Netcare: Wait for a recovery before selling
With a rising middle class and an i ncrease i n chronic diseases, South Africa has s e en a growing demand for healthcare services. Netcare, the country’s second-largest private hospital group based on market capitalisation with operations in SA and the UK, reported a 16% increase in profit after tax to R1.1bn for the six months to end March. The period was characterised by a strong performance from its South African operations, and a f urther improvement by its subsidiary BMI Healthcare in the UK, it said.
Netcare investors have enjoyed robust years of persistent upside, with the share price jumping 64% over the past 12 months alone. A continuous trend of good results has kept a steady upward
3 000 momentum, with the trend steepening from March 2014 – effectively forming the f inal phase of a major bull trend. Because the group’s revenue is split almost 50/50 between SA and the UK, a weaker rand is beneficial to the company.
Not even the heated debate regarding private hospital costs, or government’s proposals, such as the National Health Insurance ( NHI), swayed investors. Netcare is generally considered as a defensive stock because healthcare services are in demand regardless of the economic cycle, even during times of recession.
As its latest interim results show, the group’s growth story continues. But the recent dip in share prices over the last month indicates an exhausted trend to me. Understandably so – Netcare
3 000 is trading on the third and final phase of its primary bull trend, and usually a correction is imminent in that case, irrespective of any positive news f low.
Netcare could be topping out. It has pulled back within the third phase and is teetering on its support trendline. It may hold there, given the oversold relative strength index (RSI). But a reversal below 4 440c/share would mean that there are fewer buyers, and the third support trendline may well be breached. I’m cautious on Netcare, and suggest investors prepare to reduce longs if Netcare reaches a ceiling at 4 440c/share. I would recommend a short below 3 550c/share as downside to the 2 960c/share support level could then ensue.
Upside above 4 440c/share would extend the third phase to new highs, and because Netcare would be trading in the f inal phase, upside may be rapid. However, a major pullback would still be looming, in which case I would suggest selling gradually on every uptick to maximise profits.