It appears ASX investors are attracted to loss-making shares, with many of the S&P/ASX 300 Index (ASX: XKO)'s favourite names trading with red balance sheets.
Indeed, new research by MST Marquee has found 50 of the 300 companies that call the index home are yet to turn a profit.
So, why are ASX investors still buying shares in companies posting losses? It's likely the hope that they'll find the next market champion.
Why has the ASX embraced loss-making shares?
According to research by MST Marquee, cited by the Australian Financial Review, unprofitable ASX 300 shares make up a sixth of the index.
And investors might be pouring cash into the stocks in the hopes they'll turn the corner to greatness.
That is the general idea behind investing in ASX growth shares – which aren't necessarily unprofitable – after all.
But do loss-making companies really make good investments? The short answer is, sometimes.
Of course, until last month Pilbara Minerals Ltd (ASX: PLS) was yet to turn a profit. Its share price is currently 720% higher than it was five years ago at $4.85.
Looking further afield, Tesla Inc (NASDAQ: TSLA) stock was offered for US$17 as part of its initial public offering (IPO) in 2010. It turned its first profit in 2013 and nine years later, shares in the electric vehicle giant are swapping hands for US$288.
Further, Amazon.com Inc (NASDAQ: AMZN) went public in 1997. It offered shares for US$18 (7.5 US cents adjusted for four stock splits since) under its IPO before posting its first profit in 2002. The stock now trades at more than US$117.
But MST Marquee senior research analyst Hasan Tevfik urges investors to show caution when it comes to investing in loss-making shares. He said, courtesy of the AFR:
Investors could also be hoping that a few of these birds will develop wings and start soaring like an eagle, perhaps.
While the ultimate driver of share prices is the direction of profits, these companies have none. In our view, these companies are the equivalent of birds without wings.
