Have we made the right call buying Healthscope (HSO)?
What Mattered Today
Some decent weakness from the outset today with the market copping reasonable lines of selling between 10 -10.30am before grinding higher for the rest of the session. Banks led the recovery which is typical of what we tend to see in October leading up to bank reporting, and importantly, the dividend dates for the big 4. As we wrote this morning, using seasonality as a guide we see another +2% further upside for the sector in October before we look to trim our overweight allocation ahead of the traditionally weak November trading period. NAB reports on Thursday and we’ll write about this before then.
On the other side of the ledger, we bought Healthscope (HSO) on Friday after the 20% plunge with a buy price of $2.33. Today the stock was down again and the obvious question should be asked – have we made the right call? More on that below.
We had a range today of +/- 53 points, a high of 5430, a low of 5377 and a close of 5408, off -21pts or -0.40%.
ASX 200 Intra-Day Chart
ASX 200 daily chart
Healthcare stocks are typically expensive, and when one trips up like HSO did on Friday (which was a pretty average update, to say the least), it tends to be hit hard + drag down the rest of the sector. HSO’s stumble has impacted Ramsay Healthcare (RHC) as it should, given that HSO flagged industry-wide issues – not just company specific ones. HSO’s high this year was $3.17 and it’s now down at $2.24, a drop of -29%. Ramsay had a high this year of $84.08 and closed today at $71.40 – a drop of 15%.
The proportion of the drop between the two is probably about right given RHC has a lot more exposure overseas – whilst HSO is more domestically focussed. As is the case when we see a stock with a surprise downgrade, brokers scramble to downgrade and revise down forecasts – price targets etc and write about why this has all happened, however as investors, we now need to think about the future, and whether or not the investment ‘now’ stacks up from a risk versus return perspective. For what it’s worth, we now have 5 buys, 7 holds and 1 sell with an average price target of $2.65.
To put Friday's announcement into context, the company is using one-quarter of data to re-base market expectations for the year. In simple terms, they said that trends had been volatile, and September was particularly weak. Before this update, the market was looking for 10.2% earnings growth for FY17, and now the company says that ‘if’ the trends of the last quarter continue for the next three, then earnings will be flat year on year. The question remains, does that warrant a 20% slide in the share price?
It might, if – and it’s still an if, Q1 trading is repeated in Q2-Q4. If it doesn’t then the drop is an overreaction and we’ll see a decent bounce from the stock. The company reckons that it’s negative publicity around affordability and consumer confidence that has caused people to hold back from having ‘elective surgery’. We know how fickle the consumer is and trends like this change, so it’s difficult to see how one weak quarter will flow through for the remainder of the year – however it’s possible, and maybe even probable but it’s far from certain which seems to be the way the market has taken it.
Another more simplistic way to think about this could be to picture someone with a bung knee needing elective surgery. You can hobble around for a time – a month, maybe two but sooner or later you’ll need to actually pony up and have the procedure. In our view, although the near term might be somewhat cloudy we continue to think that the core industry drivers are intact – the company has some very good projects nearing completion, the balance sheet is sound, and of course, November/December is a very seasonally strong period for the healthcare sector – following a weak October. A theme we’ve spoken about in numerous reports recently.
So in answer to the original question headlined in this email, at this stage, we’re comfortable with our decision to BUY HSO around $2.33 on Friday, particularly given we sold out of a profitable position around $2.80 back in May this year.
Healthscope (HSO) Daily Chart
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