Why has the NMC Health share price lost 40% of its value in 3 days?

Even FTSE 100 (INDEXFTSE: UKX) growth stocks can crash, as NMC Health (LON: NMC) shows only too painfully.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

NMC Health (LSE: NMC) has been a golden example of how well shares in a FTSE 100 company can do.

It is, however, also an example of how a growth stock can run ahead of itself with investors jumping on and pushing the price too high. Since a peak just short of 4,100p in August 2018, the shares had lost 37% in a slide to 2,464p at market close on 16 December.

That still represented a five-year gain of 170%, over a period in which the FTSE 100 has managed to grow only 24%, so if you can take your ups and downs and cast them aside in pursuit of a long-term strategy, that’s a great result.

Shorting

But since the 16th, disaster has struck, and its name is Muddy Waters. The famous short-selling research group released a damning assessment on the 17th, telling us it has a short position in NMC and claiming it has “serious doubts” related to the company’s financial position — including reported asset values, cash, profits and debt.

In a very critical statement, the report suggests that “the company has invested in large assets at costs that we find too high to be plausible – including from parties we believe are de facto under common control,” which it says casts doubt on NMC’s claimed asset valuations.

The report also suggests that NMC’s cash balances could be overstated, and that its stated margins appear “too good to be true” when compared to others in the same business.

Response

NMC says of itself that it’s “the largest private healthcare company in the UAE and ranks amongst the leading fertility service providers in the world,” and it’s the first Abu Dhabi-based company to list on the London Stock Exchange. But the shine has been taken off that somewhat by a share price crash of 44% in the days since the Muddy Waters report was released.

In its response, NMC Health has said it “will review the assertions, insinuations and accusations made in the report, which appear principally unfounded, baseless and misleading, containing many errors of fact, and will respond in detail in due course.” It added that it “has a track record of significant, open and increasingly detailed disclosure to the market, as monitored and reviewed by its entirely independent disclosure committee.”

Reaction

What would I do about NMC Health now, only a couple of months after bullishly sayingI see no risks for the current year, with the company having told us at the interim stage that it’s primed to meet full-year expectations.

These latest allegations are of the kind that private investors really can’t anticipate, and the fact that such things happen even at the most unexpected of times is a good reason for diversifying our investment portfolios.

I had neglected to notice that NMC is one of the most heavily shorted stocks in the FTSE 100, and the Financial Times suggests that about a quarter of its free float is currently on loan to hedge funds. If I, and other private investors, didn’t take that as a red flag, we’re in good company as nine out of 11 analysts I’ve just checked have NMC as a strong buy.

Perhaps needless to say, I’m staying well clear now, at least until this messy controversy is sorted out.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NMC Health. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »