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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. Investors in Ovoca Bio plc (ISE:OVXA) have tasted that bitter downside in the last year, as the share price dropped 45%. That falls noticeably short of the market return of around -13%. However, the longer term returns haven't been so bad, with the stock down 25% in the last three years. Furthermore, it's down 42% in about a quarter. That's not much fun for holders.
Check out our latest analysis for Ovoca Bio
Ovoca Bio didn't have any revenue in the last year, so it's fair to say it doesn't yet have a proven product (or at least not one people are paying for). You have to wonder why venture capitalists aren't funding it. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). Investors will be hoping that Ovoca Bio can make progress and gain better traction for the business, before it runs low on cash.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. 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).
When it last reported its balance sheet in June 2018, Ovoca Bio could boast a strong position, with cash in excess of all liabilities of €5.1m. This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But since the share price has dropped 45% 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 Ovoca Bio'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? I would feel more nervous about the company if that were so. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
We regret to report that Ovoca Bio shareholders are down 45% for the year. Unfortunately, that's worse than the broader market decline of 13%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 6.0% 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 might want to assess this data-rich visualization of its earnings, revenue and cash flow.