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It's not a secret that every investor will make bad investments, from time to time. But it's not unreasonable to try to avoid truly shocking capital losses. It must have been painful to be a Novus Therapeutics, Inc. (NASDAQ:NVUS) shareholder over the last year, since the stock price plummeted 86% in that time. A loss like this is a stark reminder that portfolio diversification is important. We wouldn't rush to judgement on Novus Therapeutics because we don't have a long term history to look at. The falls have accelerated recently, with the share price down 78% in the last three months.
We really feel for shareholders in this scenario. It's a good reminder of the importance of diversification, and it's worth keeping in mind there's more to life than money, anyway.
Novus Therapeutics hasn't yet reported any revenue yet, so it's as much a business idea as an actual business. 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). It seems likely some shareholders believe that Novus Therapeutics will significantly advance the business plan before too long.
Companies that lack both meaningful revenue and profits are usually considered high risk. 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 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). Some Novus Therapeutics investors have already had a taste of the bitterness stocks like this can leave in the mouth.
When it reported in March 2019 Novus Therapeutics had minimal cash in excess of all liabilities consider its expenditure: just US$5.5m 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 86% in the last year. The image below shows how Novus Therapeutics's balance sheet has changed over time; if you want to see the precise values, simply click on the image. The image below shows how Novus Therapeutics'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. Would it bother you if insiders were selling the stock? I would feel more nervous about the company if that were so. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
Given that the market gained 7.0% in the last year, Novus Therapeutics shareholders might be miffed that they lost 86%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 78% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. 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.
Novus Therapeutics 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 US exchanges.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.