Small-cap stocks can generate life-changing returns if you possess the skill or luck to buy them at the right time. That’s certainly been the case to date with coronavirus test-producer Novacyt (LSE: NCYT).
At the beginning of 2020, shares in the market minnow were changing hands for just 14p each. At the close yesterday, the very same stock was trading at 426p, so some investors will have made a lot of money.
Will this form continue? Today’s update from the company was certainly encouraging. That said, I’d be wary of becoming excessively bullish on the shares if I were thinking of buying now.
Novacyt in demand
Taking into account its agreement with the UK Department of Health and Social Care and collaborations with GlaxoSmithKline, AstraZeneca, and The University of Cambridge, the clinical diagnostics specialist announced it had generated £90m worth of orders for its Covid-19 test.
As a further sign of just how much demand there is, the company went on to remark it’s now supplying the test to “more than 100 countries” with new approvals having just arrived from Ecuador and Malaysia. What’s more, the firm also spoke of “evaluating potential options to further expand its presence” in the US.
Of course, orders are only good if they can be fulfilled. Earlier this month, Novacyt said it would increase manufacturing capacity to roughly 8m tests per month. Today, it revealed it expects to meet this output in June. In addition to its two manufacturing sites, the company has also signed deals with six other manufacturers, allowing it to scale-up beyond this number when needed.
CEO Graham Mullis was understandably bullish, commenting that the visibility on sales was “transformational” for the company. He also said this demand “could continue for some months.”
Today’s news was undeniably positive. As great as all this sounds, however, I’m beginning to wonder if the ‘smart money’ has already been made.
Novacyt’s share price was up a few percent in the first few minutes of trading. That’s nothing like the gains seen in previous trading days. This suggests to me the market had already priced in much of today’s statement.
This reaction highlights the problem with small-cap investing. Since a lot of these companies are still loss-making (Novacyt being an example), all momentum rests on hope and hype. That’s fine if you manage to time your entry well, but it can be testing when investors begin taking profits.
Although they’re available for 436p, as I type, Novacyt’s shares were trading as high as 491p in mid-April. Had you bought at the peak, you’d now be 11% underwater. In the meantime, more established, profitable and liquid (easily traded) FTSE 100 or FTSE 250 stocks would have made you a lot of cash in the recent rally.
Don’t get greedy
Novacyt’s gains over the last couple of months have been nothing short of remarkable. Notwithstanding this, I’d caution anyone from buying a lot of the stock now. With the next stage of the pandemic hard to accurately predict, I think there’s still potential for people to lose their shirts if they chase gains and go ‘all-in’.
If you simply must invest, I’d advise doing so with money that you can afford to lose. Put the rest of your cash in quality stocks that have rewarded investors over the long term.
Paul Summers 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.