Novacyt (LSE:NCYT) is on a rocket ride as the biotech minnow announced the first European-approved coronavirus testing kits.
The largely-unknown AIM-listed firm has shot to the top of Hargreaves Lansdown’s most-traded shares list.
But investors should be wary of such a huge and rapid boom in retail interest.
Up 900% – FOMO?
The NCYT share price has increased by 887% in the last month alone. Zoom out to six months and the share price is nearly 2,000% higher than it was.
It’s natural to want to get a piece of the action when you see such a massive spike, even if you have no other AIM-listed shares in your Stocks and Shares ISA or SIPP.
However, in an ideal world, investors would not be swayed by FOMO, or ‘fear of missing out’, when it comes to choosing what to do with their hard-earned capital.
Early investors in NCYT are now taking their profits. As of noon on 19 February the shares have sunk 27% from their 166p high. £10m has been wiped off the company’s market cap in the last 24 hours alone.
Momentum
With momentum trades — where investors jump on board based not on fundamentals, or profits, but on price action alone — the fall on the other side of the hill is usually just as hard as the rise is impressive.
History tells us that flash-in-the-pan contenders don’t tend to last. No matter how staggering a share price rise seems, massive new interest in a previously unheard-of stock will deflate eventually.
And then selling out at a reasonable price is a lot harder than buying in.
While I do own a few AIM-listed stocks and shares, like video game developer Frontier Developments and multinational marketing firm The Mission Group, these are highly profitable enterprises with solid, long-term track records and high-margin sales growth. The same can’t be said for Novacyt.
Volatile
Coronavirus has been front page news around the world since the outbreak in the Chinese city of Wuhan in late 2019. Biotech firms have been racing to develop tests and potential vaccines for the virus.
Primerdesign, Novacyt’s molecular diagnostics division, launched a new laboratory-based test to detect the virus coronavirus on 31 January 2020.
While saying his company had received 288,000 preorders for tests from countries including the US, UK, and China, chief executive Graham Mullis admitted it was difficult to predict long-term demand for the molecular tests.
Day traders and swing traders who sit in front of screens all day every day may be able to get in and out rapidly, but the same can’t be said for the likes of you and me.
My play here would be to ignore the short-term rockets and focus on longer-term growth. While you might feel out of the loop while FOMO-chasers crow about getting rich, when the hype fades you’ll likely be in a much better position than they are.
I think the Novacyt share price has only one way to go, and I wouldn’t want to be on the wrong side of it.