Never underestimate the power of greedy short-sellers!
That's been the lesson for the past week or so of trading, thrown into stark relief by the beat-up of Slater & Gordon Limited (ASX: SGH) shares. Elsewhere in the market we've seen a general decline in roll-up businesses like G8 Education Ltd (ASX: GEM) and Affinity Education Group Ltd (ASX: AFJ) as investors grow nervous about whether the roll-up model is really good business.
While Azure Healthcare Ltd (ASX: AZV) crashed on old-fashioned disappointed expectations. Here's what you need to know about the declines in these stocks.
Slater & Gordon Limited – last traded at $3.67, down 26.7% in the past year
The recent history of Slater & Gordon has gone something like this; market announcement, shares drop $1, market announcement, shares drop $1, market announcement… shares drop $1.
According to Fairfax media reports, the number of shares held for short-selling are currently 8.7% of Slater & Gordon's total float, up from 8% a week ago and a substantial increase from February earlier this year.
With such high short interest and significant uncertainty still remaining over the outcome of the ASIC investigation into SGH, I think investors are better off steering clear of the stock. High share prices have been key to Slater & Gordon's growth by acquisition (funded by share issues) and despite an attractive valuation I think shares could well go lower in the short term.
G8 Education Ltd – last traded at $3.23, down 29.4% in the past year
Lower stock prices are also a concern for G8 investors, this being another company that uses frequent issues to fund growth by acquisition. Investors have been selling out recently over fears that growth has come to a halt and that the company's 6.7%, fully franked dividend may not be sustainable.
This is a real concern, but so far I have not seen anything that is a deal-breaker for my investment. My biggest question going forward will be how management approaches the business and the low share price going forward.
I will be looking to see some effort to improve the financial performance of existing businesses and a more cautious approach to new acquisitions. In the short-term I think share prices could go lower as investor nervousness over the roll-up strategy grows.
Azure Healthcare Ltd – last traded at $0.14, down 58.8% in the past year
Confession season!
Micro-cap healthcare technology business Azure Healthcare shares plummeted this week after management confessed in a market update update that Net Profit After Tax (NPAT) for the year to June 30 would be substantially lower at $0.8-$1 million compared to $3.87 million in the prior reporting period.
This is a direct result of higher investment in staff and technology in the past year. Azure Healthcare has played it as fuelling growth for the next 12-18 months, but I suspect investors were also disappointed with revenue growth of 12% in the past 12 months.
Shareholders will want to watch how growth plays out over the next 12 months, but Azure shares have taken quite a beating this year and I think they have gone roughly as low as they will go in the absence of further bad news.
Investors searching for tomorrow's success stories have had a keen eye on Azure Healthcare for a while, but there's two more stocks with rapidly growing revenues that are well worth a look at today's prices…
