It’s fair to say that Sirius Minerals (LSE: SXX) – one of the most popular stocks on the London Stock Exchange in recent times – has been an absolute disaster for long-term investors. As I write this, its share price stands at just 3.58p, compared to a share price of 27p this time last year, meaning that it has lost approximately 87% of its value over the last 12 months. Here, I’ll look at five key lessons from this share price crash.
Smaller companies are risky
Firstly, Sirius’s crash is a good reminder that investing in smaller companies is riskier than investing in large blue-chip companies. You can still lose money on blue-chip FTSE 100 stocks, of course, but it’s rare to lose 90% of your investment. Large-cap stocks often pay dividends as well, which can lessen the blow if a company’s share price falls. Small-caps still have a place in a diversified portfolio, in my view, but it’s important to be aware of the risks.
Lack of profits can hurt you
SXX is also a reminder of the dangers associated with investing in companies that have no revenues or profits. In my experience, companies that are unprofitable often turn out to be poor investments. Quite regularly, profits never materialise, which eventually leads to a share price crash. I’ve found that, when investing in smaller growth companies, it’s much safer to invest in businesses that are already profitable.
Small-cap miners are volatile
Additionally, Sirius demonstrates just how risky the small-cap mining sector is. While there’s certainly big money to be made in this sector, it’s also quite easy to lose money as small-cap mining stocks can be very volatile. Plenty of things can go wrong for small mining companies, and bad news can see a stock fall 30%+ in the blink of an eye. Having lost a fair amount of money on small-cap miners myself during the Global Financial Crisis, I now steer clear of the sector.
Keep an eye on short interest
It’s also worth noting that short interest in Sirius had increased significantly in recent months. This means that hedge funds and other sophisticated investors were betting against the stock. Shorters don’t always get it right, but if a stock is being heavily shorted, it pays to be careful. It means that professional investors have spotted something they don’t like.
Finally, the Sirius debacle is a great reminder of the importance of diversification. In recent weeks, I have read a number of stories about investors who have lost a fortune on Sirius because they staked huge amounts of capital on the stock. For example, one investor in the North East staked his life savings of £155,000 on SXX.
Look, no matter how bullish you are on a stock, investing a large proportion of your wealth in it just isn’t sensible. Things can go wrong. To protect yourself from large losses, it’s essential to diversify your portfolio over many different stocks across different sectors and markets.
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Edward Sheldon has no position in any shares mentioned. 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.