Taking Advantage Of Pullbacks

Includes: DGX, EPRO, LH, MPW, PAY
by: Roger Nusbaum

Over the course of a couple of hours on Thursday morning we bought Medical Properties Trust (NYSE:MPW) for most large accounts and RRGR (the ETF our firm subadvises). We've had a little cash build up from the Heinz sale and from some dividends. The timing of the purchase was such that the market had a bad day Wednesday and so I decided that if it had a lower open on Thursday we would buy some stock and that is what happened.

Often when the market starts to pull back I think the pullback will be more than it ends up being so I make a conscious effort to realize that the market seems to want to work higher and that maybe I should take advantage of an almost 2% pullback instead of waiting for 5% or the 10% a lot of people think is right around the corner. If we get that kind of pullback we still have dry powder.

As far as buying a REIT, I view MPW as having different demand characteristics than REITs that own shopping malls exclusively or office property exclusively. MPW operates hospitals, rehab facilities and urgent care facilities which plays into how the US' demographics have been evolving and could play a bigger role in how healthcare is delivered (urgent care); at least I think it will.

I think that the line of business it is in will make it less cyclical than other REITs but the company does a lot of transactions and so if the capital markets were to freeze up like in the fall of 2008 then MPW should be expected to get hit hard. Note that the market going down a lot at some point is not the same thing as markets not functioning normally and I don't think another freezing up is in the cards.

The specific timing of the purchase turned out to be a little lucky in that our average price was below the closing price and then the name was up a little more on Friday. The reason to bring this up is that occasionally someone will be incredibly unlucky with a purchase. Someone, a lot someones actually, bought VeriFone (NYSE:PAY) Wednesday near the close at $31.89. Unfortunately for those folks the stock opened on Thursday at $19.99 presumably for guiding earnings to $0.47-$0.50 when the consensus had been $0.73-$0.80.

Although not a black swan it is clear the market did not see this guidance coming. Any stock can get hit hard because of earnings related news but some are more likely to get hit hard in the face of bad news and some less likely. One surprising niche that seems to get hit hard due to earnings related news is medical testing. Check out the charts of Quest Diagnostics (NYSE:DGX) and Lab Corp Holdings (NYSE:LH) and you will see some very fast declines. In the case of DGX and LH this isn't terrible because it isn't uncommon and the stocks do make it back. The huge drop in PAY obviously will not be as easy to come back from (I don't follow the name so I have no opinion about it).

When you buy a stock you obviously think it is going to do well and if Yahoo Finance is current there were three analysts who liked PAY enough to rate it strong buy. Over the course of an entire investment lifetime it is reasonable to expect that at least once you will be incredibly unlucky with the timing of a purchase. It hasn't happened to me yet but at some point it will.