Long term investing is the way to go, but that doesn’t mean you should hold every stock forever. We really hate to see fellow investors lose their hard-earned money. Anyone who held MEC Resources Limited (ASX:MMR) for five years would be nursing their metaphorical wounds since the share price dropped 90% in that time. We also note that the stock has performed poorly over the last year, with the share price down 78%. The falls have accelerated recently, with the share price down 56% in the last three months.
While a drop like that is definitely a body blow, money isn’t as important as health and happiness.
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We don’t think MEC Resources’s revenue of AU$99,981 is enough to establish significant demand. 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 MEC Resources finds fossil fuels with an exploration program, 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 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 MEC Resources investors might realise.
MEC Resources had liabilities exceeding cash by AU$1,332,940 when it last reported in December 2018, according to our data. That makes it extremely high risk, in our view. But since the share price has dived -37% per year, over 5 years, it looks like some investors think it’s time to abandon ship, so to speak. You can see in the image below, how MEC Resources’s cash levels have changed over time (click to see the values).
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. What if insiders are ditching the stock hand over fist? I’d like that just about as much as I like to drink milk and fruit juice mixed together. You can click here to see if there are insiders selling.
What about the Total Shareholder Return (TSR)?
We’d be remiss not to mention the difference between MEC 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. We note that MEC Resources’s TSR, at -87% is higher than its share price return of -90%. When you consider it hasn’t been paying a dividend, this data suggests shareholders have benefitted from a spin-off, or had the opportunity to acquire attractively priced shares in a discounted capital raising.
A Different Perspective
Investors in MEC Resources had a tough year, with a total loss of 73%, against a market gain of about 11%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 34% per year over five years. 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. If you would like to research MEC Resources in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
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.