CRH Medical - to speculate or to invest?Insofar as CRH is concerned, I have no idea what the quoted stock price will be this month, or even this year. I actually agree with Truthless, it may decline 50% or more if there is a macro shock to the financial system, global recession, etc., etc. However, there may not be a macro crash at all. CRH may tread water at these levels or gain based on earnings announcements later this week and over the next few months. (By the way Truthless, I don’t put all of my money into one stock, I always diversify in many ways with different industry holdings, different asset classes and I use dollar cost averaging.)
So is CRH a speculation or an investment?
CRH is a rollup story. Like a snowball that gets bigger and bigger. They operate in fragmented vertical industry where they can acquire smaller players within the gastrointestinal space. What’s really cool about this business is that they use their existing and proprietary hemorrhoid product as a lead in to enter discussions for the more lucrative anesthesia service. Because their targets for acquisition are already on their customer list they can close merger deals quickly, and not spend a lot to do it. They don’t need to pay business consultants, they already have their target list of medical clinics to buy! The kicker is that once they acquire, the target’s revenues/profits are instantly accretive. This means CRH can use the new cash flow to buy the next target….and the next, and the next and so on. Rollup strategies do well with deep vertical and fragmented industries, but don’t work well if you’re not the biggest or the industry isn’t specialized enough. Because the industry is fragmented, a deep vertical and specialized (gastro medical services), conditions are perfect for the CRH strategy to play out over 3 to 5 years.
It’s important to note, CRH’s true financials lag what we see on finance websites and their most recent reported numbers. Passive investors overlook this with CRH and claim it looks ridiculously expensive, but it’s not – the investor has to understand the numbers you see never include their most recent acquisition, or the acquisition that they are negotiating now.
So….will CRH crash if the market tanks? Of course it will, it’s a small cap and most short term stock traders speculate and trade, they don’t “invest”. But as CRH comletes the acquisitions a price floor will form that value investors will not be able to ignore. In other words, as CRH reports consolidated numbers, over the next few months and years, the P/E ratios, ROE and book value will look much more attractive and it will suck more long term value investors like me into it. The stock price will increase based on the “strong hands” of value investors who buy and hold. Shorter term active traders and speculators will always dance in and out. Truthless may catch a break and be offered the stock at a reduced price. On the other hand, he may not - if the market doesn't crash and/or if CRH has reports juicy revised numbers later this week and over the next few moths.
So for the time being, the quoted price is subject to volatility of the trader. But to me, CRH is too good a business, you shouldn’t try to time this purchase. You may have to stomach a 30-50% reduction if the market turns bad later this year, but CRH will roar right back and continue to build its snowball. As the CRH acquisition snowball grows, the value floor (lowest price on worst days) will increase, along with the trading ceiling (highest price bid up by traders on its best days).
Final note, CRH is great in non taxable accounts – doesn’t pay a dividend so you don’t face any tax until you decide to sell, and for me, I’ll take Jason Donville’s tip with this and see where we’re at in 5 years time. He says $25 bucks….It’s a great compliment as a Canadian stock but it generates revenues in the USA, so you get an exchange rate boost to earnings to boot. Sweet! If you hold lots of Canadian financials and/or energy, it’s a great compliment and counter balance to round out your diversified holdings because it’s healthcare.
CRH Medical junior common stock – available for purchase at fine brokerages everywhere. Get yours today!