Many investors define successful investing as beating the market average over the long term. But if you try your hand at stock picking, your risk returning less than the market. We regret to report that long term Cobalt Blue Holdings Limited (ASX:COB) shareholders have had that experience, with the share price dropping 32% in three years, versus a market return of about 38%. And the share price decline continued over the last week, dropping some 14%.
We don't think Cobalt Blue Holdings's revenue of AU$70,331 is enough to establish significant demand. 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). For example, investors may be hoping that Cobalt Blue Holdings finds some valuable resources, before it runs out of money.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. 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.
When it reported in June 2019 Cobalt Blue Holdings had minimal cash in excess of all liabilities consider its expenditure: just AU$3.5m to be specific. So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. With that in mind, you can understand why the share price dropped 12% per year, over 3 years . You can click on the image below to see (in greater detail) how Cobalt Blue Holdings's cash levels have changed over time. You can click on the image below to see (in greater detail) how Cobalt Blue Holdings's cash levels have changed over time.
Of course, the truth is that it is hard to value companies without much revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I'd like that just about as much as I like to drink milk and fruit juice mixed together. You can click here to see if there are insiders selling.
What about the Total Shareholder Return (TSR)?
We've already covered Cobalt Blue Holdings's share price action, but we should also mention its total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Cobalt Blue Holdings hasn't been paying dividends, but its TSR of -30% exceeds its share price return of -32%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.
A Different Perspective
The last twelve months weren't great for Cobalt Blue Holdings shares, which cost holders 6.1%, while the market was up about 24%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. However, the loss over the last year isn't as bad as the 11% per annum loss investors have suffered over the last three years. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. It's always interesting to track share price performance over the longer term. But to understand Cobalt Blue Holdings better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 6 warning signs for Cobalt Blue Holdings (of which 3 make us uncomfortable!) you should know about.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.