Such Is Life: How TAO Commodities (ASX:TAO) Shareholders Saw Their Shares Drop 69%

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Even the best stock pickers will make plenty of bad investments. Anyone who held TAO Commodities Limited (ASX:TAO) over the last year knows what a loser feels like. The share price is down a hefty 69% in that time. TAO Commodities may have better days ahead, of course; we've only looked at a one year period. Furthermore, it's down 29% in about a quarter. That's not much fun for holders.

See our latest analysis for TAO Commodities

TAO Commodities hasn't yet reported any revenue yet, so it's as much a business idea as an actual business. 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. It seems likely some shareholders believe that TAO Commodities will find or develop a valuable new mine before too long.

Companies that lack both meaningful revenue and profits are usually considered high risk. There is almost always a chance they will need to raise more capital, and their progress - and share price - will dictate how dilutive that is to current holders. 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. TAO Commodities has already given some investors a taste of the bitter losses that high risk investing can cause.

When it last reported its balance sheet in December 2018, TAO Commodities could boast a strong position, with cash in excess of all liabilities of AU$3.1m. This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But with the share price diving 69% in the last year, it could be that the price was previously too hyped up. You can see in the image below, how TAO Commodities'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. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. It costs nothing but a moment of your time to see if we are picking up on any insider selling.

A Different Perspective

While TAO Commodities shareholders are down 69% for the year, the market itself is up 12%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 29% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. Before spending more time on TAO Commodities it might be wise to click here to see if insiders have been buying or selling shares.

We will like TAO Commodities 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 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 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.