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The surprise small-cap winner from the aged care debacle

Aged care stocks have taken a big hit from the upcoming Royal Commission into the sector and the negative publicity surrounding their standard of care but there’s one small-cap stock that might benefit from the expected reforms to the industry.

The allegations of elderly neglect and abuse are fuelling calls by the industry union for mandatory staff-to-patient ratios at these facilities and that could equate to a $5 billion hit to the sector’s bottom line, according to analysis by the Aged Care Guild and reported in the Australian Financial Review.

This is from staffing changes alone. Throw in tighter regulations and you can bet the profit margins for the sector will take a big hit. This is the key reason I am avoiding shares in Japara Healthcare Ltd (ASX: JHC), Regis Healthcare Ltd (ASX: REG) and Estia Health Ltd (ASX: EHE).

These shares are down between 17% and 30% since the start of the calendar year when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up 2%.

If there was a sector in dire need of automation, it would be aged care. The anticipated painful reforms are likely to be a big catalyst for technology adoption in an industry that is better known for conservatism and sticking to what it knows.

This creates an opportunity for Paragon Care Ltd. (ASX: PGC) in my opinion. I was chatting with an executive from the company about a year ago about the new products it was looking to bring to the Australian market and artificial intelligence (AI) came up.

AI is supposed to drive the next generation of patient care systems and he said that smart cameras that can recognise and anticipate patient needs are already being tested in the field. My contact was convinced that the industry will move quickly to adopt the technology.

The technology will free up staff and can even control other robotics to help with patient care. The elderly may not need a personal assistant to get out of bed or perform other daily functions.

It’s a bit futuristic but the technology is certainly available today.

I was less enthusiastic back then. It’s not that I don’t believe in the technology – I certainly do – but I know there are several regulatory hurdles and mindsets that need to be changed before we see mass adoption of what could be an invasive technology.

Key decision makers must be convinced that there are no shortcomings that could put patient lives at risk (and you can imagine the legal fallout on this front) and you can also bet the unions will be up in arms as the roll-out of AI will mean fewer jobs.

AI will certainly come to a medical facility near you but maybe not in the one-year plus timeframe that my contact believed.

Alas, the change a Royal Commission can bring! I could be the one eating humble pie and I thank my lucky stars that I didn’t make a bet to hike to Mt Kosciuszko wearing an embarrassing t-shirt (no names here on who did).

If putting up with a risk to privacy means better outcomes for the elderly, it may be a price society will be willing to pay.

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Motley Fool contributor Brendon Lau owns shares of Paragon Care Limited. The Motley Fool Australia has recommended Paragon Care Limited. 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 Scott Phillips.

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