Edward Conard

Top Ten New York Times Bestselling Author

  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

AI Summary. An analysis of gross profit relative to assets for US small-cap companies, defined as $400m–$4bn in market cap, finds a broad-based decline in quality from the early 2010s, with information technology, consumer discretionary, and industrials most affected. Health care was excluded because unprofitable pharmaceutical and biotech stocks rose from 5% to 16% of small stocks.

Chris Satterthwaite Verdad
Date Posted:
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Database

.@verdadcap uses Gross Profits/Assets as a proxy for quality, and notes that there has been a sharp deterioration in quality for US small caps. Chris Satterthwaite writes that foreign small caps have similar quality but lower price than US small caps.

Has the quality of US small-cap companies declined broadly across sectors?

Core argument: Unprofitable pharma and biotech stocks tripled as a share of US small caps, from 5% in 1995 to 16% in 2021, prompting exclusion of health care entirely from the gross profit/assets quality analysis.

Examined our favorite quality metric, gross profit/assets (GP/A), over time by sector for “small” US companies, which we define as between $400M and $4B in market cap today, or the equivalent percentile rank by market cap historically. We made the decision to exclude the health-care industry entirely given the significant proliferation of unprofitable pharma and biotech stocks, which tripled in proportion from 5% of small stocks in 1995 to 16% of stocks in 2021. We were curious whether the degradation in quality still held once we excluded this mix shift impact. The chart below shows the contribution to aggregate small-cap US GP/A by sector (e.g., IT GP/A multiplied by IT proportion of total market cap). Most notable is the broad-based decline in quality from the early 2010s to today. The most impacted sectors include IT, consumer discretionary, and industrials. We find it notable that US large caps trade at a premium to the rest of the world, while the median US small cap stock.

Takeaways by Macro Roundup® AI

  1. Unprofitable pharma and biotech stocks tripled as a share of US small caps, from 5% in 1995 to 16% in 2021, prompting exclusion of health care entirely from the gross profit/assets quality analysis.
  2. Aggregate gross profit/assets for US small caps, defined as $400M–$4B in market cap or the equivalent historical percentile rank, declined broadly across sectors from the early 2010s to today even excluding health care.
  3. IT, consumer discretionary, and industrials were the sectors most affected by the decline in small-cap gross profit/assets, measured as each sector's GP/A multiplied by its share of total market cap.

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