Is it Profitable to Invest in Profitable Firms?

SUMMARY

• The profitability of U.S. stocks has declined over the last two decades
• The number of unprofitable companies has increased
• Profitability is a complex stock selection metric on a stand-alone basis

INTRODUCTION

Investing is often seen as both an art and a science. While there are no absolute laws like gravity, certain time-tested principles—such as value investing—have proven effective over the long run. Another common strategy is focusing on high-quality stocks, particularly those with strong earnings. While definitions of “quality earnings” may vary, many investors start by avoiding unprofitable companies.

However, history tells a different story. Take Tesla, for example – it remained unprofitable until 2020 but consistently outperformed the S&P 500 for years. Similarly, companies like Palantir and Peloton delivered astonishing returns of over 50% in 2020, despite not being profitable (read Picking Profitable Companies Can Be Unprofitable).

In this research article, we will explore the prevalence of unprofitable companies in the U.S. market and their impact on overall index performance.

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