The share price of Aveo Group (ASX: AOG) slumped over 2% to a fresh one month low of $2.43 during lunch time trade on news that a second law firm has filed a class action suit against the retirement communities operator.
This means Aveo shares are 27.3% in the red over the past 12-months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up by nearly 9%.
According to the Australian Financial Review, Sydney law firm Levitt Robinson moved quickly to file the lawsuit after Melbourne-based rival Maurice Blackburn said it has started registering interest from former Aveo residents who feel aggrieved by what is alleged to be unfair and unconscionable contracts used by Aveo.
The dark underbelly of the retirement living industry was put on display following reports from the media highlighting the shortcomings of the sector.
I have no doubt that Aveo will vigorously defend itself and these are all unproven allegations, but with legal vultures circulating overhead as the company and the wider industry come under continued media scrutiny, investors have to ask themselves if this is going to end like Vocation Ltd (ASX: VET).
The vocational training services company's trouble also started from media reports looking at unsavoury practices in the industry and I suspect Aveo and its peers will continue to struggle to perform over the short to medium-term, if not longer.
Just as with the vocational education industry, the intense media spotlight is likely to draw a response from the federal government who will be under pressure to introduce tighter regulation to protect consumers.
That will be bad news for the for-profit retirement living industry, which is already suffering from reputational damage, and reputation is a big thing for the sector.
Aveo isn't the only one feeling the pain, although it is one of the largest players in the space on a market cap basis with the market value of the stock standing at just over $1.4 billion. Its peers Japara Healthcare Ltd (ASX: JHC) and Estia Health ltd (ASX: EHE) have also been underperforming.
If you thought it is only these mid to small cap stocks that will feel the fallout, you would be wrong. Large financial institutions like AMP Limited (ASX: AMP) have been investing in the sector as well and could find itself under the unwanted spotlight.
The bottom line is don't be tempted to buy into the age care sector, which may look cheap due to the big drop in valuations. Until the dust has settled, this space looks increasingly like a value trap.
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