As I get older, it’s increasingly rare that I’ll go for the kind of growth shares I used to like back in my younger days. In fact, the only one I’ve bought in years is Sirius Minerals (LSE: SXX). But what do I think you need to know if you’re thinking of joining me?
Jam tomorrow
Firstly, Sirius Minerals has not made a penny profit yet, and isn’t expected to for some years. That means it’s being funded by investors’ cash right now. While things appear to be going well enough on the financial front, we can’t be at all confident of how much cash will be needed to carry the company to its first profit.
Stage 2 financing is underway right now and the results of that could have a big effect.
One thing we can be sure of is that eventual profits will not all flow back to current shareholders, as future investors and lenders will take a chunk of the cake. If you can handle that uncertainty, fine, but you need to be happy with it.
Growth = volatility
A major characteristic of potential growth shares, especially not-yet-profitable ones, is the likely volatility of their share prices. If you look at the past five years, you’ll see the Sirius share price chart is very spiky indeed. Even today, at 36.6p, the shares are still below their peak of 52.5p almost exactly two years ago.
Despite many folk seeing growth stocks as potential ‘get rich quick’ opportunities, they’re long-term investments just like any other. If your focus is on quick profits you should… well, maybe get someone else to look after your money while you think a bit more about your aims.
News flow
The Sirius price is very much driven by news flow, as is often the case with companies in their cash-burn phase. There are no quarterly profits to analyse and therefore few meaningful metrics such as P/E ratios, cash flow, dividend yields and all that. But investors need their constant fix. What tends to happen is the share price rises when there’s news, then falls back during quiet spells.
Sirius has tried to address that by putting out regular progress updates, but we still see the same thing happening. During July, for example, we heard of progress in getting port and ship loading services arranged. Then there were two new potash uptake agreements with Chinese customers which took the company’s peak contracted sales volumes from 4.7m tonnes per year to 5.7m. And the latest is an agreement with Daniels Midland as its North American off-take partner.
Accordingly, the share price gained 12% in July. If we have a quiet month or two, I can see it drifting back down again.
Long-term potential
What I reckon is, you should be buying Sirius shares for is the long-term potential, with a period of five to 10 years from now being our payback target.
And what we’re looking for there is first production by 2021, with production of 10m tonnes per year by 2024 and 20m by 2026.
If you’re thinking of investing, you need to balance those potential production levels with the risks I’ve mentioned above, especially the cost of getting to profitability and the effect that future financing is likely to have.