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Sirius Minerals shares have fallen 50% in six months. What’s the best move now?

Edward Sheldon, CFA
Dice engraved with the words buy and sell

Sirius Minerals (LSE: SXX) shares have been a big disappointment over the last six months. Trading at around 20p back in mid-February, the share price now stands at just over 9p, meaning the stock has lost over half its value. Is this pullback a buying opportunity? Here’s my view.

Project funding problems

One of the main reasons that SXX shares have fallen recently is to do with project financing. The company needs to raise $500m to unlock a $2.5bn funding facility it has agreed with JP Morgan and it had planned to raise this money through a bond offering. However, on 6 August, the company advised that it had cancelled the bond offering due to unfavourable market conditions. This development adds considerable uncertainty to the investment case and as a result investors have dumped the shares.

Jam tomorrow

Personally, I’m not all that surprised by this recent development. As I’ve often noted in the past, Sirius Minerals is a classic ‘jam tomorrow’ type of stock. Yes, there’s an exciting long-term story (the company could eventually be one of the largest fertiliser producers in the world) that could generate big wealth for investors. Yet at the same time, there are also a lot of things that could go wrong. I’ve said before that due to the complexity of the project, Sirius is likely to experience both funding problems and operational problems and the issues that the company is facing right now are a good example of this.

When I last covered SXX in May, the shares were trading at 16p. At the time, I stated that I saw the stock as quite risky and that I would be continuing to avoid it. Today, at 9p, my view remains the same. Sure, the Sirius share price could bounce if the company announces some good news, but in my view, an investment in SXX is not worth the risk. With profits still years away (if the company can sort out its financing issues), you may as well take your money to the casino.

Making money from small-caps

If you’re looking to make consistent profits from smaller companies, a much better strategy, in my view, is to focus on companies that are already profitable.

If you can find companies that are generating strong earnings growth, are highly profitable (a high return on capital employed), with strong cash flow, low debt, and trading at reasonable valuations, you’ll give yourself a good chance of generating a decent return on your money if you’re willing to invest for a few years. Importantly, you’ll also reduce the chances of losing a lot of money, which is important if you want to be a successful investor.

Right now, there are plenty of stocks with these attributes that are listed on the AIM market. If you’re interested in learning about some of these types of companies, tune in tomorrow and I’ll highlight two small-cap stocks that I like the look of right now.

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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.

Motley Fool UK 2019