Readers might have seen this article yesterday about some of the ASX’s biggest tech wrecks over the past year. In some cases, performance was simply the market repricing the company to a more reasonable price level. In other cases, it was a combination of limited revenues and declining cash. I was embarrassed, but not altogether surprised, to see 2 companies I once owned in the list.
Here’s what I learned from some of these tech wrecks:
Newzulu Ltd (ASX: NWZ)
I owned Newzulu for a couple of years. While aware it was a speculative stock, and thus expecting the cash outflows, I was not critical enough of management’s efforts to grow the core business. An inability to grow revenues meaningfully in 2 years should have been a signal to exit the business, as were the multiple capital raisings and acquisitions. Comments from former employees on Glassdoor about management’s lack of focus should also have been a warning sign. The mistakes piled up on this one and inertia was the poisoned cherry on top – I should have sold much sooner.
Reffind Ltd (ASX: RFN)
I made a respectable return on Reffind, but again was too slow to sell – this kept a ~30% return from becoming a 100%+ return. I bought as the company was signing loads of new customers, but before the quarterly report was released, which revealed how much money those sales had generated (virtually nothing). This should have been the first cue to exit. The second cue to exit was when shares hit $1.50 – grossly overpricing the company especially in light of how small its revenues were. I should have been less patient, and/or quicker to accept what I thought at the time was an outrageous price.
iCar Asia Ltd (ASX: ICQ)
iCar Asia was a somewhat less speculative investment, I thought, with promising advertising businesses in southeast Asia. Tailwinds were strong and the company had good leadership as well as a working relationship with Carsales.Com Ltd (ASX: CAR). However, over the year I owned, revenue growth was too slow in my opinion to see management reach their target of break-even without additional capital raisings, and I sold late last year. In this article you can see a chart of the company’s cash flows – again, I was probably too patient with the reversal. I was probably also too patient with the company’s capital raisings – when it announced its 4th one in 3 years, that should have been my cue to quit.
The biggest lesson here in my opinion is that patience is good for most companies, but not for speculative companies that are burning cash. Most of the time, they are priced fairly richly – priced for growth.
If they do not grow to standards, they should be cut fairly ruthlessly, otherwise all you are left with is a company that is burning money. At least with companies like Woolworths Limited (ASX: WOW), there are assets, cash flows, and dividends to underpin some of the investment value. It is very unlikely that a big company like Woolworths will fall 50%, and then another 50% in the following year.
Lessons learned: Be less patient with speculative stocks, and positive earnings and cash flows are king. Read on to discover some much better investment ideas, with our top analyst's Top 3 ASX Blue Chips To Buy In 2017.
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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.