The Motley Fool

I got this FTSE 250 stock badly wrong. But could the time to buy now be right?

Image source: Getty Images.

In a recent article about AA and Saga, I discussed the perils of investing in companies floated on the stock market by private equity owners. As a rule, I’m wary of such businesses in their early days as public companies, on the cynical view that there’s every chance they’re over-priced, over-indebted and under-invested.

However, I made an exception with medical products and technologies group ConvaTec (LSE: CTEC) when I wrote bullishly about it within six months of its October 2016 flotation. The tip has been a disaster. The share price was 303p at the time and is now around 134p.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

I got ConvaTec badly wrong. But have we finally reached a point where the time to buy is right?

Attractive business characteristics

I’m a fan of the healthcare sector generally, due to strong growth fundamentals provided by ageing populations. And I felt ConvaTec was a particularly attractive proposition, because of its focus on “therapies for the management of chronic conditions,” and its “leading market positions in advanced wound care, ostomy care, continence & critical care, and infusion devices.”

It was these business characteristics, together with a strong set of maiden annual results as a listed company, in March 2017, that persuaded me to tip the stock. However, things soon went wrong.

Profit warnings

The company issued a shock profit warning in October 2017. It said this was largely due to supply issues, arising from a move of manufacturing lines from the US to the Dominican Republic. Temporary and fixable, I thought, and remained bullish on the stock at 180p.

A year later, we had a second profit warning. This was accompanied by the departure of chief executive Paul Moraviec with immediate effect, and non-executive director Rick Anderson (former chairman of Johnson & Johnson) taking the helm as interim chief executive. The company said the primary reason for this profit warning was a change in inventory policy by the biggest customer of its infusion devices division. These things can happen, I thought, and remained bullish on the stock at 140p.


Last month, ConvaTec released its latest annual results and interim boss Anderson’s strategic review of the business. He had some blunt things to say about the company’s commercial and operational execution failures, and he reckoned investment of $150m over three years is needed to put things right.

On the positive side, he concluded: “The fundamental opportunities of our markets, products and brands remain sound.”

Time to buy now right?

There are other positives. Despite its troubles, ConvaTec has remained profitable and cash generative. Current net debt of $1,305m and a net debt/EBITDA ratio of 2.7 are down from $1,510m and 3.0 two years ago. It’s forecast to continue being profitable and to maintain its dividend at $0.057 (4.35p at current exchange rates), giving a handy yield of 3.25%.

When I first tipped the stock, the forward price-to-earnings (P/E) ratio was 19.7 (on a par with sector peers like Smith & Nephew). Today, it’s just 12.5.

I made a big mistake in allowing my enthusiasm for the sector to override my usual caution on private equity flotations, and in tipping ConvaTec far too soon after its stock market debut (lesson learned). However, having got it badly wrong, I do think the current valuation and turnaround prospects offer considerable medium-to-long-term upside potential. As such, I feel the time to buy could now be right.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

G A Chester 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.