It’s the time of year when we revisit the stocks we thought might double this year, and those that could achieve the feat next year. For me, it’s Sirius Minerals (LSE: SXX) on both counts.
Having bought in a few years ago, I really did think the shares would start to take off when the company got its second stage of funding in place. And its huge high-grade potash deposit and long list of signed-up customers would surely have investors fighting each other to put their money down.
Cash
But it wasn’t to be, and what sounded like a promising funding plan fell through. The company is now struggling to try to find some sort of alternative funding before it runs out of cash to keep the lights on, and and we’re only talking months at most.
The result, rather than a doubling or more, is an 84% share price crash so far in 2019 with just a few days of the year still to go.
But, can it still be turned round and can the Sirius Minerals share price double, triple or more in 2020? Yes, I think it can (but please do read to the end before you decide whether you agree).
Should a funding package be found, it’s likely to be hugely dilutive and leave current shareholders with only a small portion of the whole operation. But the current share price is very close to valuing the company as if it’s near certain to go bust, and though I wouldn’t expect price levels to get close to where they have been, I can’t help feeling that any funding lifeline could boost the shares to several times their current value.
Trap
But hang on, you know what trap I’m falling into here, don’t you? It’s the penny shares trap, and I’m doing what many penny share investors do in guessing at what the shares might be worth should the best possible upside come to pass — while not really considering the potential downside.
Shares priced at just a few pennies each, like Sirius Minerals at 3.48p per share at Tuesday’s close, look like they’re cheap — I mean, 3.48p is a lot cheaper than, say, Diageo‘s 3,155p share price — Diageo is 907 times more expensive!
And looking at the downside, it’s easy to be lulled into the assumption that shares that have fallen this far can’t have much further to fall. In my case, I’m already down 81% since I invested at 18p, so I haven’t got much more to lose, right?
Loss
But if you invest now, your potential maximum loss is a full 100%, which is exactly the same as with any other share on the stock market. Every £1,000 invested in Sirius now can potentially crash to nothing if the company goes bust, exactly the same as £1,000 invested in Diageo. But Diageo is far, far, less likely to go bust.
That’s what I think you need to keep in mind if you’re considering buying Sirius Minerals shares. Can they double in 2020? Sure. Can they crash to zero? Oh yes, they surely can. I would not buy now.