Medibank Private: The Risk of Going Backwards from an Overpriced Stock

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I thought I should comment on this today because there may never be another opportunity. Taxpayers have had a win! Sort of…

As you probably know by now, the government managed to flog Medibank Private off for a massively inflated value recently.

They sold shares in the newly privatized company for $2 to retail punters and $2.15 to institutional idiots. Why do I say its value was inflated?

Because yesterday was its first day of trade on the ASX…and it finished down. Normally, if a stock lists on the stock exchange and the sale price represents good value, the stock price goes up.

Clearly this wasn’t the case with Medibank…there wasn’t too much additional demand for shares (at such a high price) yesterday. On a day when the ASX 200 surged 61 points, or more than 1%, Medibank finished 2.3% lower than what fund managers paid for it.

On that evidence, taxpayers got a good deal…shareholders not so much, though I should put that statement into perspective. It’s not as if taxpayers will actually get to see any of the cash from the sale. The government will no doubt squander/redistribute it in their own special way.

So why did I call the fund managers idiots? Well, I don’t mean all of them. But some of them are because they perpetuate a ludicrous system. That is, many fund managers simply had to buy Medibank whether they thought it was a good buy or not.

That’s because they need to follow ‘the index’ and because it’s a large stock, Medibank is now a part of ‘the index’. From the afr.com:

Medibank is a must-own stock for many big funds because their returns are benchmarked against indices. By not owning the shares, they risk going backwards if Medibank rallies, and as a top-50 company it will be represented in almost every index.’

Gee, you wouldn’t want to risk ‘going backwards’ from owning an overpriced stock, would you?

Greg Canavan+
For The Daily Reckoning Australia

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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Pankaj Rao
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What if medibank private buys NIB ?

wpDiscuz
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