Analysis And Research Of Sonic HealthCare Limited Stock Performance And Market Risks

Diversification concept with regard to investment portfolio

Sonic HealthCare Limited ( SHL) is the global health care organization that has a well established reputation for the excellence in the sector of pathology, laboratory medicine and the radiology services. It has it’s headquarter in Sydney of Australia and the company became one of the leading providers for healthcare products in Australia (Sonic Healthcare | Home, 2017).

The main objective of this report is to provide the stock market status of SHL as compared to the S&P / ASX 200 or the overall share prices of the stock market to analyse the performance of the company. The report will further state the diversification concept with regard to the investment portfolio. Moreover, the report will also focus on the systematic as well as unsystematic risk that are the company is exposed to.

Diversification concept is defined as the result of or act of meeting the variety. In the investment planning and finance the diversification of portfolio is the strategy of managing the risk with combining the asset variety to minimize overall risk from the investment portfolio. The main objective of diversification is managing the risk associated with the portfolio. A plan for managing the risk shall include the rules of diversification that are followed strictly. The diversification assists in lowering the volatility level associated with the portfolio owing to the fact that all the industries, stocks or assets do not fluctuate at the same time.

Holding various types of non-correlated assets can minimize the unsystematic risks. A close connection is there among the diversification principle and the safety margin concept. Apart from this, the diversification with regard to the non-correlated assets may reduce the losses in the bearish market and preserve the capital for investing in the bullish market. Only through proper diversification only the optimization of portfolio can be achieved as the portfolio manager has the option to invest in wider number of risk associated assets without further increasing the risk beyond the planned risk of the portfolio.

To be more specific, the managers of the portfolio with the target amount for total risk are allowed to invest large amount of the assets in the risk associated assets with the diversified portfolio against the non- diversified portfolio. The main reason behind this is holding various kind of non-correlated assets minimize the portfolio’s total risk. Therefore, it is said that the only free ride is the diversification option.

The above shown diagram represents the SHL share price as compared to the market index S&P / ASX 200. The share price of SHL is shown through the Orange line whereas the share price of S&P / ASX 200 is shown through the blue line.  It is identified from the figure that the share price of share price of SHL is moving upward and reached its top at $ 24 during April 2015 (Sonic Healthcare | Home, 2017). At that time the share price of S&P /ASX 200 was $ 19. Further, till August 2015, the share price of SHL was better as compared to that of the stock market index. However, after that the share price of SHL started falling and became lower as compared to the stock market index. Gurther, the stock price of SHL was lower at $ 14 during February 2016. After that though the share price of the company started rising, there were lot of fluctuation in the price. However, the company was able to keep its share price higher as compared to that of stock market index (Asx.com.au/asx, 2017).

The above shown diagram represents the SHL return as compared to the market index S&P / ASX 200. The return of SHL is shown through the Orange line whereas the return of S&P / ASX 200 is shown through the blue line.  

From the above table it can be identified that the average weekly return of SHL is considerably higher at 0.379% as compared to that of S&P / ASX 200 at 0.1383%. However, the risk associated with the return of SHL is higher at 2.7635% as compared to the risk of market index at 1.7589%. Further, the maximum weekly returns as well as the minimum weekly returns both are significantly high as compared to that of the S&P / ASX 200 (Sonic Healthcare | Home, 2017). Where the maximum weekly return of SHL is 10.6823%, the maximum return of S&P / ASX 200 is 2.7635% and where the the minimum weekly return of SHL is 9.2518%, the minimum return of S&P / ASX 200 is 0%. However, with the given risk the return of S&P / ASX 200 is better at 12.7191 as compared to that of SHL at 7.3321 (Asx.com.au/asx, 2017).

The Sonic HealthCare Limited (SHL) is the global health care organization that has a well established reputation for the excellence in the sector of pathology, laboratory medicine and the radiology services having its headquarter in Sydney, Australia. From the analysis of its share price and return as compared to the share price and return of S&P / ASX 200 over the period of 2013 to 2016, it is identified that there is not specific trend of return for SHL as well as S&P / ASX 200 (Sonic Healthcare | Home, 2017). However, with regard to return, SHL and S&P / ASX 200 both experience fluctuation over the period of 2013 to 2016. At some point, the share price of SHL was better than S&P / ASX 200 and at some point the share price of SHL is lower as compared to that of S&P / ASX 200 (Asx.com.au/asx, 2017).

The unsystematic risk or the specific risk or the residual risk or the diversifiable risk is the uncertainty that are associated with industry or the company in which the investor invests.  The unsystematic risk can be minimized though proper diversification. Investors are aware of some of the potential unsystematic risk; however, it is not possible to be fully aware of all the risks or be sure about the fact that the risk will take place (Alexandrov, Vyakina & Skvortsova, 2014). Investors in the health care stocks may be aware of the fact that the major shift in the government regulations can affect the company’s profitability, however, they are not sure of the fact that when the regulations will come into effect. Two unsystematic risks faced by SHL is as follows –

• Entrepreneurship judgement – it is associated with the errors in the judgement of the organization. for instance, the organization may assess that one product will be in demand for the next year. However, in practical there may be demand for another product
• Legal and political risk – the unsystematic risk the company is exposed to is the changes in the legal and political regulation of government. This risk is not industry specific rather it is company specific (Waemustafa & Sukri, 2016).

The inherent risks in the market or in the market segment are known as the systematic risk. This risk is also known as the market risk or volatility or un-diversifiable risk. It has the impact on the entire market and not on the particular industry or stock. The systematic risk is unpredictable and is not possible to avoid completely (Savor & Wilson, 2016). Further, this risk cannot be mitigated through diversification, hedging or any appropriate strategy for asset allocation. Two unsystematic risks faced by SHL is as follows –

• Risk of interest rate – if the rate of interest goes up or comes down, it will have the impact on the price of the bond. Therefore, if the company invests in the debt funds, and the interest rate goes up, the company will buy at higher value.
• Market risk – the company is also exposed to the market risk that is the risk that the investment value will fall due to various factors of market risk that include the equity risk, currency risk, commodity risk. It also involves the risks like timing risk, market risk and legislative risk ((Biswas et al., 2015).  

It can be concluded from the above discussion that the share price and return of SHL as compared to that of S&P / ASX 200 over the period of 2013 to 2016, it is identified that there is not specific trend of return for SHL as well as S&P / ASX 200. However, with regard to return, SHL and S&P / ASX 200 both experience fluctuation over the period of 2013 to 2016. At some point, the share price of SHL was better than S&P / ASX 200 and at some point the share price of SHL is lower as compared to that of S&P / ASX 200. If the overall performance is taken into account the return of SHL is higher but at the same time the risk of the company’s investment is high. Therefore, the investors with preference of low risk shall not invest in this company.

Reference 

Savor, P., & Wilson, M. (2016). Earnings announcements and systematic risk. The Journal of Finance, 71(1), 83-138.

Biswas, A., Oh, P. I., Faulkner, G. E., Bajaj, R. R., Silver, M. A., Mitchell, M. S., & Alter, D. A. (2015). Sedentary time and its association with risk for disease incidence, mortality, and hospitalization in adultsa systematic review and meta-analysissedentary time and disease incidence, mortality, and hospitalization. Annals of internal medicine, 162(2), 123-132.

Waemustafa, W., & Sukri, S. (2016). Systematic and unsystematic risk determinants of liquidity risk between Islamic and conventional banks.

Alexandrov, G. A., Vyakina, I. V., & Skvortsova, G. G. (2014). Algorithm and method for determination of unsystematic risk components based on investment climate factors assessment. ????? ? ????????????, (6), 157-169.

Sonic Healthcare | Home. (2017). Sonichealthcare.com. Retrieved 16 October 2017, from https://www.sonichealthcare.com

Asx.com.au/asx. (2017). Asx.com.au. Retrieved 16 October 2017, from https://www.asx.com.au/asx/statistics/indexInfo.do

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