You know, it was only recently that many of the above-mentioned healthcare stocks were darlings of the Stock Market.
The allure of healthcare is easy to understand: With an aging population, rising affluence of the middle class here and abroad, and a business that appears immune to the economic cycles/downturn…. what can go wrong?
1) When the Singapore Market Rises, It Doesn’t Raise All Boats (and Vice Versa)
Let’s look at the recent Stock Price performance of the 3 stocks over a one year period.
Raffles Medical Group Ltd.
Over a period of one year (from 11 Aug 2016 to 10 Aug 2017), the share price has dropped from a high of SGD 1.55 to SGD 1.13. That is an approx. 27% drop.
TalkMed Group Ltd
Over a period of one year (from 11 Aug 2016 to 10 Aug 2017), the share price has dropped from a high of SGD 0.89 (on 24 April 2017) to SGD 0.64 on 10 Aug 2017. That is an approx. 28% drop.
Singapore O&G Ltd
Over a period of one year (from 11 Aug 2016 to 10 Aug 2016), considering the stock-spilt (1 for 2) on 15 May 2017, the share price has dropped from a high of SGD 0.71 (27 April 2017) to SGD 0.49. That is an approx. 31% drop.
So how did the STI fare anyway?
From 10 Aug 2016 to 10 Aug 2017, the STI Index has risen from 2875 to 3323, that is a 15.6% rise.
And the peak was on 27 July 2017, at 3354. So the price dropped only slightly since then to 3323 eg. 0.7%.
If your portfolio has only these 3 stocks, I would not be surprised, if you thought that we are currently having a stock market correction/crash or recession, etc… Seriously, what happened? Aren’t healthcare stocks suppose to be resilient, defensive?
People stop falling sick? Need less healthcare? Someone found the fountain of youth?
2) A Lot Of Investors Forgot (or Did Not Know) Why They Bought The Stocks In The First Place
I do not want to go into the specifics, but I do understand that the recent quarter earning reports of Raffles Medical, TalkMed and Singapore O&G were anemic (if not poor).
The net profit after tax attributable to owners of the Company increased by 0.5% from S$16.7 million in Q2 2016 to S$16.8 million in Q2 2017. Revenue growth of the Group was offset by higher staff costs and consumables used.
The Group’s net profit after tax attributable to shareholders decreased by S$0.29 million or 6.4%.
The decrease could be attributed to:
Dermatology segment, however, felt the impact of lower medical tourism dollars and it saw a decline of S$0.41 million, a decrease of 9.4% over the same period last year.
Employee benefits expense increased by S$0.41 million or 7.9% from S$5.22 million in 1H 2016 to S$5.63 million in 1H 2017.
The 2nd Quarter revenue decreased by $1.53 million or 8.8% YOY. The Group recorded profit after tax of $7.88 million in Q2 2017 as compared to $9.86 million in Q2 2016.
The decrease of $1.98 million or 20.1% was mainly due to a decrease in revenue, higher operating expenses offset by a decrease in the share of loss of associate.
Before I continue, just FYI, I am vested in TalkMed. Hence, I might be bias in my opinion.
Among the trio, the worst hit would probably be TalkMed. In terms of earnings, it had the worst quarter results among the 3.
In addition, on 28 June 2017, TalkMed’s chief executive officer (Ang Peng Tiam) and main revenue contributor of Catalist-listed TalkMed Group, was given an eight-month suspension by the Singapore Medical Council after a failed appeal against a misconduct conviction (read here).
In fact, TalkMed stock price has already been trending down prior to the announcement of the suspension. Of course, it did drop sharply after the annoucement.
Business wise, what has changed? Nothing.
The macro trend of the aging population, falling birth-rate and rising middle class did not change as well.
True, in their earning reports (all these 3 stocks), there was always this mention of the softening of the medical tourism. However, that should not come as a surprise (given the high valuation of the Singapore currency) and the competition from cheaper healthcare providers in neighboring countries. These are known facts.
Earnings have dropped because of expansion, as in the case of TalkMed (eg. Higher overhead expenses incurred by a subsidiary, Stem Med Pte. Ltd. (“Stem Med”) of $0.34 million) and Raffles Medical (new hospitals and extension to existing hospital)… plus other factors like rising staff costs, legal fees, etc.
But What About TalkMed Dr Ang’s eight-month suspension?
In the case of TalkMed, I did a post on TalkMed and Singapore O&G recently (in April 2017), see below:
- TalkMed Group Ltd vs Singapore O&G Ltd (read here)
In it, I mentioned the following “However, from the point of view of an investor, there is also a certain risk in choosing a company that is highly dependent on the competency of a few highly qualified (and highly paid) professionals.”
Doctors are humans, and being humans, there is always this unpredictable aspect — humans err, humans leave or quit, etc. That is the risk one should expect before buying the stock. Yes, the risk is low, but there is always a possibility it would happen. Some people call it the “Known Unknown”.
I am sure many investors when they bought at the high price a few months back (and at a high PE), they would have been aware of the risks. If I can think of it, I am sure many others would have thought so too. So it is a known risk. And it could happen to any of the healthcare provider stocks. One of their star doctors could make a blunder or quit.
Now that it has happened… will earnings and revenue be impacted… of course it will. In the short term.
However, in the long term (and I mean Buffett’s definition of long term eg. 10 yrs)…Will the earnings be adversely affected by Dr Ang’s one singular mistake? I like to think not so much.
It is a mistake by Dr Ang, and when it is pertaining to lung cancer, it is literally a fatal mistake…… in the near term. However, sometimes, people forget what Dr Ang has achieved over the years (read here), when all the news are talking about the charges. Both of these (the blunder & his achievements) are facts.
Peter Lynch once mentioned that he finds it amazing that people will spend more time researching a holiday than they will researching an investment. “Investing without research in like playing poker without looking at the cards.“
Many times, we invest without an understanding of the company and its business (and the stock price valuation). And often when questioned, we do not know why we bought it in the first place, other than the fear of missing out. That is fine when things are rosy, stock prices are going up… but it is only when the tide change, do we realize this fact.
I was watching this old video clip of a talk by Peter Lynch (watch here, fast forward to 1.27). Think that portion is relevant here (even after all these years).
There have been a lot of discussion on the above-mentioned healthcare stocks. Many investors are cutting loss, and fearing that the prices will drop further (since valuations aren’t really cheap). Really? Were they ever cheap, recently…in recent months, years?
I have been tracking Raffles Medical for years, and I have yet to find it ‘cheap’. Singapore O&G and TalkMed have relatively a short history, as listed stocks, and unless you bought their stocks during the IPO, I think it is hard getting them at cheap valuations given the fact that their stock prices have risen significantly during their short ‘history’.
I don’t particularly like to just look at the P/E when evaluating stocks, but was looking through their historical P/E ratios below.
The last time when Raffles Medical had a P/E of less than 20 was in 2008. I am assuming it is ‘expensive’ with reference to 2008 valuation? Wonder how many of us have held the same stocks for close to 9 or 10 years.
Singapore O&G has a really short ‘history’ (as a listed stock), actually it was never really cheap in my opinion, just looking at the P/E. In fact, the P/E valuation now is even lower.
TalkMed has a really short ‘history’ as well… the P/E is higher recently, probably due to the poor earnings in recent quarters. But still, it is not way off from the S&P 500’s P/E, Singapore O&G and Raffles Medical’s P/E.
Healthcare stocks are known to have higher valuations in comparison to the broader market. So I really doubt, one can really get these stocks cheaper than the broader market (well I could be wrong)…
- Are Singapore Stocks Expensive Or Cheap Currently? (read here)
According to the article above dated 1 June 2017:
- As of 31 May 2017, the SPDR STI ETF has a PE ratio of 13.1.
- The long-term average PE ratio: The Straits Times Index’s average PE ratio from 1973 to 2010 was 16.9.
- An instance of a high PE ratio for the Straits Times Index: Back in 1973, the index’s PE ratio hit 35.
- 3 Things to Know about Singapore’s Stock Market Barometer (read here)
According to the article above dated 7 August 2017:
- As of 4 August 2017, the STI ETF was trading at a price-to-earnings ratio of 12.4 and had a dividend yield of 3%.
Given that the above figures, I reckon these healthcare stocks will be ‘expensive’ most of the time when taken in comparison to the broader Singapore Market/STI, and solely looking at P/E. And now is no exception.
Look, nobody makes money in every stock they have invested. And there is nothing wrong with losing money… what is wrong is not knowing what you are buying. I do hope that for current investors of these stocks, to question why they bought the stocks in the first place, and why at that price.
I mentioned the following in one of my posts before, but I think it is worth mentioning it here again:
I was watching a video on an interview with Mohnish Pabrai, I was reminded of the Funeral Houses again (click here – you can forward to 31.20 min). He was using the case of SCI to show how irrational the market can be. Case in point, the Dow was down 300 points for that day, and the shares of all kinds of businesses were consequently marked down including SCI which was down 2% that day. Whatever the reason that caused the Dow to go down 300 has no effect on the business of SCI (did not increase human life expectancy) yet SCI shares were down by 2%.