James Dennin, Kapitall: Investors are flocking to growth stocks that don't have profits yet. Is this strategy wise?
In an important sign that the bull market has returned after a brief sojourn in January, many of the top gainers on the Russell 1000 index are unprofitable. Analysts say that the trend indicates greed and fear of missing out have become investors' top motivation.
Performance on the Nasdaq Biotech Index also supports the notion that growth stocks are making large gains. That index is up about 25% over the last two weeks, even though only two-thirds of the companies show a profit.
[Read more from Kapitall: Chen Lin’s Perfect Biotech Stocks Prescription: Buy Low, Sell High!]In addition, it is important to remember that part of this broad bull run is the result of investors pulling capital out of foreign markets, leaving American stocks as investors' most attractive choice. But the recent flood of tech IPOs from companies like Seamless and CandyCrush – which are very trendy and popular but not very remunerative — suggests we're in a bull market. We decided to build a list of stocks that would give us a better idea of what's behind the trend. We started by screening for unprofitable stocks that are rallying at least 20% above their simple moving averages for the last 200 days (SMA200). That narrowed our screen to about 400 companies. That was too broad, so we set the parameters even higher and narrowed our screen to companies trading at least 60% above their SMA200. We focused on big names, and we only included companies with a market cap above $2 billion. We were left with six companies on our list. There are two ways to play this list. Either the market has gotten one of these companies wrong, making them a very strong short candidate, or the market's gotten them right. If that's the case, then the company's first profit would probably support another jump in share price — particularly if it prompts short-sellers to cover.