SOS Limited (NYSE:SOS) is a Chinese company providing data mining and analysis services to corporate and individual members in China. It is a penny stock trading at approximately 60 cents and has losses of nearly 90% in the past year and is already down approximately 25% year-to-date. Investors betting all their investments or a large amount on SOS stock have witnessed a dramatic selloff and heavy losses that now seem most probably irreversible.
Why would an investor bet all their capital on SOS stock? Or any capital for that matter?
It does not make sense at all and violates the diversification rule in investing. We have seen many strange moves in the U.S. stock market as of the start of the pandemic and the stock price history of SOS Limited has provided at least four important stock market lessons.
SOS Stock Lesson One: Do Your Own Due Diligence
Always preform your own very strict due diligence. Back in August 2021, I wrote another article on SOS Limited and I highlighted several red flags. The verdict was “With weak financials and an unfocused business plan, SOS stock is not worth a buy.” The unfocused business plan and very weak financials were the top reasons to avoid the stock.
History proved I was correct, and this has nothing to do with bragging, it has to do with obvious signals that investors can identify. All it needs is time to search and analyze financial statements. It is tempting to rely solely on technical analysis but starting with core financial and business performance and analyzing their trends reveals a lot of trivial factors that make the investment decision a clear buy or sell easily in most cases.
Lesson Two: Read the News
Read the news, particularly the financial news related to the companies of interest to you. And the latest news about SOS Limited is concerning:
SOS Limited has received a letter from the New York Stock Exchange (the “NYSE”) dated January 14, 2022, notifying SOS that it is below compliance standards due to the trading price of SOS’s American depositary shares (the “ADSs”).
What this means is that the company has been given notice and a cure period as its stock price is now well below $1 per share and if the listing requirements are not met then the NYSE “will commence suspension and delisting procedures.” The delisting risk itself is a huge red flag.
Lesson Three: Dig Deeper
Always dig deeper into the financial news and business developments a company. SOS Limited is a penny stock which brings its own special risks. The firm has on its website two videos about the crypto mining business, as part of its diversified and blurry business model.
Investors should be aware of China’s regulatory crackdown on cryptocurrencies and also about severe Hindenburg allegations that SOS Limited could be a “shell game.” I find it extremely disappointing for a public company to just mention “Mining is limited to licensed countries” for its mining operations. What are these countries?
What information is provided about the progress and development of the mining business? None.
There is also a lack of updated news about its other business operations. The latest news dated back on Nov. 9, 2021, stated that SOS Limited “reported the status of Phase I construction of its supercomputing and hosting center in North America. The center is located in Marinette county Wisconsin, a state with rich natural resources and renewable energy.” We are now in March 2022 and there has not been another update. This is not a good example of a public company informing its investors.
What about the financials? According to Simply Wall Street, SOS Limited has less than a year of cash runway based on its current free cash flow (FCF), and shareholders have been substantially diluted in the past year, with total shares outstanding growing by 96.5%.
These are very important and negative factors to consider.
Lesson Four: ADR Risk Factors
Finally, the fourth lesson is that ADRs entail special risks inherent to all foreign investments. The most common risks include the exchange rate risk, political risk, and foreign inflation risk. SOS Limited will file its Form 20-F with the Securities and Exchange Commission (SEC) later in 2022. Until then, the available financial data is very limited.
SOS Stock Bottom Line
We have very limited financial data to analyze because SOS stock traded as an American Depositary Receipt (ADR) on the NYSE.
Still, there are other important red flags to remind us about the riskiness of the stock. The financial and business performance is too weak, the firm has net losses, burns cash and there has been a massive stock dilution too. The NYSE delisting risk makes things ever more negative.
Avoid SOS stock now and wait for the latest SEC filing for more light on the financials.
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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. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.