The Sirius Minerals (LSE: SXX) share price has had a disappointing run over the last six months, falling from just under 30p to around 20p today. That represents a fall of approximately 33%. Since early August, the shares are down nearly 50%.
Yet looking at the investment case for SXX, I’m really not surprised by the share price fall. Indeed, I’ve actually warned investors several times in the past about the dangers of investing in the stock, stating in September that it is a “risky investment.”
Jam tomorrow
There’s no doubt that Sirius offers an interesting story. Owning the world’s largest and highest-grade deposit of polyhalite – a key ingredient in fertiliser – the company has clearly captivated the imaginations of many UK investors. However, the problem with Sirius, in my view, is that it’s a classic ‘jam tomorrow’ type of stock. What I mean by this is that profits are still a long, long way off. That adds considerable risk for investors, as, without profits, there’s nothing to really support the share price. Recent news regarding a finance deal (or lack of) has hit the shares hard.
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Even after the recent 30%+ share price fall, I’m not tempted to touch the stock. And one reason for this, on top of production and financing risks, is that short interest is quite high at the moment. According to shorttracker.co.uk, over 7% of the company’s shares are being shorted right now which essentially means that a number of hedge funds or sophisticated investors are betting that the stock will keep falling. As I’ve noted in the past, quite often, the shorters get it right. Just looked at what’s happened with highly-shorted stocks such as Carillion and Metro Bank in recent years.
With shorters targeting the stock, I’ll be continuing to steer clear of SXX shares for now.
Better growth stock
One growth stock I do hold in high regard is Gamma Communications (LSE: GAMA). Back in January, I listed the stock as one of my top small-cap stocks for 2019, and since then it has risen nearly 30% – a healthy gain. Over the last three years, it’s performed even better, rising over 120%.
Founded in 2001, Gamma company provides voice, data and mobile services for the business market, and its clients include Pret, British Heart Foundation, and Cathay Pacific. Unlike SXX, Gamma is a highly profitable company (ROE was 26% last year), and profits are rising at a prolific rate.
Just last week, the group released its full-year results for FY2018 and the numbers were excellent. Revenue was up 18% while adjusted EPS rose 31%. Cash generated by operations increased by an impressive 36%. Management also said that it is “positive about the outlook for the business in 2019 and beyond.”
For FY2019, analysts are forecasting EPS of 35.6p per share, which at the current share price places Gamma on a forward P/E of 26.9. I think that’s a fair price to pay for this high-growth company.
