Zomedica (NYSEAMERICAN:ZOM) is an interesting penny stock. It is common belief that the majority of penny stocks are too risky. That’s because they tend to be volatile due to their small market capitalizations. Right now, ZOM stock seems to be confirming this rule.
Currently, ZOM has a 52-week range of 6.3 cents to $2.91 per share. Plus, it’s not an over-the-counter stock. At the close of Mar. 31, ZOM stock had a price of $1.58. So, the question now is should you buy the dip or avoid the hype?
Here’s why I think you should avoid this stock
ZOM Stock: Show Me the Money
Looking at ZOM stock, I can’t help but think of the film Jerry Maguire. How do the two relate? Both call to mind the words show me the money.
What I mean is that Zomedica is still a company with no revenue but a market cap of $1.54 billion.
The veterinary diagnostics and pharmaceutical company has reported zero sales. A flat line. Now, personally, maybe I focus too much on due diligence, fundamentals and the valuations of stocks. However, that’s my nature — and after all, that so-called boring stuff is important. It serves as an X-ray for any stock analysis, showing the health and weaknesses of a company.
And in my opinion, even the quickest “X-ray” of ZOM shows things do not look good for the name. Let me elaborate further.
Zomedica and the Dead Cat Bounce
A “dead cat bounce” is a term used in trading and investing. Here’s a concise definition from Investopedia:
“A dead cat bounce is a short-term recovery in a declining trend that does not indicate a reversal of the downward trend […] Reasons for a dead cat bounce include a clearing of short positions, investors believing the bottom has been reached, or investors that find oversold assets.”
For our purposes, let’s focus on that last part. Which of these scenarios is the most possible with ZOM stock?
Could it be that the price was too low? ZOM’s price earlier in the year was because the company did not have any revenue. So, why buy shares in a name that simply is basically non-operational? That doesn’t really make sense.
Instead, the action in ZOM only makes sense if pure speculation was involved. The main idea is that, in early 2021, the ZOM stock price was less than 50 cents. So, for speculators who thought it was cheap, perhaps it was worth the risk. Plus, don’t forget platforms like Reddit, where mentioning a stock can make it rocket. Considering those speculative factors, that’s a better explanation as to why ZOM soared to almost $3 in February.
After all, I don’t think that the company has oversold assets. Of course, it does have a promising asset called Truforma. But oversold? No way.
Why Truforma Is ZOM’s Best Chance at Success
Recently, in a mid-March press release, Zomedica announced the first commercial sale of its Truforma pet diagnostics system.
Now, this is good news. Finally, the company will start to have revenue to record. But, on the flipside, what if the company has set expectations that are too high?
If we try to make a financial model and document scenarios of sales, free cash flow and profitability — plus the market share that Zomedica will have three to five years from now — then we have two options. We can either be optimistic and input expectations to justify the current valuation, or we can be conservative and focus on the base scenario or even the worst-case scenario.
Right now, I choose that second option, simply because buying ZOM stock today would be investing in the dark. With no trends at all for key financial metrics, making any financial forecasting model is like throwing a dart at a spinning wheel. Where it ends up depends a lot on luck. That’s not sound investing — that’s speculation.
In my opinion, there’s not much reason to delve more into the financials here. Can Zomedica become a leader in its market? I don’t know. But what I do know is that the current valuation is unjustified and too pricey.
Until Zomedica shows me the money, I plan to stay away. And maybe it can with Truforma. But until then, the stock price is too high on just-beginning sales.
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On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.