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If you are building a properly diversified stock portfolio, the chances are some of your picks will perform badly. But the long term shareholders of Pelangio Exploration Inc. (CVE:PX) have had an unfortunate run in the last three years. Regrettably, they have had to cope with a 63% drop in the share price over that period. Furthermore, it’s down 41% in about a quarter. That’s not much fun for holders.
We don’t think Pelangio Exploration’s revenue of CA$14,850 is enough to establish significant demand. You have to wonder why venture capitalists aren’t funding it. 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, investors may be hoping that Pelangio Exploration finds some valuable resources, before it runs out of money.
We think companies that have neither significant revenues nor profits are pretty 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 Pelangio Exploration investors might realise.
Pelangio Exploration had cash in excess of all liabilities of just CA$461k when it last reported (December 2018). 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 28% per year, over 3 years. You can click on the image below to see (in greater detail) how Pelangio Exploration’s cash levels have changed over time.
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. Would it bother you if insiders were selling the stock? It would bother me, that’s for sure. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
Investors in Pelangio Exploration had a tough year, with a total loss of 18%, against a market gain of about 0.7%. 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, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 13% over the last half decade. 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. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
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 email@example.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.