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Introducing Obsidian Energy (TSE:OBE), The Stock That Collapsed 98%

Simply Wall St

Long term investing is the way to go, but that doesn't mean you should hold every stock forever. It hits us in the gut when we see fellow investors suffer a loss. Anyone who held Obsidian Energy Ltd. (TSE:OBE) for five years would be nursing their metaphorical wounds since the share price dropped 98% in that time. And some of the more recent buyers are probably worried, too, with the stock falling 86% in the last year. Shareholders have had an even rougher run lately, with the share price down 48% in the last 90 days. This could be related to the recent financial results - you can catch up on the most recent data by reading our company report.

While a drop like that is definitely a body blow, money isn't as important as health and happiness.

See our latest analysis for Obsidian Energy

Obsidian Energy isn't a profitable company, so it is unlikely we'll see a strong correlation between its share price and its earnings per share (EPS). Arguably revenue is our next best option. When a company doesn't make profits, we'd generally expect to see good revenue growth. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.

In the last five years Obsidian Energy saw its revenue shrink by 40% per year. That's definitely a weaker result than most pre-profit companies report. So it's not that strange that the share price dropped 52% per year in that period. This kind of price performance makes us very wary, especially when combined with falling revenue. Of course, the poor performance could mean the market has been too severe selling down. That can happen.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

TSX:OBE Income Statement, November 22nd 2019

We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. So it makes a lot of sense to check out what analysts think Obsidian Energy will earn in the future (free profit forecasts).

A Different Perspective

Investors in Obsidian Energy had a tough year, with a total loss of 86%, against a market gain of about 12%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 52% over the last half decade. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality businesses. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.

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 CA exchanges.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.