Some stocks are best avoided. It hits us in the gut when we see fellow investors suffer a loss. Anyone who held SeaDragon Limited (NZSE:SEA) for five years would be nursing their metaphorical wounds since the share price dropped 96% in that time. We also note that the stock has performed poorly over the last year, with the share price down 50%. It’s down 50% in the last seven days.
We really feel for shareholders in this scenario. It’s a good reminder of the importance of diversification, and it’s worth keeping in mind there’s more to life than money, anyway.
Because SeaDragon is loss-making, we think the market is probably more focussed on revenue and revenue growth, at least for now. Shareholders of unprofitable companies usually expect strong revenue growth. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.
In the last five years SeaDragon saw its revenue shrink by 6.7% per year. That’s not what investors generally want to see. If a business loses money, you want it to grow, so no surprises that the share price has dropped 47% each year in that time. It takes a certain kind of mental fortitude (or recklessness) to buy shares in a company that loses money and doesn’t grow revenue. That is not really what the successful investors we know aim for.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
This free interactive report on SeaDragon’s balance sheet strength is a great place to start, if you want to investigate the stock further.
A Different Perspective
While the broader market gained around 20% in the last year, SeaDragon shareholders lost 50%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 44% over the last half decade. We realise that Buffett has said investors should ‘buy when there is blood on the streets’, but we caution that investors should first be sure they are buying a high quality businesses. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
We will like SeaDragon better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on NZ 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 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.