Can the NMC share price recover from Muddy Waters’ accusations?

Is short seller Carson Block right about the state of NMC Health?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It is very rare, and never good, to see a massive share price drop for a FTSE 100 company. By its nature, the blue-chip index should have constituents that are generally immune to such shocks. It was perhaps all the more surprising then, when healthcare operator NMC Health (LSE: NMC) saw its share plummet 40% this week thanks to a damming report from the well-known short seller Muddy Waters.

Should you listen to a short seller?

It has been my experience that the opinions of short sellers, while not always right, are always worth listening to at least. The truth is short sellers need to be more certain in their trades than the long side.

If you buy a share and it goes down rather than up, you can lose only your initial investment (assuming you are not leveraging), but when you bet on a price falling and it goes up, it can keep going up indefinitely, in theory.

Given NMC’s share price reaction, it seems many agreed with this assessment of Muddy Waters’ expertise.

Needless to say Muddy Waters’ did not release its latest report about NMC from the goodness of its heart. Even the best and most accurate analysis that leads you to open a short position only helps if the broader market finds out about it as well. However, the fact it will be making money from these trades does not mean it is wrong in its analysis.

The allegations

Muddy Waters took a broad and aggressive stance against NMC in its 34-page report, questioning just about every aspect of the company’s reported finances as well as its corporate governance. It even suggested that some of the numbers raise “questions about possible fraud and theft”.

NMC has of course offered a rebuttal against the accusations, though this has done little to help its share price. A number of very specific allegations are made in the Muddy Water’s report, and simply denying the assertions won’t possibly be enough to calm market fears until specific facts and figures can be shown.

What next?

Naturally the future of NMC largely relies on whether the allegations are true. If they are, then the company’s entire financial outlook will have to be re-evaluated by the market.

One of the specific concerns the Muddy Waters report raises is so-called off-balance sheet debt. The entirely legal practice usually involves borrowing money against future supplier payments, which, through the complex nature of accounting rules, does not get reported as debt on the balance sheet.

This does not bode well for NMC, as this practice (and activism from short sellers) was the downfall of UK outsourcer Carillion. I suspect NMC Health and its shares will be in for a very rough time of it in the next few months.

Allegations like this stick, and it takes a lot of factual evidence, as well as confidence from the market, to change people’s opinions. That is never an easy or quick process. The shares may be able to recover, but who can say when?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Karl 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »