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I’d always buy superstock SSE before this dog of a share

If successful investing relied just on looking at a firm’s financial numbers, you wouldn’t touch Xeros Technology Group (LSE: XSG) with a barge pole. Today’s full-year figures are not pretty. Earned income is down almost 8% compared to the year before to just £2.27m, which is nothing for a firm with a market capitalisation around £139m. Meanwhile, the operating loss increased more than 40% to £31m – ouch!

Burning cash

At the end of 2017, the cash balance stood around £25m, but I expect it’s lower today. The money came from a placing during the year that raised £24m. The year before, the firm raised £38m. It looks like cash is burning up at the rate of around £18m-£19m per year. As we might expect, the shares have been falling. Today’s 141p or so puts them around 56% down since the summer of 2017.

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I’m not averse to investing in a company without immediate profits as long as there’s potential for earnings down the road. I would want to see some progress, such as increasing revenues or reducing losses — even with big story stocks — before taking the plunge. There’s no such evidence here, though. All the numbers seem to be going the wrong way.

Yet, chief executive Mark Nicholls said in today’s report: “We are now at a pivotal point in the commercialisation of our technologies.” The trouble is, at the end of the 2016 trading year, he also said: “Our scope and strategy is now fixed. 2017 will be a year of execution, in which we significantly progress the commercialisation of our highly disruptive, innovative technology.”

More of the same to come?

The story could be a good one and revenues could explode soon, but how long must we wait for profits? My guess is that the share price falls and the placings to raise more money to survive are not over yet, so I’m avoiding Xeros Technology Group for the time being in favour of defensive dividend-payer SSE (LSE: SSE).

The firm produces, distributes and supplies electricity and gas to homes and businesses in Great Britain and Ireland. It’s a classic defensive, high-dividend-paying business and the stock looks like it was caught in the sell-off of such defensive firms that brought their valuations down over the past year or two. However, since the middle of February, the share price has been creeping back up.

Today’s 1,315p throws up a forward price-to-earnings ratio just under 11 for the trading year to March 2020 and the forward dividend yield is around 7.4%. City analysts following the firm expect earnings to lift 4% for the year to March 2019 and 1% the year after, dipping 7% in the current year, so a fairly stable outlook on earnings.

The outlook is mildly positive and I reckon there’s a good chance that the valuation will return to a level where the dividend yield sits around 6% or so, as it did before, suggesting a little more potential upside for the shares. Meanwhile, I reckon the so-far reliable dividend makes the firm a decent long-term hold.

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Kevin Godbold holds shares in SSE but not in Xeros technology Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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