As every investor would know, not every swing hits the sweet spot. But you want to avoid the really big losses like the plague. So take a moment to sympathize with the long term shareholders of Catabasis Pharmaceuticals, Inc. (NASDAQ:CATB), who have seen the share price tank a massive 93% over a three year period. That’d be enough to cause even the strongest minds some disquiet. And the ride hasn’t got any smoother in recent times over the last year, with the price 76% lower in that time. Even worse, it’s down 21% in about a month, which isn’t fun at all.
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.
Catabasis Pharmaceuticals recorded just US$250,000 in revenue over the last twelve months, which isn’t really enough for us to consider it to have a proven product. 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 more focused on would could be, than paying attention to the current revenues (or lack thereof). For example, they may be hoping that Catabasis Pharmaceuticals comes up with a great new treatment, 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. The 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). It certainly is a dangerous place to invest, as Catabasis Pharmaceuticals investors might realise.
Catabasis Pharmaceuticals had net cash of US$39m when it last reported (September 2018). That’s not too bad but management may have to think about raising capital or taking on debt, unless the company is close to breaking even. We’d venture that shareholders are concerned about the need for more capital, because the share price has dropped 59% per year, over 3 years. The image belows shows how Catabasis Pharmaceuticals’s balance sheet has changed over time; if you want to see the precise values, simply click on the image.
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’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.
A Different Perspective
The last twelve months weren’t great for Catabasis Pharmaceuticals shares, which cost holders 76%, while the market was up about 3.5%. 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 59% 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.
Of course Catabasis Pharmaceuticals may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
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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