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.


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

Could Premier African Minerals be a millionaire-maker penny stock?

Shares of Premier African Minerals (LSE:PREM) have crashed over the past year. Is this a golden opportunity for me to…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Which FTSE defence stock should I buy? Here’s what the charts say

FTSE shares like BAE Systems have been flying higher over the last couple of years as the geopolitical situation has…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Here’s why investors should consider buying Scottish Mortgage shares today

After a steady rise in recent times, this Fool thinks Scottish Mortgage shares could be worth considering. Here he explains…

Read more »

Young black man looking at phone while on the London Overground
Growth Shares

This FTSE 250 stock keeps blowing broker forecasts out of the water

Jon Smith considers the ever-increasing share price targets for a FTSE 250 stock that has risen by 120% in the…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Marks and Spencer shares could rise 29%, according to this broker

Marks and Spencer shares currently sport a P/E ratio of just 10, and one well-known City broker believes the company…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 of the best FTSE 100 beginner stocks to consider buying

The Footsie offers people just beginning their investment journey some of the best stocks to buy. Here are two to…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Here’s why the Aviva share price suddenly dived

The Aviva share price suddenly dropped by over 6% the other day. But there's a simple explanation for this sudden…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

With no savings, I’d listen to Warren Buffett to aim for long-term wealth

Warren Buffett looks for "1-foot bars" to step over, not "7-foot bars" to jump. Stephen Wright looks at what this…

Read more »