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It’s not possible to invest over long periods without making some bad investments. But you have a problem if you face massive losses more than once in a while. So consider, for a moment, the misfortune of Five Prime Therapeutics, Inc. (NASDAQ:FPRX) investors who have held the stock for three years as it declined a whopping 85%. That would certainly shake our confidence in the decision to own the stock. And the ride hasn’t got any smoother in recent times over the last year, with the price 64% lower in that time. Furthermore, it’s down 50% 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.
Five Prime Therapeutics isn’t currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. When a company doesn’t make profits, we’d generally expect to see good revenue growth. That’s because it’s hard to be confident a company will be sustainable if revenue growth is negligible, and it never makes a profit.
In the last three years Five Prime Therapeutics saw its revenue shrink by 90% per year. That’s definitely a weaker result than most pre-profit companies report. And as you might expect the share price has been weak too, dropping at a rate of 47% per year. We prefer leave it to clowns to try to catch falling knives, like this stock. It’s worth remembering that investors call buying a steeply falling share price ‘catching a falling knife’ because it is a dangerous pass time.
You can see how revenue and earnings have changed over time in the image below, (click on the chart to see cashflow).
This free interactive report on Five Prime Therapeutics’s balance sheet strength is a great place to start, if you want to investigate the stock further.
A Different Perspective
While the broader market gained around 3.1% in the last year, Five Prime Therapeutics shareholders lost 64%. 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 16% 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. You could get a better understanding of Five Prime Therapeutics’s growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
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.