Medical Properties Stock: Stay Out of the Way (NYSE:MPW) – Seeking Alpha | Jewelry Dukan

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(Note: This article appeared in the September 21, 2022 newsletter.)

Medicinal Properties Trust (NYSE:MPW) has become a stock where, at least temporarily, it looks like current fundamentals don’t matter. There is a fight between bulls and bears the fundamentals that could win in the future. Indeed, as David Dreman states in his book “Contrarian Investment Strategies – The Psychological Edge” the institutional crowd often falls into “groupthink” mode. So, if one of them goes towards the exit, more will soon follow to form the chart that is shown since the beginning of the year:

Medicinal properties rely on common price history and key valuation metrics

Medical Properties Trust Common Price History and Key Valuation Metrics (Seeking Alpha Website September 21, 2022)

What happens when there’s a big drop like this is that institutional holdings become dangerous for the individual investor who worries when a stock falls about 10%. The institutional crowd often has benchmarks and “keep up with the Joneses” has a very strong pull on investment decisions. This often explains the institutional tendency to drive all outputs at once.

Investors need to remember that big returns have been easy to come by for nearly a decade. All a pro had to do was load up on FAANG-type stocks (also known as one-decision stocks). No research was required as these stocks were sure to rise and outperform the overall market.

But like all good things (they never stop), the market cycle continues and what has worked in the past is unlikely to work in the future. Suddenly, it’s a lot harder to find a stock that’s “continuing to climb” than it was before. Therefore, holding a stock like this is very dangerous for an institution. The institutional equivalent of music chairs arises with a potentially costly result when the music stops.

At this point, fundamentals are secondary to many large holders because the longer they hold a stock like this, the bigger the losses. For a buy-and-hold investor, this may not be a threat since that investor has decided to give the company five years or more. Some investors never sell. So they don’t worry about what happens as they have faith in the company.

But many investors are also startled by the technical “breakaway train” that is forming on the chart shown above. For that reason alone, it’s best to just stay out of the way until the dust settles. The common stock is obviously a long way off the highs and in bargain territory. There’s nothing wrong with buying a bargain, diversifying properly and waiting for the possible outcome. The problem is that many investors don’t have the strength for such a strategy.

Antero Resources Technical Runaway Train

Antero Resources (AR) stock had this situation a few years ago. The situation turned out to be ok. But the question remains whether, from a technical point of view, you as a shareholder would have held out as a shareholder during the “breakaway” or sold at a loss and moved on?

Antero Resources common stock price history and key valuation metrics

Antero Resources common stock price history and key valuation metrics (Search Alpha website, September 21, 2022)

Above is the end of the technical “freight train” as institutions hurriedly left the stock. This rush for exits drove the stock price below $1. The shorts, screaming the company was going bust, clearly had time to turn a generous profit. But they also missed out on a great run through the low price if they didn’t change gears.

I can’t tell you how many people have written to me and told me this stock is gone. The fundamentals clearly spoke against it. This included a financial strength rating of B, which was speculative. But it never fell into the high-risk junk zone, where most failures occurred.

Antero Resources debt structure and financial strength assessment

Antero Resources Debt Structure and Financial Strength Assessment (Antero Resources August 2022 Company Presentation)

In fact, the company, which has received several financial rating upgrades since its IPO, has continued this trend with further financial rating upgrades up to the one shown above.

Similarly, the high cost argument died when the market realized that the company sells a matrix of products and the breakeven price of natural gas depends on the selling price of other products made from the rich gas.

where we are now

The hospital core business is recovering from the stresses of a pandemic. But the great thing is that the main operator of the stores is still standing. So often early recovery is ugly. As in the case of publicly cyclical companies, the market often lacks early confidence in recoveries until the recovery is firmly established in the eyes of the market. This often creates a lot of volatility early on.

Medicinal properties rely on historical records of main operator

Medical Properties Trust Inc Historical Records of Main Operator (Medical Properties Trust August 2022 Company Presentation)

Medical Properties Steward Operations

Medical Properties Trust presentation of the current steward position as passed to the company (Medical Properties Trust August 2022, company presentation)

Now all that’s really available is management disclosure. To date, management believes that no additional disclosures are required. As a rule, the auditors are aware of the situation, even if they do not usually examine quarterly reports. Accountants are regularly taken to court. Therefore, they take additional measures to ensure that they stay out of court whenever possible, even if they do not examine declarations. First of all, as far as the bears argue that more disclosure is warranted, more disclosure is always better. But so far it doesn’t seem to be necessary.

Second, given the newness of the recovery and the ongoing events surrounding the pandemic, the lack of confidence in Steward’s improvement is roughly synonymous with course. As an accountant, I’ve been through this more times than I can count. Recovery can derail, and it wouldn’t be the first time this has happened. But for now things are going well. The longer they stay the course, the better this whole combination of organizations can handle future surprises (and the pandemic was definitely a surprise).

What can happen through disclosure, one only has to look at a public disclosure. I wrote about Warner Bros. Discovery (WBD) taking the first steps to “whip the acquisition in-line,” and the stock was slammed. Anyone who looked at the cash flow knew it needed a deep clean, and management probably knew it before the acquisition went ahead, too. But when the impairments were disclosed and EBITDA adjusted for essentially zero free cash flow improvement when the acquisition was included, the market panicked.

This market will not initially reward disclosure as it is very preoccupied with risk or even too focused on it. We come from a time when making money was easy. Now, rising rates in January are likely to result in many pink notes on Wall Street. Compared to the boom times of the past, this makes the market much more nervous.

The future

With the pandemic, the risk level of what was a routine business has clearly increased. It is also clear that this group of companies would not survive a second pandemic-like situation without a little more recovery time. On the other hand, something like this (a quick replay) rarely happens. As such, investors can expect a very bumpy start to the recovery until a fair amount of market fears dissipate.

This means that the current price of this trust can easily fall further. The chart shown at the beginning of the article not only shows that the stock price is moving down. It likely reflects the growing panic among a number of institutional holders who have already had a bad year without this “extra” price action. It is very likely that there will be an institutional panic to the point where bids will literally disappear.

With that possibility there, those investors worried about a 10% or even 20% drop will need to stay away until the chart settles similar to Antero Resources.

I believe the stock is cheap and has been for some time. So anyone holding the stock should be fine. I also believe in the potential for institutions to panic when common stocks fall. We’ve all heard of window dressing. Having lived through Antero Resources going below $1 for no logical reason, nothing would surprise me about the future price here (although I think it’s worth every penny of the current price).

The stock market can do some strange things in the short term. If you’re not afraid of that, then this is definitely value for money. But if you are someone likely to be “stopped out”. Then definitely wait until the dust has settled. It can’t hurt, and the stock is well within the bargain range. This bargain isn’t going anywhere anytime soon because there is too much technical damage as shown on the stock chart.

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