I think it is fair to say that it hasn't been a great 12 months for the Nanosonics Ltd. (ASX: NAN) share price.
During this time the infection control specialist's shares have fallen a sizeable 20%.
The majority of this decline came following the release of its half-year results in February which were below expectations.
So with its shares down sharply over the 12 months, is this a buying opportunity?
The good.
Nanosonics has a huge opportunity in a market which its product is regarded as the best in its class. As of its half-year report, the company's Trophon EPR ultrasound probe cleaning product had grown its global installed base to 16,000 units. This is just a fraction of the total addressable market that management estimates to be 120,000 units.
But soon it isn't just going to be a one-trick pony. The company has two products in development targeting one or more new infection prevention solutions which it believes have unmet needs. Considering the strong reputation it has and its wide distribution network, I believe that these new products could be a big success and complement Trophon EPR's growth.
The bad.
There's no denying that its shares are a little on the expensive side at the moment. This was masked in FY 2017 by large one-offs but is now much more apparent. At present Nanosonics' shares are priced at 118x trailing earnings or 11x sales. While I feel the company is capable of growing at a rate that justifies the premium, failure to do so could result in a sizeable share price decline.
Another concern I have is the rising level of short interest in its shares. Out of nowhere Nanosonics has suddenly become one of the most shorted shares on the local share market. The latest data out of ASIC reveals that 10.7% of its shares are being held short. As short sellers only tend to make a move when they have a high conviction of success, this build-up of short interest is worrying.
Should you invest?
I think Nanosonics is up there with Pro Medicus Limited (ASX: PME) and Volpara Health Technologies Ltd (ASX: VHT) as one of the best buy and hold options in the healthcare sector.
However, investors may want to keep a close eye on short interest levels. If short interest continues to build then it could weigh heavily on its share price performance in the short term.
