Is it riskier to buy an unproven very low cap stock with a decent chance of uncovering new worth OR to buy a fallen ex darling stock on implosion course with a beaten down stock price?
Most would go for the latter because they see revenues, because the company has IP and some proven track record and get seduced by a >50pc crash in the stock price.
Now think Appen (APX) as filling that bill, those who had bought at a quarter of its all time $40 price at $10 lost 90pc and more of their investment. Guess what? APX is about to make a CR of $25m at 95c after just having made one 6 months ago at $1.85 to raise $60m.
If you think only fundamentals or fundamentals driven, you wouldn’t consider the specs, you would prefer a beaten down revenue generator that provides value., unknowingly falling into the value trap.
Think of this way. The first is like a low valued house that is now believed to be built on a land that is potentially sitting on a gold reserve below, there is no guarantee but there is some probability. The second is like an expensive home that has just had the misfortune of being adjacent to a newly declared landfill site. While the value of the second house is much higher than the first, we are more likely to see steep appreciation for the first and steep depreciation for the second. It is all about future or forward outlook relative to what they’re currently worth.
