Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. For example, the Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX) share price is down 14% in the last year. That falls noticeably short of the market return of around 7.9%. Crinetics Pharmaceuticals may have better days ahead, of course; we've only looked at a one year period. It's down 15% in about a quarter.
We don't think Crinetics Pharmaceuticals's revenue of US$2,353,000 is enough to establish significant demand. 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 Crinetics Pharmaceuticals 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 such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt.
Crinetics Pharmaceuticals has plenty of cash in the bank, with cash in excess of all liabilities sitting at US$143m, when it last reported (March 2019). That allows management to focus on growing the business, and not worry too much about raising capital. But since the share price has dropped 14% 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 Crinetics Pharmaceuticals's cash levels have changed over time. You can click on the image below to see (in greater detail) how Crinetics 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. Would it bother you if insiders were selling the stock? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
A Different Perspective
While Crinetics Pharmaceuticals shareholders are down 14% for the year, the market itself is up 7.9%. While the aim is to do better than that, it's worth recalling that even great long-term investments sometimes underperform for a year or more. Notably, the loss over the last year isn't as bad as the 15% drop in the last three months. So it seems like some holders have been dumping the stock of late - and that's not bullish. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.