Confident Charlie & The Ramsay Shorters

Rudi Filapek-Vandyck

Shares in Ramsay Health Care (RHC) have found the going tougher, and not just in recent weeks. Open up a long term price chart and there's an argument to be made things started to become a little hairier in 2015, which essentially marked a flat year in a multi-year steep uptrend. In particular after peaking near $85 in September last year, the share price has faced more downside pressure.

This need not be a bad omen. Popular peers such as CSL (CSL) and Cochlear (COH) also have had their temporary trend breaks in the past and we know now, assisted by the always wise Harry Hindsight, those breaks were just that -- temporary.

Most shareholders on Ramsay's register would still be carrying a broad smile as the stock has been one of the stand-out performers in a decade that saw many large cap stocks not add anything, net, outside of dividends. It's easily forgotten today, and certainly not highlighted anywhere,but BHP shares ten years ago were hovering around $40, National Australia Bank shares were at $38 and Telstra was firmly above $4.

At the time, Ramsay Health Care shares were trading around $10. Even after the notable de-rating over the past twelve months, total gains since are still more than six-fold, ex dividends.

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Such success means Ramsay has many loyal fans in the local investment community, but equally many naysayers and critics who never understood why a stock trading on a Price Earnings (PE) ratio in the high 20s can possibly still represent good value when the aforementioned BHP, NAB and Telstra are all trading on much lower multiples.

Another thing to take into account is that most investors, subconsciously or otherwise, are momentum driven. They are eager to jump on board, and to stay on board, when a share price is on the rise. Their view changes when this is no longer happening.

In Ramsay's case, this means many of the not so faithful have by now moved elsewhere, while the voices of those who wish the share price down have become louder. Those voices also become more credible as, you know, the share price is no longer showing the same oomph it once had.

In February, the company was able to counter those negative voices by upgrading its guidance for the year. The subsequent share price recovery is clearly visible on price charts today. Next it invited analysts over to its operations in France and in the UK. But then in August its guidance for EPS growth between 8% and 10% for the year ahead disappointed and the share price weakness that followed is also clearly visible on price charts today.

As things stand, Ramsay shares are trying to find firmer footing around $62, having tumbled nearly -20% since reaching $76 in August. Consensus forecasts are for 10.5% growth this year and 9% next year meaning analysts certainly give management under the new CEO the benefit of the doubt.

The PE ratio has now fallen to circa 21x, and trying to stabilise at that level, whereas most price targets set are double digit percentage higher. Shareholder dividends are expected to grow by more than the EPS.

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Some investors have contacted me in recent weeks, asking why Ramsay's share price kept on falling. The company didn't issue a profit warning. Was there anything negative happening overseas, maybe?

What is not always easy to understand is that the share market, outside of reporting season and major events and announcements, is a public forum. In the absence of major news, share prices sometimes simply take guidance from those who vent their views the loudest. In particular when, after an overall disappointing reporting season, most market participants only remember certain stocks "disappointed".

One only has to look at what happened to Suncorp shares in recent weeks, down -18% before starting to recover on the back of positive broker commentary, to see the validity of that statement.

Part of the weakness in Ramsay Health Care shares can also be attributed to the fact that Charlie Aitken has gone short, and he keeps on telling everybody about it.

For those who are not familiar with Charlie, and I doubt there are many among you, for many years Charlie Aitken wrote daily market commentary from his institutional desk at subsequent employers, the last one was Bell Potter. While doing so he showed his talent for giving investors exactly what they wanted to hear/read.

Most above all, Charlie quickly learned rule number one in Finance: always be confident. Charlie is the type of guy one can send into the heart of a nuclear reactor that is about to melt down. There are two buttons in the control room. One means instant death. The other saves the planet.

I don't know Charlie personally, but when in public he's the hero who strides through overheating corridors, presses the button and upon return calmly says: "You didn't think I was going to press the wrong one, did you? What's next?"

That type of market commentary has amassed him a broad following among investors in Australia.

Since a year or two ago, Charlie is running his own fund. Again showcasing how smart he is, Charlie's investment mandate is not limited to the moribund local share market. He invests globally, which offers a lot more options, and potential for higher returns.

Now that Charlie has singled out Ramsay Health Care to go short, many in the local community are paying attention.

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Truth to be told, irrespective of his confidence in public, Charlie Aitken does on occasion ruin the superhero story by pressing the wrong button.

Back in 2008, with the BHP share price descending from $49 and hedge funds targeting the Big Australian, confident Charlie declared these shorters were to be proven wrong. BHP was a great buy, he said. He also declared CSL's blood plasma essentially a commodity, just like iron ore. On multiple occasions he sang the praises of Telstra's future.

Ten years ago, before everything started to turn really bad, Charlie agreed with AMP's Shane Oliver, and many others, the ASX200 remained poised for 7000 before year-end, and beyond in 2008.

Before you start thinking my goodness, Rudi seems an obsessive scholar of Charlie Aitken's share market commentary, I can assure you this is not the case. Our mission here at FNArena is to keep track of expert views and I read Charlie's whenever it lands in my inbox, because he is smart and eloquent, and everybody knows he has a following (also among journalists).

The examples mentioned above are merely the ones that are easy for me to remember, because I was on the other side of the argument for that particular stock at that particular time.

I also know Charlie likes Aristocrat Leisure, as do I, and he likes Link Administration, as do I, as well as Treasury Wine, Star Entertainment, Crown Resorts and Baby Bunting. Maybe the latter two not so much anymore. Charlie was chosen 'Emerging Manager of the Year' at this year's AIMA Hedge Fund awards.

I still own shares in Ramsay Health Care. I am not about to join Charlie's confidence there is another -$10 waiting to be de-rated off today's share price.

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Explaining why Ramsay Health Care is now a core short position for his fund, Charlie has nominated five "bear points":

1. The shares are expensive: more than double long-term price to book ratio (currently at 6.5x book value versus long-term average of 2.9x)

2. Regulatory Risk: review into prostheses pricing could have major impact on profitability, along with tariff cuts in France & UK

3. Management Change: Managing Director Chris Rex unexpectedly stood down in February after 10 years in charge

4. Significant Insider Selling: MD & CFO sold $27m and $7.5m of shares respectively

5. Competitor Downgrades: biggest competitor, Healthscope ((HSO)), has experienced management turnover, earnings downgrades and significant insider selling. UK peer Spire also issued a profit warning recently.

Given Ramsay is now a core short, i.e. with a lot of conviction, I find the above five core reasons quite disappointing. Management has repeatedly indicated any impact from prostheses pricing reform in Australia will be minor, a Managing Director leaving after ten years in the job always creates uncertainty, but it is but logical that he cashes in his options and shares. I would do the same. It's not like you are the founder of the business; his family trust remains a loyal shareholder.

Once the MD leaves, he moves on, he probably has plans, which probably also involve the money he has at his disposal. I note recent ASX notifications involve directors buying shares in the company. And competitors issuing downgrades; that only works sometimes. Look at Bellamy's and a2 Milk, for example.

I have been saying for years Healthscope, simply, is not of the same ilk as is Ramsay Health Care.

Granted, the operational environment for the private hospitals sector has become a lot tougher over the past year or so. This in itself deserves a reduction in premium, but Charlie's short vision probably requires a profit warning from Ramsay in the year ahead to be proven correct.

Ironically, Charlie does think such a profit warning is forthcoming, though he doesn't mention it among his five key "bear" points.

So far, the first share price movement has definitely been in Charlie's favour, but I would argue this has been a rather easy win. Ramsay's FY17 report disappointed. Higher bond yields have weighed on domestic healthcare stocks. The share market itself has been lacklustre and directionless, with volumes low. Charlie's profile and following were always going to increase initial pressure to the downside.

I suspect some caution will remain among buyers, so probably best not to carry too high expectations for the near term. The best response from the company would be another upgrade to guidance, or the announcement of a major acquisition on favourable terms, but such scepticism-breakers simply cannot be forced.

In their absence, I will be awaiting management's update at the AGM, scheduled for November 16th.

Happy to ignore Charlie's early victory glowing in the meantime.

By Rudi Filapek-Vandyck, Editor FNArena (VIEW LINK)


Rudi Filapek-Vandyck

FNArena is a supplier of financial, business and economic news, analysis and data services.

Expertise

ASX:RHC Ramsay Health Care

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Scott Forbes

great article

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richard dobosz

great comments ,thank you for telling it as it is

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Patrick Fresne

Moribund local share market? More likely an inability on the part of Australian fund managers to recognise the value that is already there. Ramsay is currently only the 89th most shorted stock on the ASX, and in my opinion if you want an example of an unappreciated stock targeted by short sellers look at Select Harvests, currently the seventh most shorted ASX stock. This is not a new thing, Select has often been a favourite punching-bag of the short sellers, but my long-standing suspicion has been that the shorters only have a vague idea as to the the real strategic value of the company.

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Adrian Querzoli

Yes nice article, I also recall reading that article and thinking it's a flimsy bear thesis considering this is one of the best quality companies on the ASX with excellent demographic tailwinds. I hold RHC but good on Charlie if he get this right... it seems a very low percentage trade to me and helps facilitates an opportunity for longer term investors to scoop up a few more for the bottom drawer!

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Kim Jordan

Well written article Rudi, thank you - your views too are ALWAYS worth listening to.

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Graeme Holbeach

I’ve long held suspicions that shorting basically isn’t profitable. If it was, those fund managers doing so would proudly be numerically reporting the affect it has had on their returns. They are few and far between. Rudi's article does highlight the seemingly necessary promotional aspects that appear to go hand in hand with shorting. As a corollary, I have a nagging feeling that a number of managers hold one or two high profile token shorts either to demonstrate their sophistication and / or to justify their promoting themselves in the absolute returns category.

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John Tonkin

Thanks Rudi .. when I see Charlie I am reminded of the guy I once bought a used car from.

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Adrian Querzoli

I agree generally Graeme, the odds are stacked against shorting given the market goes up on average 7% p.a. and the additional costs involved in borrowing shares. Let alone taking a quality stock like RHC which averages much higher TSRs. It's a brave move but as I said earlier not a percentage play and not something I would want to see from any funds manager I have entrusted my hard earned. Just my opinion FWIW

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Patrick Fresne

As noted noted above by Graeme, short selling is a highly risky activity and few short sellers survive for long, so there aren't too many of them. This is why I am sceptical about the frequent claims that the poor performance of a particular stock is due to short selling. If you do a bit of digging into the details, more often than not you find such claims are dubious. The probable explanation as to why Ramsay shares have been falling is simply because it is overvalued.

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Harry

Good common sense analysis backed by facts unlike the hyperbole of shorters. So they have a few wins thats what the market is about. On any analysis I cant see that RHC is overvalued . In relation to what ? PE , Money on deposit, Gilts, bonds. True value comes from continued performance over many years which is why you pay a premium compared to short run "stars" .The banks in my view are way under valued because I can find no marker to convincingly show a reason for their medium term destruction in value. Having lived through the time of Bank ofNew South Wales troubles there is no similarity to current times. There will always be the spruikers at sideshow alley that is what gives the dull consistent earners some light relief.

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Wendy Sherman

Thank you. Your voice of logic and reason is always appreciated

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