We're definitely into long term investing, but some companies are simply bad investments over any time frame. It hits us in the gut when we see fellow investors suffer a loss. Anyone who held Six Sigma Metals Limited (ASX:SI6) for five years would be nursing their metaphorical wounds since the share price dropped 98% in that time. And we doubt long term believers are the only worried holders, since the stock price has declined 33% over the last twelve months. Furthermore, it's down 20% in about a quarter. That's not much fun for holders.
We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don't have to lose the lesson.
With just AU$18,547 worth of revenue in twelve months, we don't think the market considers Six Sigma Metals to have proven its business plan. You have to wonder why venture capitalists aren't funding it. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Six Sigma Metals finds some valuable resources, before it runs out of money.
Companies that lack both meaningful revenue and profits are usually considered 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 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). Six Sigma Metals has already given some investors a taste of the bitter losses that high risk investing can cause.
When it last reported its balance sheet in June 2019, Six Sigma Metals had cash in excess of all liabilities of AU$1.1m. While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. With the share price down 56% per year, over 5 years , it seems likely that the need for cash is weighing on investors' minds. You can see in the image below, how Six Sigma Metals'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 Six Sigma Metals'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. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
Six Sigma Metals shareholders are down 33% for the year, but the market itself is up 22%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, longer term shareholders are suffering worse, given the loss of 55% doled out over the last five years. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. If you want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares - and the price they paid.
Six Sigma Metals is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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.
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. Thank you for reading.