The Motley Fool

Is Sopheon a falling knife to catch, down 10% today?

As so often happens on the stock market, Sopheon (LSE: SPE) delivered decent full-year results today, but the shares plunged. As I write, the stock is down just over 10%, so is this a falling knife to catch?

The software and services company provides customer-firms and organisations with “complete enterprise innovation management solutions including software, expertise, and best practices.” The firm’s Accolade solution covers the innovation management and new product development lifecycle, which includes strategic innovation planning, road-mapping, idea and concept development, process and project management, portfolio management and resource planning.  

International sales

The offering is popular, and Sopheon boasts some 250 customers and 60,000 users from more than 50 countries, with the majority of the operating profit earned in the US.

Indeed, there’s been a bit of a buzz about the company and its long-term potential in the investing community lately, and trading figures have been coming in ahead of expectations for a while. And I think that’s part of the problem today, which could account for the weakness in the stock on these results.

When outperformance is well known, the valuation of a company can be fully up with events, and the only thing that will move a share price higher on results day is likely to be unexpected further operational outperformance. Sopheon is reporting as expected, so any speculation baked into the price about unexpected progress is probably unwinding today. We see this over again on the stock market and it calls to mind the old adage, ‘buy the rumour, sell the fact’.

The headline figures look good with revenue almost 19% higher than a year ago, profit before tax up just over 25%, and the net cash balance shooting almost 76% higher to $16.7m. The directors expressed their satisfaction and confidence in the outlook by slapping another 30% on the dividend.

Going for growth

Chairman Barry Mence explained in the report that Sopheon has a “large diversified blue-chip client base, a comprehensive software platform and deep sector expertise.” There were 18 new customer wins during the year, which compares to 13 in 2017, and he believes the time is right for Sopheon to accelerate investment and “solidify” its “leadership position.” The company has around $20.6m of sales visibility and the pipeline includes “a number of large opportunities.”

But Sopheon’s success has not gone unnoticed. Even at today’s share price close to 1,031p after this morning’s decline, the stock is more than 1,000% higher than it was three years ago. Had you been holding, that would have been an investing success by most standards. But even now, the market capitalisation sits near to just £116m, which means the firm remains in small-cap territory. I can’t help believing that the forward potential is still large for the company and its investors.

If you dig in to research Sopheon you’ll find some impressive quality metrics and a full-looking valuation. I believe the long-term potential of the company is attractive and would be inclined to look at setbacks in the share price like today’s as more of a buying opportunity than a reason to abandon the stock.

Under-The-Radar Investment

There are a number of small-cap stocks that could be worth buying right now, and our investing analysts have written a FREE guide called "1 Top Small-Cap Stock From The Motley Fool".

The company in question may have flown under your investment radar until now, but could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle. Click here to find out all about it — it's completely free to do so.

Kevin Godbold has no position in any share 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.