Strong performance from tech companies powered the overall Nasdaq (NASDAQ:NDAQ) exchange to post incredible gains in 2020, and the Nasdaq Composite Index has climbed roughly 43% in the year's trading so far. Of course, with more than 3,300 companies listed on the exchange, it shouldn't come as a surprise that some stocks posted huge losses in a year that was fraught with destabilization and uncertainty on many fronts.
Sea Energy Maritime Holdings (NASDAQ:SHIP), Top Ships (NASDAQ:TOPS), and Globus Maritime (NASDAQ:GLBS) lost nearly all of their value across this year's trading and rank as the Nasdaq's three worst-performing stocks across the stretch.
The common thread? For starters, each small company operates in the global shipping industry and saw extra headwinds from the coronavirus pandemic. Should investors treat the dramatic sell-offs as an opportunity to build positions in companies that could be due for a rebound? Let's take a look.
Warning signs abound with these struggling companies
With such dreadful stock performance, it's natural to assume that the values of the underlying companies also plummeted across 2020's trading. In most cases, a complete stock-price collapse can rightfully be expected to correspond with a steep decline for a company's market capitalization.
However, that wasn't the case with any of this year's three biggest Nasdaq losers. Take a look at the chart tracking each company's market capitalization year to date.
Comparing the increase in market capitalization for the Nasdaq's three biggest losers with their calamitous stock price declines should set off immediate red flags. How is it possible that share prices for Sea Energy Maritime Holdings, Top Ships, and Globus Maritime could plummet while their respective market caps soared? The answer is simple enough: Extreme stock dilution.
Take a look at this chart tracking the increase in each company's outstanding share count in 2020:
From a shareholder perspective, this level of stock dilution is absolutely disastrous. If you owned a stake in any of these companies at the start of the year, each company offered so much new stock so as to essentially bring your position to the edge of worthlessness.
So, why would these companies go this route? Each of these businesses was struggling before the coronavirus pandemic disrupted operations, and each turned to a massive new share offering in order to fund operations after conditions became even more challenging due to the pandemic. Perhaps even more concerning, the huge new injection of outstanding shares occurred at a time when the broader market was entering into a powerful, recovery-driven bull market phase.
The combination of a huge injection of new outstanding shares when the broader market was rebounding from the March market crash probably helped Maritime Holdings, Top Ships, and Globus Maritime see substantial market capitalization gains at the same time shareholder value was being crushed into the ground. For any investors considering an investment in these companies, the last year should be a huge warning sign.
There's no sense chasing junk stocks
Is it possible that investing in Maritime Holdings, Top Ships, and Globus Maritime could lead to big returns for investors with large risk tolerance? Sure, in the same way that it's possible to win some money from scratch-off tickets. However, investors should proceed with the understanding that there's little grounding for a thesis as to why you might get better performance with any of these stocks than you would with scratch-off tickets.
Put simply, buying any of these stocks is tantamount to gambling. Perhaps more importantly, it's tantamount to gambling when the odds are very much against your favor.
When a company boosts its outstanding share count by more than tenfold across a single year, it's often a clear sign that the company isn't acting with the interest of its shareholders in mind or is under such extreme pressures as to be unable to maintain operations without raising funds through ridiculous new stock offerings.
In the cases of Sea Energy Maritime Holdings, Top Ships, and Globus Maritime, these were bad businesses before the coronavirus pandemic created new risk factors and sources of uncertainty. Risk-tolerant investors have plenty of better choices available and will likely be well served by staying away from these low-quality and dangerously speculative stocks.