We think intelligent long term investing is the way to go. But along the way some stocks are going to perform badly. For example the Sterling Energy plc (LON:SEY) share price dropped 63% over five years. We certainly feel for shareholders who bought near the top. Furthermore, it’s down 11% in about a quarter. That’s not much fun for holders.
With zero revenue generated over twelve months, we don’t think that Sterling Energy has proved its business plan yet. We can’t help wondering why it’s publicly listed so early in its journey. Are venture capitalists not interested? 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 Sterling Energy will discover or develop fossil fuel before too long.
As a general rule, if a company doesn’t have much revenue, and it loses money, then it is a high risk investment. 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 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). It certainly is a dangerous place to invest, as Sterling Energy investors might realise.
Sterling Energy has plenty of cash in the bank, with cash in excess of all liabilities sitting at US$45m, when it last reported (June 2019). That allows management to focus on growing the business, and not worry too much about raising capital. But with the share price diving 18% per year, over 5 years, it could be that the price was previously too hyped up. You can click on the image below to see (in greater detail) how Sterling Energy’s cash levels have changed over time.
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.
A Different Perspective
Investors in Sterling Energy had a tough year, with a total loss of 16%, against a market gain of about 4.8%. 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. Unfortunately, longer term shareholders are suffering worse, given the loss of 18% doled out over the last five years. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. You could get a better understanding of Sterling Energy’s growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
We will like Sterling Energy 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 GB exchanges.
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