by Scott Ronalds

There’s an axiom in our industry that’s especially relevant today: a great company doesn’t always make a great investment.

This may seem illogical. If a company makes an outstanding product or offers a superior service, why wouldn’t you want to own it? The answer is price. If you overpay for an asset — be it real estate, fine art, or a stock — you may be underwater on your investment for a long time. If you really stretch on price, you may never see a profit.

Investors are currently laser-focused on profitability. Stocks with high price-to-earnings multiples (P/E’s) and newly public companies that have yet to generate a profit are currently seeing a return to earth after a sharp runup. Equities in general have had a challenging year so far, but this cohort has had a disastrous few months.

In the ‘reopening’ phase of the economic recovery, many investors wanted exposure to fast-growing, game-changing businesses, price be damned. This strategy worked well for a short time but is feeling the pain today. Higher interest rates, swelling inflation, and a cloudier economic outlook mean the ‘potential’ profits are being delayed, or may be unattainable altogether for certain businesses.

Many interesting and innovative companies have seen a downright crash in their stock price this year. Here are just a few.

• Peloton, the front-runner in spin bikes and connected fitness classes, is down 90% from its high last year.
  
• Rivian, the maker of high-end electric trucks and SUVs, is down 85%.
  
• Beyond Meat, the leading producer of plant-based meat substitutes, is down 80%.
  
• Zoom, the first name in video conferencing services, is down 75%.
  
• Shopify, the leading all-in-one e-commerce platform, is down 75%.
  
• Netflix, the premier subscription streaming service, is down 75%.
  
• DoorDash, the largest online food delivery platform, is down 70%.
  
• Spotify, one of the largest music streaming services, is down 65%.
  
• Uber, the forerunner in independent ridesharing, is down 50%.
  
• Airbnb, the pioneer in short-term home rental services and experiences, is down 45%.

We’ve referenced some of these stocks in our writing lately (see Why stock market forecasters are in need of a reality check and Capital markets have been doing a lot of normalizing lately) and my purpose here isn’t to pile on. Many of these are still fantastic companies. Their products are in demand and their services are industry leading. But it’s clearly evident that they have not been terrific investments (for those who purchased in the last year or so, at least). The severe declines reinforce the point that no company is a great investment without consideration of its price.

Note: We do not own any of the above stocks. Our fund managers pay close attention to valuation and have long been wary of high-multiple stocks and unprofitable businesses. Their focus is on great companies trading at what they believe to be good prices.