Why has the Codan share price rocketed 20% in 2 months?

The Codan Limited (ASX: CDA) share price has been experiencing significant positive momentum over the past few months, with the stock price up 20% since June.

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The Codan Limited (ASX: CDA) share price has been experiencing significant positive momentum over the past few months, with the stock price up 20% since June. This rally in CDA shares has come off the back of two positive announcements by Codan, and puts the share price close to $4. This share price means that Codan shares have produced an average annual rate of return of more than 55% over the past 3 years.

What announcements did Codan make? 

In May, Codan announced that its profit for the second half of 2019 would be higher than originally anticipated. Management suggests full year profit will be in the range of $42–45 million, which is considerably higher than what the core business was expected to deliver. Strong metal detector sales and a strong performance by Codan's communication business have been the main contributing factors.

In this same announcement, Codan stated that its Minetec business unit would make a small operating loss in FY19. However, Codan also indicated that a trial of Minetec technology with Caterpillar's Minestar system was successfully completed in March. This a positive sign for this business unit's future.

In July, Codan announced the signing of a new communications contract with the Kenyan Government. This contract is said to be worth $15 million and will be delivered in the first half of 2020. This is will help ensure another strong performance for the Codan communications business next year.

Foolish takeaway 

Codan is a company with no debt and a management team that has demonstrated the ability to generate high returns on equity. Additionally, Codan's biggest business unit, metal detection, continues to hold market-leading technology and grow revenue consistently. These factors make me believe Codan has a bright future.

Despite a bright future, I will be choosing not to invest in Codan. This is because I believe that the recent share price rise has eroded much of the safety margin associated with CDA shares. In order to ensure capital preservation and maximum returns, I will be looking to invest elsewhere while keeping Codan on my watchlist for a future buying opportunity.

Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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