Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. That downside risk was realized by Collegium Pharmaceutical, Inc. (NASDAQ:COLL) shareholders over the last year, as the share price declined 48%. That's disappointing when you consider the market returned 6.1%. Longer term shareholders haven't suffered as badly, since the stock is down a comparatively less painful 15% in three years. Furthermore, it's down 30% in about a quarter. That's not much fun for holders.
Because Collegium Pharmaceutical is loss-making, we think the market is probably more focussed on revenue and revenue growth, at least for now. When a company doesn't make profits, we'd generally expect to see good revenue growth. Some companies are willing to postpone profitability to grow revenue faster, but in that case one does expect good top-line growth.
In the last year Collegium Pharmaceutical saw its revenue grow by 223%. That's a strong result which is better than most other loss making companies. Given the revenue growth, the share price drop of 48% seems quite harsh. Our sympathies to shareholders who are now underwater. Prima facie, revenue growth like that should be a good thing, so it's worth checking whether losses have stabilized. Our brains have evolved to think in linear fashion, so there's value in learning to recognize exponential growth. We are, in some ways, simply the wisest of the monkeys.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Take a more thorough look at Collegium Pharmaceutical's financial health with this free report on its balance sheet.
A Different Perspective
The last twelve months weren't great for Collegium Pharmaceutical shares, which cost holders 48%, while the market was up about 6.1%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. The three-year loss of 5.2% per year isn't as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. Although Warren Buffett famously said he likes to 'buy when there is blood on the streets', he also focusses on high quality stocks with solid prospects. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.