Did Changing Sentiment Drive Gratomic Inc’s (CVE:GRAT) Share Price Down A Painful 88%?

Long term investing works well, but it doesn’t always work for each individual stock. We really hate to see fellow investors lose their hard-earned money. For example, we sympathize with anyone who was caught holding Gratomic Inc. (CVE:GRAT) during the five years that saw its share price drop a whopping 88%. And we doubt long term believers are the only worried holders, since the stock price has declined 38% over the last twelve months. Furthermore, it’s down 41% in about a quarter. That’s not much fun for holders.

While a drop like that is definitely a body blow, money isn’t as important as health and happiness.

See our latest analysis for Gratomic Inc

With zero revenue generated over twelve months, we Gratomic Inc has proved its business plan yet. You have to wonder why venture capitalists aren’t funding it. So it seems that the investors more focused on would could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Gratomic Inc finds some valuable resources, before it runs out of money.

Companies that lack both meaningful revenue and profits are usually considered high risk. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. 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 Gratomic Inc investors might realise.

When it reported in September 2018 Gratomic Inc had minimal net cash consider its expenditure: just CA$1.6m to be specific. So if it hasn’t remedied the situation already, it will almost certainly have to raise more capital soon. With that in mind, you can understand why the share price dropped 35% per year, over 5 years. You can see in the image below, how Gratomic Inc’s cash and debt levels have changed over time (click to see the values).

TSXV:GRAT Historical Debt, March 12th 2019
TSXV:GRAT Historical Debt, March 12th 2019

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? It would bother me, that’s for sure. You can click here to see if there are insiders selling.

A Different Perspective

Investors in Gratomic Inc had a tough year, with a total loss of 38%, against a market gain of about 3.4%. 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. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 35% 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 want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares – and the price they paid.

Gratomic Inc is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 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.