Technology and information specialist Altitude Group(LSE: ALT) is among the top risers today. Its shares have risen by as much as 18%, which takes its gain over the last year to in excess of 1,000%. Clearly, the company is becoming more popular among investors, so could this mean that now is a time to sell, rather than buy?
Today's share price gain has come despite a lack of news. Similarly, in October the company's shares rose sharply and as a result it released a statement saying that it was unaware of the reason for the share price gain. Clearly, the company is becoming increasingly popular among investors as it continues to implement a shift in strategy that's focusing on 'right-sizing' the business. This seems to be the key reason for today's as well as recent share price gains, as investors anticipate improved performance from the company.
Previously, Altitude Group had duplicated operations in multiple locations. This made the company relatively inefficient and led to the cost of implementing changes in 2013/14 failing to be sufficiently offset by revenue gains. It has since focused on improving efficiency and now controls all software maintenance and development from the UK, rather than having part of its operations in the US. Allied to this is an outsourcing strategy which seeks to reduce costs, with £1.8m of annualised operating expenses being removed in 2015.
While Altitude Group has growth potential within its end markets and now has an improved business model to capitalise on it, the company remains relatively risky. It has been lossmaking in recent years and has a negative operating cash flow. For example, in the last two years net cash flow from operating activities has averaged minus £671,000. At the end of the 2015 financial year, it had just £336,000 in cash on the balance sheet and this could lead to a requirement for additional capital over the medium term.
In addition, it remains a relatively small company which has net assets of only £993,000 and yet its market cap is £47m. This puts it on a price-to-book (P/B) ratio of over 47, which indicates that it may be overvalued at the present time. And with it being lossmaking and cash flow negative, it's difficult to gain a sense of what the company is worth at the present time.
A less risky option
Sector peer Micro Focus(LSE: MCRO) offers far less risk as well as relatively high potential rewards. It has an excellent track record of profitability, which could be boosted by its acquisition of HPE. This is expected to generate synergies for the business and could also reduce its risk profile. The combined entity may offer greater diversification as well as improved efficiencies. This could not only have a positive impact on its bottom line, but also on investor sentiment in the stock.
While Altitude Group also has growth potential, it remains very risky. More share price gains can't be ruled out, but due to the lower risk of Micro Focus it remains a better buy for the long term.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.