The History and Performance of Concept Stocks

We analyze the history and performance of concept stocks, defined as stocks whose current valuation appears out of line with tradition valuation metrics. Although the obvious current example is Internet stocks, concept stocks characterize every period. Popular concept stocks of earlier periods include industries as diverse as oil and gas extraction to industrial, computer, and office equipment. Concept stocks, identified as firms with extreme levels of price to sales, are markedly different from glamour stocks or IPOs. Using a sample of firms extending from 1967 through 1999, we also note that the characteristics and identity of concept stocks has changed markedly. The ratio of price to sales has increased dramatically over time while the percentage of firms with positive earnings has dropped precipitously. In more recent periods, concept stocks, like the firms identified by Fama and French (2001) tend to be smaller, less profitable and with higher level of investments. Over the entire sample, the typical concept stock is insignificantly different in size from the typical CRSP firm. However, the percentage of concept stocks still trading after ten years declines markedly over the sample period. Moreover, analysis of the long run performance of concept stocks, using both buy and hold returns and the Fama-French factors reveals underperformance. The results are robust to extensive sensitivity analysis and are separate from glamour or IPO effects