Long term investing works well, but it doesn't always work for each individual stock. It hits us in the gut when we see fellow investors suffer a loss. Imagine if you held Encanto Potash Corp. (CVE:EPO) for half a decade as the share price tanked 91%. And it's not just long term holders hurting, because the stock is down 60% in the last year. The falls have accelerated recently, with the share price down 38% in the last three months. This could be related to the recent financial results - you can catch up on the most recent data by reading our company report.
While a drop like that is definitely a body blow, money isn't as important as health and happiness.
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Encanto Potash didn't have any revenue in the last year, so it's fair to say it doesn't yet have a proven product (or at least not one people are paying for). This state of affairs suggests that venture capitalists won't provide funds on attractive terms. As a result, we think it's unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. It seems likely some shareholders believe that Encanto Potash will significantly advance the business plan before too long.
We think companies that have neither significant revenues nor profits are pretty high risk. There is almost always a chance they will need to raise more capital, and their progress - and share price - will dictate how dilutive that is to current holders. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some Encanto Potash investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Our data indicates that Encanto Potash had CA$24,630,195 more in total liabilities than it had cash, when it last reported in December 2018. That makes it extremely high risk, in our view. But with the share price diving 39% per year, over 5 years, it's probably fair to say that some shareholders no longer believe the company will succeed. You can click on the image below to see (in greater detail) how Encanto Potash's cash levels have changed over time.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
A Different Perspective
Encanto Potash shareholders are down 60% for the year, but the market itself is up 1.6%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 39% over the last half decade. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality businesses. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.