Taking the occasional loss comes part and parcel with investing on the stock market. Anyone who held S2 Resources Ltd (ASX:S2R) over the last year knows what a loser feels like. In that relatively short period, the share price has plunged 63%. To make matters worse, the returns over three years have also been really disappointing (the share price is 59% lower than three years ago). The falls have accelerated recently, with the share price down 23% in the last three months.
S2 Resources hasn’t yet reported any revenue yet, so it’s as much a business idea as a business. This state of affairs suggests that venture capitalists won’t provide funds on attractive terms. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that S2 Resources will find or develop a valuable new mine before too long.
As a general rule, if a company doesn’t have much revenue, and it loses money, then it is a high risk investment. 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). Some S2 Resources investors have already had a taste of the bitterness stocks like this can leave in the mouth.
When it last reported its balance sheet in June 2018, S2 Resources had net cash of AU$14m. 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 63% in the last year. You can see in the image below, how S2 Resources’s cash and debt levels have changed over time (click to see the values).
In reality it’s hard to have much certainty when valuing a business that has neither revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
A Different Perspective
The last twelve months weren’t great for S2 Resources shares, which cost holders 63%, while the market was up about 9.1%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. The three-year loss of 26% 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. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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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.