Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
It’s not a secret that every investor will make bad investments, from time to time. But serious investors should think long and hard about avoiding extreme losses. It must have been painful to be a Sierra Oncology, Inc. (NASDAQ:SRRA) shareholder over the last year, since the stock price plummeted 82% in that time. That’d be a striking reminder about the importance of diversification. To make matters worse, the returns over three years have also been really disappointing (the share price is 73% lower than three years ago). Furthermore, it’s down 62% in about a quarter. That’s not much fun for holders.
We really feel for shareholders in this scenario. It’s a good reminder of the importance of diversification, and it’s worth keeping in mind there’s more to life than money, anyway.
With zero revenue generated over twelve months, we don’t think that Sierra Oncology has proved its business plan yet. This state of affairs suggests that venture capitalists won’t provide funds on attractive terms. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. For example, they may be hoping that Sierra Oncology comes up with a great new product, 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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Sierra Oncology has already given some investors a taste of the bitter losses that high risk investing can cause.
When it last reported its balance sheet in March 2019, Sierra Oncology had cash in excess of all liabilities of US$78m. While that’s nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. We’d venture that shareholders are concerned about the need for more capital, because the share price has dropped 82% in the last year. The image below shows how Sierra Oncology’s balance sheet has changed over time; if you want to see the precise values, simply click on the image.
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. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? It would bother me, that’s for sure. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
Sierra Oncology shareholders are down 82% for the year, but the broader market is up 5.7%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. The three-year loss of 35% per year isn’t as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. We would be wary of buying into a company with unsolved problems, although some investors will buy into struggling stocks if they believe the price is sufficiently attractive. 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.
Sierra Oncology 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 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.