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

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »