Long term investing works well, but it doesn’t always work for each individual stock. We really hate to see fellow investors lose their hard-earned money. Anyone who held Pilot Energy Limited (ASX:PGY) for five years would be nursing their metaphorical wounds since the share price dropped 94% in that time. And we doubt long term believers are the only worried holders, since the stock price has declined 29% over the last twelve months. Furthermore, it’s down 40% in about a quarter. That’s not much fun for holders. Of course, this share price action may well have been influenced by the 28% decline in the broader market, throughout the period.
While a drop like that is definitely a body blow, money isn’t as important as health and happiness.
Pilot Energy recorded just AU$321,545 in revenue over the last twelve months, which isn’t really enough for us to consider it to have a proven product. This state of affairs suggests that venture capitalists won’t provide funds on attractive terms. As a result, we think it’s unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. For example, they may be hoping that Pilot Energy finds fossil fuels with an exploration program, before it runs out of money.
Companies that lack both meaningful revenue and profits are usually considered 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 Pilot Energy investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Our data indicates that Pilot Energy had AU$671k more in total liabilities than it had cash, when it last reported in September 2019. That puts it in the highest risk category, according to our analysis. But with the share price diving 43% per year, over 5 years , it’s probably fair to say that some shareholders no longer believe the company will succeed. You can see in the image below, how Pilot Energy’s cash levels have changed over time (click to see the values). You can see in the image below, how Pilot Energy’s cash levels have changed over time (click to see the values).
Of course, the truth is that it is hard to value companies without much 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.
What about the Total Shareholder Return (TSR)?
Investors should note that there’s a difference between Pilot Energy’s total shareholder return (TSR) and its share price change, which we’ve covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Pilot Energy hasn’t been paying dividends, but its TSR of -91% exceeds its share price return of -94%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.
A Different Perspective
We regret to report that Pilot Energy shareholders are down 29% for the year. Unfortunately, that’s worse than the broader market decline of 17%. Having said that, it’s inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. However, the loss over the last year isn’t as bad as the 38% per annum loss investors have suffered over the last half decade. We’d need to see some sustained improvements in the key metrics before we could muster much enthusiasm. 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. Case in point: We’ve spotted 6 warning signs for Pilot Energy you should be aware of, and 3 of them are significant.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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