Self help2 Oct 2021 15:03
The U.K. market in general is not good at valuing companies. If you look at the sheer size of the PE market and the number of companies that are take from public to private via PE you can tell that PE are able to see value where public equity investors can’t see the wood for the trees. Then when you get to AIM…forget about it. It’s largely deep retail, financially illiterate, herd investing/trading where participants are chasing fast money dreams with an investment horizon ranging from 10 minutes to 6 months. There is very little sticky smart money/institutional INVESTMENT in AIM and swings in SP can be irrational, brutal and illogical on both the way up and the way down.
As such, for investors in small caps the challenge is as much a mental one, as it is a financial one. Seconding guessing, doubting yourself, wondering what others know that you don’t, dealing with large moves on seemingly no or little information. Its tough. Very tough. It’s not for everyone and can really consume you mentally. One day you are Gordon Gekko, the next you are Gordon the gopher.
So what can you do?
Personally, I want to make investments and as such I try to ignore the daily/weekly/monthly share price as much as possible and almost try to kid myself that I am invested in a private unlisted business/equity.
I ask myself the question: “Given the reported financials, the outlook and guidance provided by management, the industry trends, comparable transactions within the industry (eg M&A) , the news flow, supply and demand etc…am I happy with the investment I made at the price I made it?” I ask myself that, if I was a principal at a private equity company would I be writing the value of my equity investment up or down in my fund.
For Novacyt, I am long in the mid 5s in some size. When I ask myself the above questions there is no way I would be questioning whether my equity investment was “in the money”. In fact, from a fundamental equity valuation perspective, I would almost certainly be valuing this investment higher than my purchase price given the recent financials, the r&d outlook, the guidance for 2021, my views on 2022, recent m&a and ipo transactions. Every single model and method for valuation I know would value this higher. Literally, every single one.
So why do we doubt ourselves and our investment in Novacyt? There is only one reason: the daily irrational manipulated fast money moves in the share price. If you are able to look past this (it’s not easy) deep down, you know you will make money. You know that this company will be a winner in a post covid diagnostics world.
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