The art and science of stock market investing requires a tolerance for losing money on some of the shares you buy. But it's not unreasonable to try to avoid truly shocking capital losses. So spare a thought for the long term shareholders of Aleafia Health Inc. (TSE:ALEF); the share price is down a whopping 70% in the last twelve months. While some investors are willing to stomach this sort of loss, they are usually professionals who spread their bets thinly. We wouldn't rush to judgement on Aleafia Health because we don't have a long term history to look at. The falls have accelerated recently, with the share price down 30% in the last three months.
Because Aleafia Health is loss-making, we think the market is probably more focussed on revenue and revenue growth, at least for now. Shareholders of unprofitable companies usually expect strong 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 twelve months, Aleafia Health increased its revenue by 504%. That's well above most other pre-profit companies. So on the face of it we're really surprised to see the share price down 70% over twelve months. Something weird is definitely impacting the stock price; we'd venture the company has destroyed value somehow. We'd recommend taking a very close look at the stock (and any available forecasts), before considering a purchase, because the share price is not correlated with the revenue growth, that's for sure. Of course, markets do over-react so share price drop may be too harsh.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. You can see what analysts are predicting for Aleafia Health in this interactive graph of future profit estimates.
A Different Perspective
Given that the market gained 2.7% in the last year, Aleafia Health shareholders might be miffed that they lost 70%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 30% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. Before spending more time on Aleafia Health it might be wise to click here to see if insiders have been buying or selling shares.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA exchanges.
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