Innovaderma is a company that has had a turbulent history, with the stock listing around 75p, reaching highs of over 400p, and now languishing 100p most of the calendar year.
All charts taken from SharePad
Investors are no stranger to volatility, but they might’ve been surprised to see a big sell-off on what appeared to be a good update in July, with revenue increasing 21% and profit before tax doubling. Gross margins improved significantly, and it seemed as if the company had shrugged off some troubles. But that wasn’t the case, and the market retaliated with a brutal sell-off on large volume. The market makers gapped it off, possibly expecting buyers, but instead the price carried on going lower for weeks.
The stock struggled to rally on its notice of results, and with the results announced on Tuesday 24th September we saw big indecision in the market, with the stock rallying in early morning trading, only to be slapped back down by sellers, to then recover again.
The following day, the stock so far has been walked down. Nobody seems sure of what the actual price is.
Opportunity?
With the results now out of the way, and the company confirmed back to healthy growth, is there an opportunity for a trade?
Well, that depends. The stock so far has traded above its 200 EMA for only a few days since the 17th of October 2017. Buying now means that we are buying into a confirmed downtrend. We would want the stock to break the 200 EMA convincingly if we are to hope that it would continue on an upward trajectory.
Is the company in good shape?
Nobody wants to buy into a company only to be landed with a placing, so it’s always worth checking the cash flow statements to see what is really happening behind the P&L. This is something I have covered in my free book, but let’s take a quick look now.
We can see that the business generated over £1m in cash from the operating side. Just under £1m was invested back into the business, so cash remained flat at around £2m. So, no serious problems at first glance.
However, we’re told to check Note 25. Most people don’t bother with this, but it’s always worth it. Not all management teams are of good intentions, and if they want to hide something – this is where they do it. Or in the annual reports that nobody reads!
Here we can see that profit after income tax has been worked back to show the net cash outflow from operations. It should really say inflow, as cash is coming in, but that’s a trivial point.
To me, the business looks self-sustaining (as long as they can continue growing and do not let their receivables book become overstretched).
Considering that they brought in £962,835 of net income, and they’re currently trading at a market cap of just over £11m, we’re looking at paying between 11x-12x earnings. It’s fair to say that for a company growing EPS at a substantially higher rate, this stock is cheap – but cheap does not always equal superior share price performance.
I would be interested in buying this stock if it restarted an uptrend – I have done very well previously on this stock and if the stock can capture the market’s attention through some good updates and a rising trend then there’s no reason why it can’t be done again.
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