Investors can approximate the average market return by buying an index fund. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. That downside risk was realized by Allakos Inc. (NASDAQ:ALLK) shareholders over the last year, as the share price declined 17%. That's well bellow the market return of 5.5%. Allakos may have better days ahead, of course; we've only looked at a one year period. It's down 21% in about a month.
Allakos hasn't yet reported any revenue, so it's as much a business idea as an actual business. 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). For example, they may be hoping that Allakos comes up with a great new product, before it runs out of money.
We think companies that have neither significant revenues nor profits are pretty high risk. 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 such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized).
Allakos has plenty of cash in the bank, with cash in excess of all liabilities sitting at US$151m, when it last reported (March 2019). This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But since the share price has dropped 17% in the last year, it seems like the market might have been over-excited previously. You can see in the image below, how Allakos's cash levels have changed over time (click to see the values). You can click on the image below to see (in greater detail) how Allakos's cash levels have changed over time.
It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I would feel more nervous about the company if that were so. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
Given that the market gained 5.5% in the last year, Allakos shareholders might be miffed that they lost 17%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 16% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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.