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Generally speaking long term investing is the way to go. But along the way some stocks are going to perform badly. For example, after five long years the Mexco Energy Corporation (NYSEMKT:MXC) share price is a whole 56% lower. We certainly feel for shareholders who bought near the top. And it's not just long term holders hurting, because the stock is down 51% in the last year. Shareholders have had an even rougher run lately, with the share price down 36% in the last 90 days.
Mexco Energy recorded just US$2,674,291 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). It seems likely some shareholders believe that Mexco Energy will discover or develop fossil fuel before too long.
We think companies that have neither significant revenues nor profits are pretty high risk. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Mexco Energy has already given some investors a taste of the bitter losses that high risk investing can cause.
Mexco Energy had liabilities exceeding cash by US$1.4m when it last reported in December 2019, according to our data. That puts it in the highest risk category, according to our analysis. But since the share price has dived -15% per year, over 5 years , it looks like some investors think it's time to abandon ship, so to speak. You can click on the image below to see (in greater detail) how Mexco Energy's cash levels have changed over time.
Of course, the truth is that it is hard to value companies without much revenue or profit. Would it bother you if insiders were selling the stock? I would feel more nervous about the company if that were so. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
While the broader market lost about 3.2% in the twelve months, Mexco Energy shareholders did even worse, losing 51%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 15% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Mexco Energy (at least 2 which are potentially serious) , and understanding them should be part of your investment process.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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.
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