When we invest, we’re generally looking for stocks that outperform the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the Fenix Resources Limited (ASX:FEX) share price is up 60% in the last 5 years, clearly besting the market return of around 23% (ignoring dividends). On the other hand, the more recent gains haven’t been so impressive, with shareholders gaining just 33%.
With just AU$18,904 worth of revenue in twelve months, we don’t think the market considers Fenix Resources to have proven its business plan. 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 Fenix Resources will find or develop a valuable new mine before too long.
We think companies that have neither significant revenues nor profits are pretty high risk. 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 Fenix Resources investors have already had a taste of the sweet taste stocks like this can leave in the mouth, as they gain popularity and attract speculative capital.
When it last reported its balance sheet in June 2019, Fenix Resources had cash in excess of all liabilities of AU$3.6m. 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 up 119% per year, over 5 years , the market is seems hopeful about the potential, despite the cash burn. You can see in the image below, how Fenix Resources’s cash levels have changed over time (click to see the values). The image below shows how Fenix Resources’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. However you can take a look at whether insiders have been buying up shares. If they are buying a significant amount of shares, that’s certainly a good thing. You can click here to see if there are insiders buying.
A Different Perspective
We’re pleased to report that Fenix Resources shareholders have received a total shareholder return of 33% over one year. Since the one-year TSR is better than the five-year TSR (the latter coming in at 9.9% per year), it would seem that the stock’s performance has improved in recent times. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example – Fenix Resources has 5 warning signs (and 3 which are concerning) we think you should know about.
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 AU exchanges.
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.
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