Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. For example, the Concert Pharmaceuticals, Inc. (NASDAQ:CNCE) share price is down 49% in the last year. That’s well bellow the market return of 5.2%. Longer term shareholders haven’t suffered as badly, since the stock is down a comparatively less painful 14% in three years. The falls have accelerated recently, with the share price down 30% in the last three months. We note that the company has reported results fairly recently; and the market is hardly delighted. You can check out the latest numbers in our company report.
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With just US$1,031,000 worth of revenue in twelve months, we don’t think the market considers Concert Pharmaceuticals to have proven its business plan. 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). For example, they may be hoping that Concert Pharmaceuticals comes up with a great new treatment, before it runs out of money.
As a general rule, if a company doesn’t have much revenue, and it loses money, then it is a high risk investment. 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.
Concert Pharmaceuticals has plenty of cash in the bank, with net cash sitting at US$125m, when it last reported (March 2019). This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But since the share price has dropped 49% in the last year, it seems like the market might have been over-excited previously. You can click on the image below to see (in greater detail) how Concert Pharmaceuticals’s cash levels have changed over time.
Of course, the truth is that it is hard to value companies without much 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
Investors in Concert Pharmaceuticals had a tough year, with a total loss of 49%, against a market gain of about 5.2%. 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. Longer term investors wouldn’t be so upset, since they would have made 6.3%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.
Concert Pharmaceuticals 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 US 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.