They lose, you gain? Why one fund manager sees big potential in companies reporting losses

Investing in companies that lose money may sound counterintuitive. But one fund manager sees great bargains in select stocks that are reporting negative earnings numbers.

Brian Lund, co-portfolio manager of the small-cap fund at ClearBridge Investments, points to three names in particular that fit this bill: sand manufacturer Hi-Crush, online education marketing platform 2U and drug manufacturer Ironwood Pharmaceuticals.

"Our approach is to try to tease out, from the market price, exactly what the expectations are among investors for returns on capital, investments, growth, et cetera, for the company, and then using our own competitive strategy work, try to figure out how our expectations are different," Lund said Wednesday on CNBC's "Trading Nation."

And in many cases, they are typically one of three kinds of companies: They are either investing back into themselves for future growth, are start-ups or are cyclically depressed.

One name Lund recommends is Houston-based sand manufacturer Hi-Crush Partners, which provides sand for fracking operations. Lund said the company produces high-quality sand in a low-cost area but has suffered as the number of rigs in land-fracking operations has fallen in recent years. He sees growth potential as demand may begin to pick up.

"So we think they're going to end up earning a lot more money in the future. They earned as much as $3 a few years ago and now it's trading under $20, so we think that's going to come back," Lund said.

Hi-Crush in October reported a quarterly loss of 21 cents per share, missing analysts' expectations of a 16 cent loss.

Another company Lund likes is 2U, a digital marketing platform for colleges' online degrees. The company has reported a loss of 47 cents in the 12 months through September, but Lund classifies it as a company investing for the future, as it went public just two years ago, and has high start-up costs. Lund sees growth potential, noting that when the platform locks in 10-year accounts with colleges, it makes a hefty percentage of the tuition that students then pay for those online degrees.

"The more programs they win, the more money they lose, but the more valuable they are," he said.

His third stock, Massachusetts-based drug manufacturer Ironwood Pharmaceuticals, posted a quarterly loss of 23 cents per share in November, beating analysts' estimates by a penny. It has posted a loss of 56 cents over the last 12 months through September, though has surged about 70 percent this year.

For Chad Morganlander, a portfolio manager who seeks out value holdings, these companies wouldn't be prime for his portfolio. But he does see the value in investing in companies that could be classified as "undiscovered gems" with potential for growth once they invest in themselves.

He pointed to Amazon as one company that faced criticism that it wasn't "making money for about 10 years." However, it was running a great business, and reinvesting back into it.

"By deploying that capital, you had a tremendous amount of growth and a tremendous amount of shareholder value," he pointed out Wednesday on CNBC's "Trading Nation."


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more