A staggering 122 companies hit new 52-week lows this week, most of them in resources as plunging iron ore and Brent crude oil prices hit producers and service companies for six. Shares in Rio Tinto Limited (ASX: RIO), Beach Energy Ltd (ASX: BPT), and South32 Ltd (ASX: S32) all hit new lows this week.
No surprises there, but a couple of decent companies look to have been thrown out as well:
Santos Ltd (ASX: STO) – last traded at $3.31, down 61% for the year
Let's get the obvious mention out of the way first. Santos shares have been hammered in the past year because low oil prices have crushed its profits and investors are looking increasingly nervous about the company's ability to pay its debt.
While a low Australian dollar theoretically provides a good tailwind (since oil is sold in US dollars), Santos' debt is denominated in USD which mitigates much of the benefit. While Santos shares could experience significant upside when the value of oil recovers, that could take a long time as high-cost producers don't exit the market overnight – just look at iron ore.
Santos is a speculative investment, and only for buyers with a high risk tolerance. After all, prices could always go lower.
Healthscope Ltd (ASX: HSO) – last traded at $2.48, down 5% for the year
Owned by private equity until recently, private hospital and pathology operator Healthscope has been sold off over investor fears it will turn into the next Dick Smith Holdings Ltd (ASX: DSH) or Spotless Group Holdings Ltd (ASX: SPO).
Shares are down 10% from recent highs and 5% for the year, which is nowhere near enough to mitigate the risks given that Healthscope was highly priced when it debuted and still trades on a price to Earnings (P/E) ratio of 27. Debt is high and Healthscope also faces similar uncertainty to Primary Health (although to a lesser extent) as a result of the government focus on cutting health expenditure.
While it may be a solid business, I feel that there are better companies out there at more attractive prices.
Primary Health Care Limited (ASX: PRY) – last traded at $2.99, down 37% for the year
I wrote on Primary Health at its previous 52-week low in October, where I stated that I was uncomfortable with the company's high debt load and the potential for an earnings hit in the form of the government's ongoing productivity review into the healthcare system.
Since that article, shares have fallen another 20% and Primary trades on a P/E of 11, substantially lower than competitors Sonic Health Care Limited (ASX: SHL) and Ramsay Health Care Limited (ASX: RHC), which have P/Es north of 20 and 30, respectively.
In fact Primary Health looks to be firmly in bargain territory – if you're comfortable with the above risks.
I'm not, and I believe investors should wait for more information on the company's future growth plans and the anticipated impacts from the medical system review before buying. Primary has a very poor track record of growing shareholder wealth over the long term and a low price won't necessarily change that.
