Small Cap Favourites: Navitas Limited
Navitas (NVT.ASX) has disappointed again. While our focus is on small caps below the $1bn market cap range, we always look to those slightly larger businesses to see what the trend in business, valuation and expectations are suggesting. Navitas as a market cap of around $2bn, so the disappointment is worth digging into. The earnings numbers were broadly in line with expectations, but the guidance disappointed.
Navitas says the new financial year will be impacted by changes in its partnerships. The key here is the lack of growth – earnings are expected to remain the same (no growth) and this is what has the market worried. The stock is well off its yearly high just above $6 per share because the market is now trying to justify the valuation against earnings expectations.
The key with small cap and growth stocks generally is that the market panics when growth slows and over-reacts when a business is growing its earnings. The panic leads to trading opportunities and when something is so pumped up for growth, there are likewise shorting opportunities. We’re indifferent to Navitas – the reaction is what we’re more interested in. Anything that is pumped up for growth and puts out an honest statement that does not meet expectations will be sold off in this type of market.
Likewise, anything that smells like there is growth momentum in the short term will be reward. This is dangerous, the market is chasing short term gains and forgetting about long term opportunities. Navitas will probably find support at around the $5 per share level, assuming things don’t get worse. It still grew revenue and earnings impressively this year, so it’s something we’re keeping a close eye on.
Chief Market Analyst
Peter Esho is a member of Invast’s Investment Committee and Chief Market Analyst at Invast Financial Services in Australia. The Invast’s Investment Committee constructs professionally constructed global thematic portfolios of Direct Market Access (DMA) CFDs over highly liquid global shares and ETFs through its new PortfolioInvestor platform. Since 1960, the Invast Group has grown to become one of the largest and most successful global brokerage firms, offering state-of-the-art trading technology and unparalleled service catering to all levels of traders.
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