Could aged-care shares be hazardous to your retirement?

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For investors who received allocations in the 2014 initial public offerings of aged care providers Estia Health Ltd (ASX: EHE), Japara Healthcare Ltd (ASX: JHC) and Regis Healthcare Ltd (ASX: REG) their initial joy has likely turned sour.

After initially finding favour with the market and rewarding IPO investors with significant paper profits, recent turmoil has resulted in a significant reversal of those gains.

In Estia’s case, its share price has fallen by over 30% since the beginning of calendar year 2016.

The abrupt change in investor sentiment towards listed residential aged care providers can be narrowed down to two key factors.

Firstly, there are fears that regulatory changes could be imminent

Secondly, some operators appear to have employed aggressive accounting practices in their reported results

History might not repeat but it does rhyme

The first issue is an age old problem, but one which investors have a habit of forgetting.

Regulated industries are a double-edged sword. While having a government mandate or being government subsidised can offer predictable revenues, it also comes with the risk that a government may change the rules.

This scenario should really not come as any surprise to investors given the upheaval currently underway in the vocational education sector which has affected numerous listed players. Likewise, it was only a few years ago that McMillan Shakespeare Limited (ASX: MMS) experienced a dramatic plunge of over 50% in its share price when changes to salary packaging were proposed.

Stock picking still matters

Given the history of risks associated with companies that are dependent on government policy, it’s arguable that these types of stocks should actually trade at a discount rather than a premium to the market.

Sadly, many investors have probably ended up owning residential aged care providers as they’ve seen it as a way to gain exposure to the aging thematic. While this tailwind is indeed appealing, the current headwinds facing the aged care sector are a reminder that simply identifying an appealing thematic is not enough to ensure positive investment results.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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.

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