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Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. Investors in Xenon Pharmaceuticals Inc. (NASDAQ:XENE) have tasted that bitter downside in the last year, as the share price dropped 18%. That contrasts poorly with the market return of 13%. On the bright side, the stock is actually up 7.4% in the last three years.
With just US$16,000 worth of revenue in twelve months, we don't think the market considers Xenon Pharmaceuticals to have proven its business plan. 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. For example, they may be hoping that Xenon Pharmaceuticals comes up with a great new product, 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 last reported its balance sheet in June 2019, Xenon Pharmaceuticals had cash in excess of all liabilities of US$79m. 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. With the share price down 18% in the last year , it seems likely that the need for cash is weighing on investors' minds. You can see in the image below, how Xenon Pharmaceuticals's cash levels have changed over time (click to see the values). The image below shows how Xenon Pharmaceuticals's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. 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
Over the last year, Xenon Pharmaceuticals shareholders took a loss of 18%. In contrast the market gained about 13%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. Investors are up over three years, booking 2.4% per year, much better than the more recent returns. The recent sell-off could be an opportunity if the business remains sound, so it may be worth checking the fundamental data for signs of a long-term growth trend. Before spending more time on Xenon Pharmaceuticals it might be wise to click here to see if insiders have been buying or selling shares.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
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 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. Thank you for reading.