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.
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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Editor, The Daily Reckoning