As every investor would know, you don't hit a homerun every time you swing. But it should be a priority to avoid stomach churning catastrophes, wherever possible. So we hope that those who held Homestay Care Limited (ASX:HSC) during the last year don't lose the lesson, in addition to the 88% hit to the value of their shares. While some investors are willing to stomach this sort of loss, they are usually professionals who spread their bets thinly. We wouldn't rush to judgement on Homestay Care because we don't have a long term history to look at. Furthermore, it's down 77% in about a quarter. That's not much fun for holders.
While a drop like that is definitely a body blow, money isn't as important as health and happiness.
Homestay Care recorded just AU$93,821 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? 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 Homestay Care will significantly advance the business plan before too long.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. It certainly is a dangerous place to invest, as Homestay Care investors might realise.
Homestay Care had liabilities exceeding cash by AU$99k when it last reported in June 2019, according to our data. That makes it extremely high risk, in our view. But with the share price diving 88% in the last year , it's probably fair to say that some shareholders no longer believe the company will succeed. You can see in the image below, how Homestay Care's cash levels have changed over time (click to see the values). You can see in the image below, how Homestay Care's cash levels have changed over time (click to see the values).
In reality it's hard to have much certainty when valuing a business that has neither 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. You can click here to see if there are insiders selling.
What about the Total Shareholder Return (TSR)?
We'd be remiss not to mention the difference between Homestay Care's total shareholder return (TSR) and its share price return. The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. Homestay Care hasn't been paying dividends, but its TSR of -85% exceeds its share price return of -88%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.
A Different Perspective
While Homestay Care shareholders are down 85% for the year, the market itself is up 23%. While the aim is to do better than that, it's worth recalling that even great long-term investments sometimes underperform for a year or more. The share price decline has continued throughout the most recent three months, down 77%, suggesting an absence of enthusiasm from investors. Given the relatively short history of this stock, we'd remain pretty wary until we see some strong business performance. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
Of course Homestay Care may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.