are no longer in a system of competitive capitalism, but one of competitive deficitism

Oldwood's picture

Debt is the new currency. How would a profitable company with cash be able to compete in wagering with one with massive debts, PLUS, apparent infinite demand for more debt?

Its almost like the old Yellow page adds on TV for Arnold's rug store. He only has one rug and doesn't dare sell it for he would have to close his doors. If Amazon actually reliably made a profit their stocks would flatten out or collapse.

TBT or not TBT's picture

Just like Cargo Cults in the Pacific we are acting on the faith that displays of faith in and of themselves will, must, drag the dream into existence.   Sorry, for growth to occur again, the incentives to thrift and effort must be restored.  

My Days Are Getting Fewer's picture

That may be true.  But how can money-losing companies have positive value?

Osmium's picture

I believe it's referred to as the Pets.Com effect.

ajax's picture



Sing the fucking song:

Buy the stock, drink the fucking crap and then buy the diabetes drugs to counter-act it all. Makes sense.

You people are always talking about "broken windows" economics: I'd rather have a few broken windows than kidneys that won't function anymore.


- Disclaimer: my mother died of type 2 diabetes because of American crap fast food and an addiction to American 'soft' drinks: Pepsi and Coke and 7-Up and "Dr. Pepper".


SheepDog-One's picture

The trick is to get your FED knee pads then you can be a successful company.

ajax's picture



"The trick is to get your FED knee pads then you can be a successful company."

No, it's called "foaming the runway" not "kneepads".

ajax's picture



And speaking of which; why the fuck is Chase Utley in deep shit for for a slide into second base? A slide which blocked a double play by the Mets? A slide which Utley knows is used ALL THE TIME AGAINST SECOND BASEMEN BECAUSE HE IS A SECOND BASEMAN?

As baseball goes so doesn't Wall Street? Baseball players are in more deep shit than the coke-snorting creeps with tiny testicles on Wall and Broad Streets who have ripped off absolutely everyone? An entire world economy?

Nobel prize winners Scholes and Merton: were they ever "benched"?



Not if_ But When's picture

Philly sports fan here who always liked Utley.  You're wrong about the slide.  Watch it a few times - way out of base line, late slide, much too high.  Never even touched the bag with no intention to.  Take out slides are supposed to be slides - not barreling that high and late.  But it'll never beat Pete Rose ruining Ray Fosse's career in a freakin' ALL STAR GAME.

Sir SpeaksALot's picture

if a "company" is too big to fail, you know it is not capitalism anymore...

ajax's picture



I've had it with "the system", and that's when I begin posting videos featuring Bach played by Glenn Gould:

Happy Thanksgiving Day Canada - Love Glenn Gould:


ajax's picture



I've had it with "the system", and that's when I begin posting videos featuring Bach played by Glenn Gould:

Happy Thanksgiving Day Canada - Love Glenn Gould:




Wallstrefugee's picture

I believe this actually supports the profit margin mean reversion assertion in that the market is over-valuing companies with high profit margins and undervaluing companies with low profit margins. High margin compaines' profits will decrease as their margins mean revert and low margin companies' profits will increase as their profits mean revert. The market gets this wrong and does not properly adjust valuation for profit margin mean reversion.

ajax's picture




Dear "Wallstrefugee":

OH PLEASE! There IS no 'mean reversion', there is no "properly adjusted valuation".

Wouldn't it be nice??

Dream on idiot.




buzzsaw99's picture

you must lose money to get the negative infinty p/e bitchez

yogibear's picture

Living off the Federal Reserve's cheap money tit.

Tin Hat Salesman's picture

good tail hedge...low beta does well in bad markets. garbage outperforms in easy money scnearios

RopeADope's picture

Reality can be a real bummer.

Oldwood's picture

Gambling requires knowing the unknowable. Businesses with solid markets and profitabilities offer no bet, like betting on if the sun comes up tomorrow. Whereas the big losers, well they have nowhere but up to go, so the bets are placed. Gambling is completely irrational....unless you are winning, and then it makes perfect sense. Of course the streak ends and rationality returns, but the addiction, the need is still there...waiting for the next opportunity.

We used to live in a society that shunned gambling, making it illegal in virtually all forms. Things changed when it was discovered that there was not nearly enough real productivity to support the producers AND the mooches, so government did a complete turnabout and embraced gambling. Casinos everywhere and Lotto as the great economic savior. All of the sudden what was a vice for the weak and simple minded is now the path to riches. We can sit and bitch about evil corporations that manipulate us into all sorts of terrible circumstances, but gambling...its all good. Especially for those rigging the games, making SURE that profits go where they should and are most needed by "society". We have progressed from a society that understood the necessity of personal responsibility and the dangers that vices held, to one where the vices are now positive, where losers are bailed out, where the single greatest opportunity is the deliberate manipulation and fleecing of the weak and simple minded, the only penalty for which is a higher tax bracket. Personal responsibility, like austerity, is now a dirty word. A hateful word with negative implications towards gamblers and mooches alike...and will not be tolerated.

RopeADope's picture

Quite remarkable how the concept of responsibility keeps popping up when discussing the ails of today's human society.

ajax's picture


"so government did a complete turnabout and embraced gambling"

Oh really? Really?

The gov't. by whom for whom?  

Do you really believe the USA was anything else than a filthy gambling corporation from the very beginning of its existence? If so - please read history.

NO. All you "Zionist" creeps please keep out of it.


Oldwood's picture

Laws were on the books for decades that outlawed even the most innocent of gambling. Now governments are direct funding from its proceeds, not even satisfied with taking their cut. The casinos of Wall Street are benefiting government in countless ways and would collapse without it.

abbottmd's picture

long corporate debt, short equity should be a massive paired trade at some point.

Shadow1275's picture


Topsy Turvy could describe the world at this point as well, not just the "Capitalist" economies of the world.

rejected's picture

There are no Capitalist economies in the world,,, the possible exception of some very poor nations with what we call 'black markets' which most are truly free capitalist markets. A free market in the modern world would be illegal.

Oldwood's picture

Economies that attempt to evade or operate outside the control of government, will not be tolerated...for the good of the people, or at least the government for which they are forced to stand.

Shadow1275's picture

Of course. We must restrict freedom in order to protect the freedom of our countrymen. Yay for Freedom.

Oldwood's picture

It IS for our own good. We don't want people running around with sharp scissors and shit, falling and getting hurt or something.


In other words, risk is transfered to those that can least afford it given the 2x2 decision matrix. Highest return on investment is to stick with the least amount of risk. Ergo, corporations that post the least return on investment are the most honest, least risk, and less likely to bullshit the investor to get them to invest. The most eager for sales are those posting the largest payback, most risk, and the most bullshit to prime Muppetts into buying their stock. No sales pitch pretty well means better gains. Stackers stack, and Mupetts opt for the sales pitch.

Radical Marijuana's picture

Indeed, that is quite so!

Welcome to RUNAWAY


Capitalism isn't about making money.

It's about who can blow through money the fastest.

There are comprehensible and comprehensive REASONS for how and why everything appears to be absurdly backwards. I repeat a couple of my favourite quotes which should always be kept in mind regarding the bullshit about "capitalism," (as well as the bullshit about every other "ism.")

From historian Carroll Quigley, what has been ACCOMPLISHED:

"... powers of financial capitalism had another far-reaching goal, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole ..."

However, it is MISTAKEN to label that "financial capitalism." Rather, it is really the triumph of organized crime applied through the political processes, to result in a political economy based upon governments ENFORCING FRAUDS by privately controlled banks.

Silent Weapons for Quiet Wars

Energy is recognized as the key to all activity on earth. Natural science is the study of the sources and control of natural energy, and social science, theoretically expressed as economics, is the study of the sources and control of social energy. Both are bookkeeping systems: mathematics. Therefore, mathematics is the primary energy science. And the bookkeeper can be king if the public can be kept ignorant of the methodology of the bookkeeping. ... In this structure, credit, presented as a pure element called "currency," has the appearance of capital, but is in effect negative capital.

Everything in the currently established political economy operates through fundamentally fraudulent financial accounting systems, where the public "money" supply (which is supposed to represent accumulated "capital" as a store of value) is actually the banksters' FRAUDS ENFORCED by governments, which operates through the vicious feedback loops of its POLITICAL FUNDING.

The banksters are the FRAUD KINGS, since "the bookkeeper can be king if the public can be kept ignorant of the methodology of the bookkeeping." Hence, the public "money" supply is actually as ABSURDLY BACKWARDS as possible, because it continues to be able to presented as IF it "has the appearance of capital, but is in effect negative capital."

Indeed, all public discussions regarding political economy are based upon the banksters' bullshit, which developed from the long history of the biggest bullies' bullshit social stories being able to dominate civilizations. It is extremely difficult for most people to begin to appreciate the degree to which they think about economics is almost totally based upon absurdly backward bullshit. Therefore, despite the anomalies piling up and UP, there are still not sufficiently profound paradigm shifts in the basic ways that people perceive politics to cope with the existence of those increasingly numerous and blatant anomalies.

Ironically, the article above HAS asked the right question: "Perhaps we've been doing it wrong all these years." However, there is not likely to be enough of a systemic profound paradigm shift regarding the degree to which "we've been doing it wrong all these years!"  Human beings and civilization should be understood as general energy systems. However, the actual history of civilization based upon successful warfare backing up deceits with destruction, morphing to become successful finance based upon ENFORCING FRAUDS, takes series of intellectual scientific revolutions, and profound paradigm shifts, due to the degree that civilization was always based on being able to back up lies with violence, which became more sophisticated systems of legalized lies, backed by legalized violence.

Human beings necessarily operate as entropic pumps of environmental energy flows. However, civilization developed to do that through the maximum possible deceits and frauds. That development has REASONS which are comprehensible and comprehensive as the results of human beings and civilizations actually operating as general energy systems. Natural selection drove the development of artificial selection systems to operate through the maximum possible deceits and frauds. Therefore, the actually existing political economy is really based upon governments ENFORCING FRAUDS by privately controlled banks, while those social facts simultaneously require attitudes of deliberate ignorance towards the principle of the conservation of energy, as well as deliberately misunderstanding the concept of entropy in the most absurdly backward ways possible.

"Capitalism" only makes sense as a subset of organized crime. The best organized gangsters, the banksters, have captured control over governments, which are the biggest forms of organized crime. Hence, the public "money" supplies are being created out of nothing as debts by privately controlled banks, while governments ENFORCE THOSE FRAUDS. Of course, since that "money" is made out of nothing, it is NOT actually "capital" in any old-fashioned sense. Rather it is effectively "negative capital." Therefore, those who have first access to that negative capital manifest the patterns presented in the article above: "It's about who can blow through money the fastest."

The deeper problem is that most people keep on discussing those social facts through the same old-fashioned bullshit-based languages, using terms such as "capitalism" that no longer mean anything that makes sense, according to either their dictionary definitions, or according to their relationships to the actual social facts.

What we should do is change the paradigms with which we perceive politics, in order to make that become consistent with physical science. However, doing that takes profound changes, because all the established systems are being run by the best available professional liars and immaculate hypocrites, including the layers of controlled opposition that surround the central core of the organized crime done by bankster controlled governments.

There is NO DOUBT we are living inside of Wonderland Matrix Bizarro Worlds, where everything appears to be absurdly backwards. THERE IS "BACKWARDS CAPITALISM." However, that goes way, way deeper than most people begin to imagine. The accumulating anomalies can be explained. However, doing so requires series of more profound paradigm shifts in political science than those which have already been achieved in physical science.