Shares in FTSE 100 company NMC Health (LSE: NMC) fell 20% yesterday to close at £10.36, with heavy volume starting the slide in the early afternoon.
NMC Health is a private healthcare company in the United Arab Emirates that owns and operates hospitals.
A few months ago, NMC Health dove on the back of a short report from Muddy Waters Research (of Netflix’s The China Hustle fame). Nobody knows why the stock fell this time, which fuelled speculation that the fall was due to a major shareholder liquidating their position in the company – and fast.
Muddy Waters’ allegations
Muddy Waters Research is an investment research firm that focuses on uncovering business and accounting fraud. It investigates businesses and then takes positions based on their findings (both long and short). The firm came to prominence in the UK with their high-profile attack on Burford Capital in the summer of 2019. Burford is in the business of buying lawsuits to then attempt to win the case. Given that its assets are intangible, this makes the business fairly difficult to understand or even value.
Muddy Waters suggested something similar with NMC Health, writing in its report that the business had inflated its asset purchase prices and also its cash balances. The firm also alleged that NMC Health had understated its debt.
Many investors believe that short selling should be illegal. I don’t agree, because without people and companies looking out for fraud and deception, the stock market would be a much worse off place. That’s not to say that I agree with the modus operandi of Muddy Waters – I do not agree with all of it.
Their way of initiating the short attack on Burford Capital was highly dramatic. They announced one day that they would be revealing a large short position on a UK-listed stock at 8 the next morning. Burford took a huge hammering when it was revealed as the stock Muddy Waters were shorting.
There have been many frauds on the London listed market, and while I do not think Burford Capital is one, short sellers are a necessary part of the stock market.
What I’d do with NMC Health
Many investors know one of Warren Buffett’s most famous phrases: “Be greedy when others are fearful“.
But Warren Buffett buys companies that he absolutely believes in. He also learned very early on his career that it’s “far better to buy a wonderful company at a fair price, than a fair company at a wonderful price“.
Is NMC Health a wonderful company at a fair price? I would suggest not. It doesn’t make any sense for short sellers to go after wonderful companies. It’s far easier, and far more profitable, to target a company that isn’t of the highest quality or a company that is genuinely conducting fraudulent activities.
Therefore, it’s unlikely that Warren Buffett would be taking advantage in the drop of NMC Health’s share price.
I would also avoid this company. It could be that the short seller’s claims were legitimate, or it could be that they are vastly far-fetched – either way, I intend to watch this game from the sidelines.