This Covid-related AIM stock is up 700% in 1 year. Should I buy it now?

Jonathan Smith reviews Avacta Group, an AIM-listed stock he’s thinking of buying that’s involved in the development of Covid-19 test kits.

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A lot of focus since the start of the pandemic has been on large pharmaceutical companies trying to find a vaccine. But aside from this, there are other companies involved in the virus fight in other ways. For example, Avacta Group (LSE:AVCT) is involved in manufacturing rapid result testing kits. This AIM-listed stock is one I’m seriously considering buying now. The share price performance has been very strong over the past year, but has it got further to run or am I buying at the top?

What is Avacta?

Avacta is a UK-based healthcare business involved in the production and development of drugs, along with diagnostics to help provide more information on existing treatments. It also has several joint ventures, which isn’t uncommon in the medical world. For example, it’s collaborating with Cytiva to make rapid-response Covid-19 test kits. At the same time, it’s working with the University of Glasgow on virus research.

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Unfortunately, financial results to the middle of 2020 didn’t make for great reading for the stock. An operating loss of £8.1m grew from a £6.6m loss for the same period in 2019. However, this can largely be attributed to its big R&D investments. The investment and fundraising during this period is one reason I’d look to buy the stock now. 

Despite the loss recorded, Avacta managed to raise over £50m in new funds to help support key initiatives. That shows me investors believe in what the business is doing. It also leads me to conclude that I could look past the losses, with towards potential profits in the long term when the fruits of the R&D hopefully come through.

An AIM stock that’s aiming high

Another reason I would look to buy the stock now is potential ongoing gains from Covid-19 testing kits. It’s not unrealistic to think that such kits are doing to be in high demand for years to come. Avacta is currently at the stage of trying to get full clinical validation for its rapid test. In a statement released in late February, it said that “in the UK, the Department of Health and Social Care is a potential customer and partner in the rollout of such a validated test.”

No numbers or revenues have been discussed at this time, but a project with the Government would be very good news for the business. Obviously, this speculation has already seen the share price move higher. It’s up 50% in the past month alone following this news coming out. I missed the boat here, but still think it has room to move higher given the potential market for distribution of the kits. 

Buying a stock that’s risen 700% in a year is risky. I get this. AIM stocks in the past have burnt several friends badly and speculation can drive prices to unsustainable levels. If I buy the stock now and final trials flop, I could be looking at a large loss. I’m also aware that many other companies (some much larger) are competing in this space. Avacta is a small fish and could easily get muscled out of the way.

I acknowledge the risks, but  feel the rewards could be big and would still look to buy the stock now, ahead of any potential major rollout of the Covid-19 kit.

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jonathansmith1 has no position in any of the shares mentioned. 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.

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