Did Changing Sentiment Drive Eagle Mountain Mining's (ASX:EM2) Share Price Down By 11%?
Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. That downside risk was realized by Eagle Mountain Mining Limited (ASX:EM2) shareholders over the last year, as the share price declined 11%. That contrasts poorly with the market return of 25%. Eagle Mountain Mining hasn't been listed for long, so although we're wary of recent listings that perform poorly, it may still prove itself with time. It's down 24% in about a quarter.
View our latest analysis for Eagle Mountain Mining
Eagle Mountain Mining hasn't yet reported any revenue, so it's as much a business idea as an actual business. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Eagle Mountain Mining finds some valuable resources, before it runs out of money.
We think companies that have neither significant revenues nor profits are pretty high risk. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). 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).
Eagle Mountain Mining had cash in excess of all liabilities of just AU$1.6m when it last reported (June 2019). So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. With that in mind, you can understand why the share price dropped 11% in the last year . You can see in the image below, how Eagle Mountain Mining's cash levels have changed over time (click to see the values). You can click on the image below to see (in greater detail) how Eagle Mountain Mining'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 costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
Given that the market gained 25% in the last year, Eagle Mountain Mining shareholders might be miffed that they lost 11%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. It's worth noting that the last three months did the real damage, with a 24% decline. So it seems like some holders have been dumping the stock of late - and that's not bullish. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Eagle Mountain Mining has 7 warning signs (and 3 which are a bit unpleasant) we think you should know about.
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 AU exchanges.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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