So I was listening to an interview with Howard Marks & Joel Greenblatt, called “Is It Different This Time?” and one of Joel’s talking points about the euphoria we’ve reached in the stock markets is that:

• He took the 100 least profitable companies in 2019 (pre-covid)

• As of early 2021 all 100 companies have posted a 100% return [1]

I thought that statement was bonkers, so I took a list of NYSE + NASDAQ companies ~ 6500, excluded SPACs/warrants and anything that triggered an error in google sheets (lazy I know), which left around 5000 equities.

• Of the 5,000 equities, Over 3,130 have posted a >100% return from their 52 week low

• Of the 5,000 equities, Over 500 have posted a >500% return from their 52 week low

So I try to rationalize these statements as buying opportunities as a result from COVID but when I filter the 5,000 equities to only include companies w/ a TTM EPS of <0 I am left with 2500. So 2500, or ~50% of the total universe of equities on NYSE + NASDAQ, over a 12 month window, have not been profitable (as defined by TTM EPS <0).

What blows my mind is of these 2,500 “unprofitable companies”

1,795 have had a >100% return from their 52 week low500 of the have had a >50% return YTD

Really?

50% of all publicly traded NASDAQ/NYSE companies are not profitable

• Filter 1 = only list equities where TTM EPS <0

• Result = 2500

Yet 35% have posted a 100% return from their 52 week low

• Filter 1 = only list equities where TTM EPS <0

• Filter 2 = Filter 1 + [2]

• Result = 1795

And 10% have had a 2021 YEAR TO DATE RETURN OF > 50%

• Filter 1 = only list equities where TTM EPS <0

• Filter 2 = Filter 1 + [3]

• Result = 500

I mean guys, do this yourself if you don’t believe me — it’s literally 5 GOOGLEFINANCE functions a bunch of pivot tables in excel.

What I don’t have is a relative basis for comparison, e.g if these numbers are normal in a pre-covid environment, e.g. 5 years ago, 10 years ago, etc.

I love a good rally, and i’m definitely in some risky small caps but when I see companies like SOUTHWEST AIRLINES posting negative quarter-over-quarter earnings, yet it is trading back at pre-pandemic levels I have come to one of two conclusions:

1. My math is wrong

2. There will be a “major correction” in 2021

In the absence of my math being wrong, i predict a +10% correction in 2021.

[1] — (Share price at end of 2019 — Share price End of January 2021) / (Share price at end of 2019)

[2] — ( (current price — 52weeklow)/52weeklow) > 100% )

[3] — ( (currentprice — price on 1/1/21) / price on 1/1/21 ) > 50%)

Make sure to set stop limits and take profits.

John
February 2021
San Francisco, CA