What is Happening to the Cover-More Share Price?

Travel concept

What does CVO do?

Cover-More [ASX:CVO] is a travel insurance and medical assistance provider operating in Australia and Asia. Put simply, the company writes travel insurance, managing medical assistance claims for travellers.

What’s happening to the Cover-More share price?

As you can see in the chart below, Cover-More’s share price has traded in a wide range over the past few years. After reaching marginal new highs in 2015, Cover-More’s share price began to trend lower in the second half of the year.

Cover More Share Price

Source: BigCharts

It is always worth looking at a share price chart before you invest. The declining share price in the latter part of 2015 told you to be wary of the stock. It was in a downtrend (trading below moving averages), which is a sign to avoid the stock.

The reason for the weakness became apparent on 16 February, 2016. CVO issued a trading update which showed a 15% decline in operating profit for the first half of the year. The company blamed higher claims expense for the profit drop, driven by a depreciating Aussie dollar.

This sent the share price plunging from $2 to as low as $1.40. It’s since bounced back a little, but the stock remains fragile.

What now for CVO?

Cover-More has an attractive business model. Travel, especially to Southeast Asia, is a strong growth market. You would therefore expect a business catering to travel insurance and related medical assistance to be a good one.

The problem is that these types of businesses become popular and, therefore, expensive. And when a company is expensive, it is susceptible to bad news. Prior to the 16 February profit warning, CVO traded on a P/E ratio of nearly 20 times.

That’s expensive. There’s no room for bad news when a stock trades on such a high multiple. While the fundamental nature of the business sounds good, the charts gave you plenty of warning to get out beforehand.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.

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Greg Canavan

Editor, Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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