This post was originally published to Supports by email on 26 October 2019
During the week, one of my holdings, Novita Healthcare (ASX:NHL) increased from 1 cent per share (where I bought it about a month ago) to 4.6 cents per share, on Friday afternoon at 4pm. That’s a gain of 360%. Now, I realise not everyone holds shares in it, but I think it is a good opportunity to talk you through how I analyse — and make decisions — after a share price spike.
Why Did This Happen?
Fundamental Analysis Mental Model – the company announced on Thursday that it had paid consultants The Pinnacle Health Group to assess their commercialisation of Tali Detect (the ADHD detection software) and the consultants had said that Tali Detect falls under (Current Procedural Terminology) CPT Code 96146, named “Psychological or Neuropsychological testing administered by computer, single instrument, automated result only”.
Not to put too fine a point of it, I had assumed that this would be the case, and while it’s great to see that the company has received advised that is the case, it’s just one very small step in a long path to commercialisation. The only real significance is, to quote the CEO, that “leveraging this CPT code will assist us in securing relevant channel partners…”
Market Based Mental Model – prior to the last few weeks, virtually no-one had heard of Novita Healthcare, and the company had trouble raising capital at 1 cent per share. Indeed, I have reason to believe that our group of Supporters were probably the main on market buyers over the last month. Importantly, however, I timed my own buy with the end of the capital raising process, which means that the effectively surplus supply of shares at that price was trying up. While no guarantee, that did mean that it was more likely that demand could outstrip supply (since supply would reduce).
Sociological Mental Model – as always, the sociological mental model is far more effective at explaining extremely fast price movements.
In the last few weeks, Novita’s advisers PAC Partners have started to make a bit more noise about the stock. They didn’t tweet about the stock until two days before the placement had been completed. Since then, Novita Healthcare presented at the Technow conference in both Sydney and Melbourne, which PAC Partners tweeted their excitement about. Not only was the Sydney presentation well received, but the company then presented in Melbourne, on the very same day we received the “fundamental” good news (which wasn’t really that surprising) about the CPT code.
While none of that is particularly remarkable, what did blow my mind was the speed with which Novita’s Hotcrapper forum filled with posts from some of the most dangerous posters I know about. These are people whose track records are so bad that it is hard to believe it’s a coincidence; the kind of people who hysterically attacked me for predicting the Resapp and Getswift share price crashes. One who promoted BigUn aggressively, right into the trading halt from which it never emerged. Another who has been exposed on twitter — and who I consider to be a red flag, just by existing on the register.
Now, it could be that this brigade of red-flags have arrived by coincidence. After all, red-flaggers love to associate themselves with remarkable share price rises to give themselves some legitimacy when they are trying to promote other stocks. The entirety of their posts appeared after the share price rise (with no mention of the stock prior). Essentially, it’s plausible that they have seen the rise and, while they are unable to point to their commentary on the stock prior to the rise, they are able to claim to have owned it prior to the rise — and that is good enough for beginners who don’t realise they are contra-indicators.
Alternatively, it could be that they are linked in ways I don’t understand. What is clear, is that when the red-flags are there you can be sure a stock is hyped (although, of course, a hyped stock can always become more hyped).
Finally, it’s worth noting that part of the consideration payable to PAC Partners was unlisted options exercisable at 3 cents, which created an incentive for that organisation to get the share price above 3 cents. This is an incentive for people to generate hype.
What Now?
As I write Novita Healthcare is a $30m company with negligible revenues and just a few million in cash. It is more a business plan than a business, and to be frank I would have been more comfortable if the share price had just chugged along until there were some genuine cashflows to back up a share price rise. Notably, all this share price action has happened prior to the release of the Quarterly Cashflow report.
It should show around $1.6 million in cash left, assuming that the $400k worth of debt remains outstanding. Let us make no mistake, when I bought shares in Novita Healthcare it was (I perceived) a real but distressed business transitioning to a real but slightly-less-distressed business. I’d buy shares in it at 1 cent again, happily, because that implies an enterprise value of around $6 million. If this TALI product works even moderately well, it could definitely be worth a fair bit more than that. However, there is literally no certainty around that, and while my conversation with the CEO (some time back) does make me think the business has good leadership, this hype cycle undermines that view. Some say I’m too harsh — others would question why I invest in such risky stock in the first place.
Suffice it to say at an enterprise value of around $28 million, the risk versus reward is no longer attractive. The question is now, when to sell and how much.
For me, it’s clear I should start selling on Monday morning. I will likely initially sell around 50% of my holding. I’m not quite sure how long this irrational share price run will continue, but I’d consider the fair value of the stock to be around 2 to 2.5 cents per share (albeit with high risk).
As a general rule, I wouldn’t look to sell out of Novita Healthcare completely on Monday morning. My mind may change (it’s a tough one), but I’m tempted to keep at least a small holding for the long term. As the years progress, I could see Novita being worth $100 million or more, due to the blue-sky opportunity of TALI Train as an attention enhancer for all children, not just to treat ADHD. Having said that, I also think that it could be worth zero if commercialisation fails (although I’d guess the shell and the story have value to certain people, so call it about $10m). From here that would be a gain of 3.3x and a potential loss of 65%, probably equally likely (in my view) with the reality falling somewhere in between. There’s a minor chance we go above $100m — although that would require hype cycle 2.0 in my view.
All in all, what is near certain is that I will sell half my shares on Monday morning, and I will consider whether to hold or sell the rest. It’s perfectly possible that by the time I write to you next I’ll have sold all my shares, although that would be a little unusual. The biggest reason to sell all my shares is I no longer feel comfortable being on the same register as some of my fellow shareholders.