In theory it is hard to argue with the common sense appeal of bottom-trawling, or bottom-fishing, as an investment strategy. Buy low and sell higher is a mantra intoned by history’s greatest share market investors.
In practice, many an investor has learned the hard way that bottoms often prove unstable, breaking through to ever deeper bottoms. The anticipated rebound in price may also be slow in coming and as the share price drops lower, investors keep buying to lower their average cost per share.
Bottom-trawling can also lead to healthy profits as a stock heals. Some investors jump in too early and need nerves of steel to hang on as the bottom continues to drop. Others are dead wrong and lose out as the bottomed-out stock never recovers.
The lure of bottom-trawling is enhanced by stories of success, such as experienced by investors who took the risk and bought shares of the one-time pride and joy of the ASX Healthcare Sector – Cochlear Limited (COH). You probably know the story. Back in 2011 Cochlear voluntarily recalled its flagship implant line – the Nucleus CI500. The stock hit a 52 week low as analysts claimed the company would lose market share and perhaps never recover. Cochlear secured a seat on the ASX Top Ten Shorted Stocks list for a while. You also probably know the end of the story. Here it is.
Stocks hitting 52 week lows are good candidates for bottom-trawlers to begin their research. We checked the Rolling Year Records table at the AFR for the first few days of March and found five healthcare stocks dropping to 52 week lows. Obviously not every healthcare stock is going to become the next Cochlear or Ramsey Health Care or CSL; but the sector as a whole stands to benefit from two powerful long term trends. First is the retirement of the massive Baby Boomer generation. Second, people are living longer, requiring more healthcare.
The following table lists the year over year share price performance of the five stocks that made the list. Two began trading on the ASX in the second half of 2015.
Radiology Company Integral Diagnostics (IDX) debuted on 21 October 2015, opening the day at $1.94 per share and falling to close at $1.83. The company provides diagnostic imaging services at 44 different sites across Australia. Although new to the ASX the three “brands” operating under the IDX banner have been around for some time. Global Diagnostics has been offering diagnostic imaging services to rural and regional areas across Western Australia for more than 16 years. Prior to the beginning of Global Diagnostics these services were only available in metropolitan areas of Western Australia. Lake Imaging is a technology leader, being the first practice to offer fully integrated digital imaging as far back as 2002. South Coast Radiology is the largest radiology group on the Gold Coast, in business for more than 45 years.
The share price may have suffered but this company came to the ASX with some impressive sponsors. Morgan Stanley and UBS were the lead managers for the IPO, with analysts at Morgan Stanley estimating the company’s enterprise value to be between $333.7 million and $388.6m with an 8.3% 2016 growth forecast for earnings before interest, depreciation, and amortization (EBITDA).
The current enterprise value for Internal Diagnostics is $283 million. Investors appear to have soured on this stock when IDX on 18 December issued a statement on the impact of the Federal Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) detailing proposed changes to the bulk-billing arrangements for the country’s pathology and diagnostic imaging providers. IDX management estimates the changes will reduce company revenues by 2-3% if the proposed changes go into effect on 1 July 2016. Reaction to the news was not positive and the dismal trading conditions in early 2016 have done nothing to help the share price of a profitable company operating in a red hot sector. Here is a price performance chart for IDX since it began trading on the ASX.
Pulse Health Group (PHG) is the only stock in the table paying dividends with a current yield of 1.5%, fully franked, and a two year dividend growth forecast of 8.1%. The company has done well for its shareholders prior to this year, with an average annual rate of total shareholder return of 23% over five years and 30.6% over three years. Here is the price performance for PHG over the last five years.
Pulse Health operates a network of private hospitals and day surgeries offering regional communities specialist care such as mental health, ophthalmology, general surgery, gynecology, orthopedics, plastic surgery, and oral and maxillofacial surgery. Right now the company has nine hospitals and centres in operation. Acquisitions are part of the company’s future growth plans.
In August 2015 Pulse Health lost its proposed acquisition of Vision Eye Institute (VEI) to China’s Janghao Group. On 26 February the company announced its acquisition of three endoscopy centers in the Melbourne area. This followed the January 2016 announcement of the acquisition of another endoscopy surgical centre, this one in Sydney. Adding in earlier 2015 acquisitions here and in New Zealand brings the total specialist hospitals and surgical centres to 15. The company reported profit of $900 thousand in FY 2014 which grew to $2.5 million in FY 2015.
Anteo Diagnostics (ADO) is a biotechnology company with a patented nanoglue technology called Mix&Glo used in a variety of healthcare diagnostic procedures. This is a high-tech bonding process using something like a molecular glue to bond antibodies to synthetic surfaces. Supposedly the company’s nanoglue technology could be expanded for use in battery technology.
Anteo is an intriguing company with a technology that sounds breathtaking but may be beyond the understanding of most. Like many promising biotechs with earth-shaking technologies, Anteo has as yet failed to turn a profit, with a $4.2 million loss posted for FY 2015. However, there is hope for investors on two fronts. First the company finalised the acquisition of Belgian based global specialty diagnostics company, DIAsource ImmunoAssays SA. This is an existing company with international reach, products, and manufacturing and distribution capabilities Anteo lacks. Anteo management called the acquisition “transformational” and it very well may be.
The second reason for hope is the decision by US based Bergen Asset Management to fund the acquisition and provide additional working capital. Anteo has been around for more than ten years and after initial investor enthusiasm has struggled mightily. Here is the price performance chart for ADO since its inception on the ASX.
Azure Healthcare (AZV) provides communications systems for hospitals and aged care facilities. Its principal offerings are high-tech nursing call systems. The company has two operating subsidiaries. Sedco Communications provides communications systems to healthcare operators in Australia, New Zealand, Singapore, Middle East and Indonesia. Austco Communications is global in scope, operating in 60 countries and features the company’s flagship call system, Tacera.
In the FY 2015 Annual Report Azure management highlighted the disruption in the healthcare industry with increasing demands for information-based systems rather than the traditional medical devices standard for the industry. In effect, the industry is looking to join the “smart” world versus the mechanical world. In an effort to shift to new and improved “smart” nursing call systems Azure is investing heavily in research and development, including additional staffing.
Although revenues increased 11.6% in FY 2015, net profit after tax (NPAT) fell 71.7%, due to the substantial increase in operating expenses. The results came as no surprise to investors as the company had pre-announced on 29 June 2015 the expected profit decline. The share price fell sharply and has yet to recover. Here is the chart.
In the long run the company’s quest for “smart” systems could pay off. On 24 February the company released its first software enhancement to the Tacera product line, Tacera Pulse. Part of the long term growth strategy is to move Tacera manufacturing to the US, the recognized global leader in healthcare innovation. In addition, Azure is increasing its share in the US market and recognizes the critical importance of obtaining US FDA compliance.
Paradigm Pharmaceuticals (PAR) is a biopharmaceutical company whose principal product right now is PPS, a repurposed pentosan polysulphate sodium used in treating bone marrow edema (BME) lesions. Drug repurposing is the application of existing drugs to new medical conditions. PPS has been used for decades for the treatment of blood clots.
BME is essentially a bruised bone. Skeptics might be wondering how big the market for bone bruising is. In fact, bone bruising is a common sports related injury and also a result of car accidents or even minor falls. At this time there are no treatments for BME at diagnosis. Non-steroidal anti-inflammatory drugs are considered ineffective and come with potentially serious side effects.
Paradigm has a US patent to use PPS for treatment of BME as well as patents in Australia, New Zealand, and China. The company will begin launching Phase 2A clinical trials throughout Australia, with the first in the Southern Orthopaedics Medical Centre in Adelaide and the second at Box Hill Sportsmed Biologic medical clinic in Melbourne. Paradigm already has a 20 year exclusive supply agreement for PPS with Germany-based manufacturer bene pharmaChem.
The company went public on 20 August 2015 with an issue price of $0.35, opened at $0.40 and closed at $0.37. Paradigm has plans to develop a nasally inhaled version of PPS for treatment of respiratory diseases including allergic rhinitis and asthma, and chronic obstructive pulmonary disease (COPD). ZILOSUL® is the name the company has given to its proprietary pharmaceutical formulation of PPS.