Over the last month the Cullen Resources Limited (ASX:CUL) has been much stronger than before, rebounding by 33%. But spare a thought for the long term holders, who have held the stock as it bled value over the last five years. Indeed, the share price is down a whopping 95% in that time. The recent bounce might mean the long decline is over, but we are not confident. The fundamental business performance will ultimately determine if the turnaround can be sustained.
We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don’t have to lose the lesson.
We don’t think Cullen Resources’s revenue of AU$23,726 is enough to establish significant demand. You have to wonder why venture capitalists aren’t funding it. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Cullen Resources finds some valuable resources, before it runs out of money.
We think companies that have neither significant revenues nor profits are pretty high risk. There 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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Cullen Resources has already given some investors a taste of the bitter losses that high risk investing can cause.
Cullen Resources had cash in excess of all liabilities of just AU$591k when it last reported (December 2018). So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. That probably explains why the share price is down 46% per year, over 5 years. You can see in the image below, how Cullen Resources’s cash levels have changed over time (click to see the values).
In reality it’s hard to have much certainty when valuing a business that has neither revenue or profit. 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.
What about the Total Shareholder Return (TSR)?
We’d be remiss not to mention the difference between Cullen Resources’s total shareholder return (TSR) and its share price return. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Cullen Resources hasn’t been paying dividends, but its TSR of -95% exceeds its share price return of -95%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.
A Different Perspective
While the broader market gained around 12% in the last year, Cullen Resources shareholders lost 42%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, longer term shareholders are suffering worse, given the loss of 44% doled out over the last five years. We’d need to see some sustained improvements in the key metrics before we could muster much enthusiasm. Before spending more time on Cullen Resources it might be wise to click here to see if insiders have been buying or selling shares.
Of course Cullen Resources may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU 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.