I type these lines with a deep sense of sadness knowing that this post will not contain any Donald Trump references, jokes, puns or gags. For those that have followed our hugely popular ASX:TRUMP series I recommend you get your fix here. For those of you who remain, let’s talk about rampant speculation.
Speculative stocks are very loosely defined as those that have very high degrees of risk offset by a small possibility of making a large return. They often trade at very low volumes, market caps and share prices and as such can be seen as super exciting investments by those new to the trading game. I got sucked in pretty hard a while back, and purchased about 10, 000 shares in ASX:CFU at 8 cents a pop. For those of you that haven’t heard of CFU (Ceramic Fuel Cells Limited) that’s probably because they went broke after burning through all the capital they’d raised by selling shares to people like me. Knowing what I do now I can easily spot the mistake I made, however (as we all know) hindsight is 20/20 (and a huge bitch).
Blue Lake Invest does not hide away from the fact that we’ve written heavily about Neuren Pharmaceuticals, a stock that meets all the criteria of a speculative stock just mentioned. What makes ASX:NEU any different from the epic fail that was ASX:CFU?
- CFU had no clear strategy. CFU produced the most efficient hydrogen energy cells ever created, and seemed poised to dominate the growing renewable energy sector. However, they failed to account for the fact that clean energy from their fuel cells was still more expensive than traditional sources, and that consumers weren’t educated enough to understand the benefits of hydrogen fuel cells.These two giant roadblocks were never included in any contingency plans or strategy, and CFU blew all their cash desperately marketing in Germany (as Germany have a more advanced renewable energy market than us Aussies). On the other hand NEU is fully funded for the duration of all their planned clinical trials, and has secured official endorsement from the institutions that currently represent their proposed target market.
- CFU wasn’t as unique as they (or I) thought. While it was true that CFU sold a hydrogen fuel cell product never before seen by the energy consumers of the world they didn’t really provide anything new. At the end of the day, they sold a product that created energy, and consumers had plenty of ways to buy energy that didn’t involve tacking a fuel cell to the side of their house. In addition to that, CFU wasn’t even unique in an environmental sense, as technologies such as solar and wind energy offered essentially the same value proposition, i.e. guilt free, non-polluting energy. Neuren however has patent protected rights to a newly developed drug (Trofinetide) to solve an existing problem (Rhett’s Syndrome) that currently has no cure. No consumer in Neuren’s target market can substitute Trofinetide for another drug as no other drug is like Trofinetide.
- CFU just didn’t understand business. Despite the technical brilliance of their product, CFU was banking on a flood of revenue from consumers who’d magically start buying fuel cells. If that didn’t work, they planned on leveraging subsidies handed out by the German government and then………. That was it. They had no more ideas about how to make money from their technology. Neuren holds regular investment presentations and explains the FDA regulation process that will enable the drug to be sold. Neuren doesn’t deny the possibility of a venture capital buy-out, Neuren can name the potential revenue and customer base of their target market in multiple countries. Neuren has contingency plans should any of their commercialisation goals not be met, You get the idea. Neuren is very keen on making money.
So to recap, speculative stocks can be very tempting and the thought of making returns in the 100’s or 1000’s of % can be too much for us mere mortals.But, should you still choose to indulge you should always ‘Check That Spec’ and make sure you can say yes to the 3 following questions:
- Does the business have a feasible plan or strategy for the short to medium term? Do they already have paying customers or a well defined potential customer base?
- Do they own patent (or equivalent) rights to a product/service that doesn’t yet exist in the market? Or is the product far superior to anything already available?
- Does the business demonstrate an ability to make and/or manage money? If they are already active when do they intend to turn a profit? If they are researching do they have enough funds to conclude all pre-sale work?
So next time you’re reading about “The Next Big Tech Stock That Is Just Around The Corner” take a few minutes to think about the basic spec checklist. You’ll thank yourself for it, promise.
People who join our mailing list always check their specs. Just saying.