Imagine Owning Gowest Gold And Trying To Stomach The 76% Share Price Drop

Even the best investor on earth makes unsuccessful investments. But it should be a priority to avoid stomach churning catastrophes, wherever possible. We wouldn’t blame Gowest Gold Ltd (CVE:GWA) shareholders if they were still in shock after the stock dropped like a lead balloon, down 76% in just one year. A loss like this is a stark reminder that portfolio diversification is important. To make matters worse, the returns over three years have also been really disappointing (the share price is 63% lower than three years ago). On top of that, the share price has dropped a further 25% in a month.

View our latest analysis for Gowest Gold

Gowest Gold didn’t have any revenue in the last year, so it’s fair to say it doesn’t yet have a proven product (or at least not one people are paying for). You have to wonder why venture capitalists aren’t funding it. So it seems that the investors more focused on would could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Gowest Gold finds some valuable resources, before it runs out of money.

Companies that lack both meaningful revenue and profits are usually considered high risk. The is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). 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). Gowest Gold has already given some investors a taste of the bitter losses that high risk investing can cause.

Gowest Gold had net debt of CA$23,056,293 when it last reported in July 2018, according to our data. That makes it extremely high risk, in our view. But since the share price has dived -76% in the last year, it looks like some investors think it’s time to abandon ship, so to speak. You can click on the image below to see (in greater detail) how Gowest Gold’s cash and debt levels have changed over time.

TSXV:GWA Historical Debt, February 27th 2019
TSXV:GWA Historical Debt, February 27th 2019

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. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I’d like that just about as much as I like to drink milk and fruit juice mixed together. It costs nothing but a moment of your time to see if we are picking up on any insider selling.

A Different Perspective

While the broader market gained around 4.7% in the last year, Gowest Gold shareholders lost 76%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 17% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. Investors who like to make money usually check up on insider purchases, such as the price paid, and total amount bought. You can find out about the insider purchases of Gowest Gold by clicking this link.

Gowest Gold is not the only stock that insiders are buying. 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 CA 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 editorial-team@simplywallst.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.