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
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.
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Motley Fool contributor Sean O'Neill owns shares of G8 Education Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.