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We’re definitely into long term investing, but some companies are simply bad investments over any time frame. We don’t wish catastrophic capital loss on anyone. Imagine if you held Aberdeen International Inc. (TSE:AAB) for half a decade as the share price tanked 75%. And some of the more recent buyers are probably worried, too, with the stock falling 72% in the last year. There was little comfort for shareholders in the last week as the price declined a further 11%.
Aberdeen International 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. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). It seems likely some shareholders believe that Aberdeen International will significantly advance the business plan before too long.
Companies that lack both meaningful revenue and profits are usually considered 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). Aberdeen International has already given some investors a taste of the bitter losses that high risk investing can cause.
Aberdeen International has plenty of cash in the bank, with cash in excess of all liabilities sitting at CA$19m, when it last reported (April 2019). This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But with the share price diving 24% per year, over 5 years, it could be that the price was previously too hyped up. You can see in the image below, how Aberdeen International’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. 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
While the broader market gained around 2.0% in the last year, Aberdeen International shareholders lost 72%. 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 24% 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. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.
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 CA 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.