When a high-performing share’s price falls from its highs, it is tempting to ask if I should buy the dip. This is the case now with biotechnology stock Avacta (LSE: AVCT). The Avacta share price has just dropped 15% from its all-time highs in less than two weeks.
But before I buy the high-performing stock, I would like to ask three questions. These are:
#1. Why did the Avacta share price rise?
The Avacta share price first started rising in early April last year when it collaborated with Cytiva, which was earlier GE Healthcare Life Sciences, to develop coronavirus diagnosis tests. Unlike tests available until then, the rapid test would give results within minutes.
This development gave the stock sharp momentum for around two months, before it settled at elevated levels compared to the pre-pandemic share price. Until early 2021, that is.
In February this year, the Avacta share price showed another sharp climb when it received positive results for clinical studies on its tests. The initial evaluation allowed it to move to the full clinical validation of the tests.
Then towards the end of the month, the company released a business update with optimism about the commercial potential of the coronavirus test, keeping the momentum up. And in early March the company said that its test can detect coronavirus variants found in the UK as well.
#2. What are the prospects for it?
That is a lot of positive developments for a company in a short span of time. Considering how important coronavirus tests are and will be for the foreseeable future, Avacta could well be in a sweet spot.
I also like that it is developing therapies for cancer through its proprietary platforms. It aims to start providing its chemotherapy treatments in the first half of this year, which target achieving a more durable response in patients than existing treatments.
These steps reflect the company’s growth, and this could well be the year that proves to be a turning point. So far however, it has made losses and its revenue has been somewhat inconsistent too.
#3. What are the risks to the Avacta share price?
There are a number of companies working on various coronavirus-related solutions, from vaccines to diagnosis and treatment. As an investor, if I am looking to buy these, I would consider this entire spectrum. And a reminder here, this includes some of the biggest FTSE companies, like AstraZeneca, and US-based ones like Pfizer.
Alternatively, I can consider it if I wanted to buy shares of a company that promises fast growth. But here too, better performing companies can be found.
What I’d do now
My point is that my reason for buying the Avacta share should be clear. If it is not, then I would rather wait for some proof of progress in its financials than be tempted today by the Avacta share price.
Manika Premsingh owns shares of AstraZeneca. 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.