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Azure Healthcare Ltd plunges 50% and then jumps 40%: Should investors be concerned?

Azure Healthcare Ltd (ASX: AZV) shares plunged 47% on Monday to a six-month low of just 24 cents after the company released a cryptic announcement that warned of a 50%+ fall in net profit for the first half of the financial year.

40% Jump!

Amazingly, the shares made up a lot of the loss on Tuesday when the company’s shares extended early gains to finish up 27% at the end of the day. The sharp change in investor sentiment appears to have come after an analyst released a note saying that he had spoken with the company and that the fall in net profit was, in fact, due to start-up costs associated with four sizeable recent contract wins.

Lessons to be Learnt

I believe there are a few lessons to be learnt here:

  1. The disclosure practices of Azure Healthcare’s management team needs some work.
  2. Investors should try to unearth the full background of an announcement before jumping to conclusions.
  3. Long-term investing is best.

Azure’s management team, led by chairman and CEO Robert Grey have had a reasonably poor history when it comes to comprehensive reporting and Monday’s announcement is no exception. Investors that took the announcement on face value could have assumed that the fall in net profit was a result of poor management or an unexpected fall in sales, when the opposite appears to be the case. Long-term investors may find that the share price recovers quickly and that doing little was the best course of action.

So what happened? Should you be worried?

The analyst responsible for the ‘calming’ note to clients pointed out that Dr Grey said that new staff were required in the USA for four new contract wins that would not contribute to earnings until the second half of the financial year. The total full year cost of these hires would be in the realm of $1.3 million, which implies that full-year profit is on target for between $2.9m to $3.7m, before considering the impact of the new contract wins.

I’m in no position to say whether this will come to light, but the information at hand indicates that the announcement could have been a positive for the company, but instead was made out to be a massive negative.

Investors could rightly feel concerned about the poor reporting by the company, but have so far been rewarded by a rising share price. Only time will tell, but cautious investors may be better suited investing in The Motley Fool’s top pick for 2015. Be among the first to get the name and code right now. (Hint: It’s a sexy ASX tech company!) Simply click here for your FREE copy... BEFORE the investing crowd gets wind of this!

Motley Fool contributor Andrew Mudie owns shares in Azure. You can find Andrew on Twitter @andrewmudie

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