NMC Health (LSE: NMC) has been a golden example of how well shares in a FTSE 100 company can do.
It is, however, also an example of how a growth stock can run ahead of itself with investors jumping on and pushing the price too high. Since a peak just short of 4,100p in August 2018, the shares had lost 37% in a slide to 2,464p at market close on 16 December.
That still represented a five-year gain of 170%, over a period in which the FTSE 100 has managed to grow only 24%, so if you can take your ups and downs and cast them aside in pursuit of a long-term strategy, that’s a great result.
But since the 16th, disaster has struck, and its name is Muddy Waters. The famous short-selling research group released a damning assessment on the 17th, telling us it has a short position in NMC and claiming it has “serious doubts” related to the company’s financial position — including reported asset values, cash, profits and debt.
In a very critical statement, the report suggests that “the company has invested in large assets at costs that we find too high to be plausible – including from parties we believe are de facto under common control,” which it says casts doubt on NMC’s claimed asset valuations.
The report also suggests that NMC’s cash balances could be overstated, and that its stated margins appear “too good to be true” when compared to others in the same business.
NMC says of itself that it’s “the largest private healthcare company in the UAE and ranks amongst the leading fertility service providers in the world,” and it’s the first Abu Dhabi-based company to list on the London Stock Exchange. But the shine has been taken off that somewhat by a share price crash of 44% in the days since the Muddy Waters report was released.
In its response, NMC Health has said it “will review the assertions, insinuations and accusations made in the report, which appear principally unfounded, baseless and misleading, containing many errors of fact, and will respond in detail in due course.” It added that it “has a track record of significant, open and increasingly detailed disclosure to the market, as monitored and reviewed by its entirely independent disclosure committee.”
What would I do about NMC Health now, only a couple of months after bullishly saying “I see no risks for the current year, with the company having told us at the interim stage that it’s primed to meet full-year expectations.“
These latest allegations are of the kind that private investors really can’t anticipate, and the fact that such things happen even at the most unexpected of times is a good reason for diversifying our investment portfolios.
I had neglected to notice that NMC is one of the most heavily shorted stocks in the FTSE 100, and the Financial Times suggests that about a quarter of its free float is currently on loan to hedge funds. If I, and other private investors, didn’t take that as a red flag, we’re in good company as nine out of 11 analysts I’ve just checked have NMC as a strong buy.
Perhaps needless to say, I’m staying well clear now, at least until this messy controversy is sorted out.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NMC Health. 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.