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Why I think this stock’s price is looking so unhealthy

UDG Healthcare (LSE: UDG) is a stock that I’ve been monitoring for a while and briefly held a few years back. Looking through my watchlist recently I’d seen its shares have been in freefall recently. Why is that?

Let’s examine the problem

In the year to date, the share price has fallen by around 24%. The sell-off was actually most acute before the recent market volatility, indicating the problem is more related to concerns about UDG Healthcare specifically, rather than the stock just following the market down. Slowing growth seems to be the main concern for investors and given the high price-to-earnings (P/E) of the company, still at around 22, it’s quite expensive. Its high P/E coupled with a low dividend yield means investors were seeking growth. Now that’s slowing, and the company is selling off divisions, many investors seem to be selling and that is sending the share price crashing.

The broker Numis is concerned UDG has become overly reliant on bolt-on acquisitions, many of which don’t enhance or tie closely enough to the core business. Given how larger companies in recent years have become unstuck by an over reliance on buying growth, it’s little wonder UDG is getting short shrift.

Is the patient recovering after a bad crash?

In August it provided its three-month results up to the end of June. They showed that performance across the company’s divisions was mixed. In its Ashfield divisions, UDG said Ashfield Communications & Advisory performed “strongly” however. Ashfield Commercial & Clinical, meanwhile, experienced a “challenging” quarter. Operating profit was well below the same quarter last year due to the phasing of contracts and fewer new business development opportunities.

On the same day as the results, UDG also announced the sale of its Aquilant division to H2 Equity Partners, a European private equity firm, for a total potential net consideration of up to €23m ($27m).

August saw the shares fall heavily indicating investors were not pleased with the results and the announcement of a divestment. For a company reliant on growth, the current state of the company wouldn’t make me want to buy the shares. At least not until they provide much better value and that’s still a long way off.

Another not so healthy stock for investors

Another stock that’s been hurting investors’ wealth is ConvaTec (LSE: CTEC). Its shares have also fallen 24% in the year so far. The healthcare company, which listed in 2016 at 240p a share, now languishes 35% lower at around 155p per share. Just this month, the company issued a profit warning and announced its chief executive’s departure. The company expects to see a material negative impact on revenue in the fourth quarter of between $18m and $23m. It is also facing “challenging” dynamics in specific markets in Advanced Wound Care. For investors then, not much to get excited about.

Much like UDG, ConvaTec isn’t offering much to shareholders. Anyone who bought in at the IPO is sitting on heavy losses and the company seems to just offer negative news. The most recent profit warning was the second in 12 months. 

It’s common knowledge within investing that catching a falling knife is risky. UDG and ConvaTec are both falling knives showing no clear signs of turning around as far as I can see.

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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.