http://streetcapitalist.com/2010/03/24/learning-from-michael-burry/

“I have always believed that a single talented analyst, working very hard, can cover an amazing amount of investment landscape, and this belief remains unchallenged in my mind.”

“A lot of clients were glad to be done with it in the end… Perhaps I’d made the trade too big… It’s remarkable. There are investors that made tens of millions of dollars out of this, and they’re still pretty upset.”

“Thank you for visiting. Dr. Michael Burry has liquidated Scion Capital, LLC and is currently focusing on his private investments. Dr. Burry is not accepting outside investors.”

Well, I do manage OPM and it’s unfortunately simply not feasible to follow a concentrated portfolio strategy when you are dealing with 99% of clients. This is simply because most people, despite what they tell you, have no real conception of risk and return. They just cannot tolerate a 10% loss in their portfolio. Most people believe that the stockmarket provides a regular 10% return – losses are what happens to other people, the stuff they read about in the paper or see on the news. And when a blowup does occur, they’re shocked and go through the usual stages of shock, disbelief, anger etc etc.

Seriously, no matter how many times you tell someone that they could lose a part or all of their investment, they’re always amazed when it actually occurs. And of course the larger the loss, the more extreme the reaction. Managing a concentrated portfolio for OPM is unfortunately a quick way to either lose clients or be sued. Most people simply cannot live with losing 10% of their portfolio (or more) in one hit.

I’d go with a sum of parts for valuing it. wrt to your points :
1. Sales: People got a bit too excited about pathology in the past. To me it’s like a regulated utility. Some of the reduced revenue was due to their GP practise part charging a co-payment. They maybe able to get this through over time with the GP centres but where they’re located I’m not sure this will be as much as they expect. I think there is little scope for PRY or Sonic being able to implement co-payments for pathology services to preserve their margins. There is no direct relationship between the pathology provider and the patient. Few people are going to be willing to pay a gap for pathology services and if they try to introduce this, it will encourage new entrants into the market. I guess it depends on whether the government prices are rock bottom or whether there is still a reasonable margin. Even if they were able to get the co-payments for pathology this would probably encourage less pathology ordering and affect their volume. So you can’t have it both ways.
2. Low ROE due to pathology
3. Same management still in place as far as I am aware
4. Low NTA. Huge amount of goodwill. Arguably this is what can I say ?creative accounting. They used to pay GP’s for their practise and the GP’s would be on contract for 5 years. After 5 years I’d argue that goodwill is not worth much.
5. High debt at high rates when they bought Symbion, ?10% for the first year or so from what I can gather. Their interest expenses should go down even in a rising rate environment.

Their business model is not one that I am very keen on. There are lots of perceived conflicts of interests with them owning pathology and medical centres that write referrals for this. I think it’s likely to get negative regulator and government attention over time.

I think the pathology business (40%) is like a utility that I would buy on a PER of 9. The Medical centres (40%) I am not that keen on but would buy on a PER of 9. The health information bit (?5%) is worth a PE of 20 to me.

So I would buy it on a 9 PE or less (or about $3 at the current period). It may never get there, but the business model, management, track record and fundamentals are poorer than for Ramsay. Unfortuanately Ramsay has gone up a lot to reflect that. Still things happen in cycles and at some stage Ramsay will face pricing pressures also. Neither of them are solid businesses like Woolworths and are subject to more competition and government regulation risk.

For an earlier version of PRY, ONT is interesting. I had a look at it but haven’t bought any. I don’t know much about dentistry but this might be more amenable to corporatisation than the medical area where the medicare system means patient goodwill is worth less. At a PE of 15 for a microcap it seems a bit overpriced though.

As always, everyone should do their own research and this isn’t a recommendation to buy or sell anything.

On the plus side. If management are to be believed (how’s their track record?) then 15% growth in EBITDA for the next two on trailing eps of 39c or forward (double interim) of 33c makes the current price look attractive and a double in two years seem possible. First I’d need to get comfortable with the above.

At them moment everything looks fully valued to me, although I’m running the ruler over EHL and PRY.

From my experience the sure things or deep value investments turn out to be the least profitable. So I reckon in retrospect I should have taken bigger positions in attractive situations eg in the last 3 months WOW at 25, RHC at 10. Although they were attractive they were not at load up the truck valuations. But they also had good fundamentals, 10 year track records and reasonable management. Interestingly Intelleigent investor rated their performance and their Excellent/sure thing buys did the worst also.