Novacyt shares have soared! Are they a buy right now?

Novacyt shares have rallied wildly! Are they still a buy right now? Anna Sokolidou tries to find out.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Novacyt (LSE:NCYT) shares have soared from around 15p since the start of the year to about 285p today. The rise is impressive but is the biotechnology company’s stock a good buy now?

Novacyt’s shares rise dramatically

To start with, Novacyt specialises in producing and selling medical equipment. Health professionals use it in detecting diseases. Before the coronavirus pandemic affected most countries around the globe, Novacyt traded for 15p per share at the end of January 2020. However, it is now trading for around 285p per share. What’s the reason for this surge?

Well, the reason is the soaring demand for coronavirus testing equipment that Novacyt specialises in. As my colleague Alan Oscroft points out, there has been an impressive sales boost because the company started selling the right equipment at the right time. Indeed, the estimated sales revenue of £120m for 2020 is much higher than 2019’s £11.5m. 

But how sustainable is this extraordinary sales boost? And how about the surging Novacyt shares? In my view, all this isn’t sustainable at all. I have mentioned several times that the coronavirus pandemic is far from over. But at the same time it doesn’t mean that the current situation will last forever. As we have all heard, a coronavirus vaccine is expected to be ready by the end of 2021. If that happens, we will end up getting far fewer coronavirus cases. As a result, the demand for Covid-19 testing equipment will fall substantially.

There is also the classic threat of rising competition in this field. Indeed, a number of companies are, or have been, selling equipment and drugs useful in the treatment of Covid-19. Consider anti-malaria drugs. So, when more firms start producing coronavirus testing equipment and the pandemic is over, Novacyt shares will fall in value.

Novacyt’s fundamentals

But let us consider the company’s accounting fundamentals. I’d like to appeal to Benjamin Graham, the father of value investing. He introduced the concept of intrinsic value. This involves measuring the real value of a particular company’s stock by taking into account its earnings per share (EPS) and the EPS growth rate. If we apply this concept to 2018 and 2019 earnings, we will end up with a negative intrinsic value. That’s because those earnings were negative. The pretax loss totalled €2.1m in 2018 and widened to €3.9m in 2019. The 2020 earnings are not out yet. Graham also liked earnings to be stable, which doesn’t seem to be the case here, either. 

Some accounting multipliers allow us to understand that the company isn’t a bargain at all. Novacyt’s ratios are compared to the industry’s averages below. Remember that the industry also includes large and profitable companies. The price-to-book and the price-to-sales ratios are above the industry’s averages, which make the shares look overvalued to me.

Source: Investing.com

Finally, it’s more of a risk to invest in small companies. With sales figures of £11.5m for 2019, Novacyt is small.

Is Novacyt still a buy?

I don’t think so. Buying now at such a price seems speculative to me. There are plenty of other companies deserving your attention.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Anna Sokolidou has no position in any of the shares mentioned in this article. 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.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »