Buying shares of a beaten-down stock that has been struggling for years is a risky proposition to consider. For contrarian investors, the allure is the potential for the stock to turn things around and deliver some mammoth returns, possibly doubling or tripling in value if things go right. But many times, it doesn't turn out that way.
Medical Properties Trust (MPW -1.27%) is a prime example of a high-risk, high-reward stock. In just the past three years, the stock price for this real estate investment trust (REIT) has fallen 77%. During that time, the healthcare-focused REIT also slashed its dividend nearly in half. There has been no shortage of problems surrounding the business.
Given those factors, this isn't a stock risk-averse investors should be considering. But if you are an investor with a higher risk tolerance, there could be an opportunity worth considering with Medical Properties Trust, given its sharply reduced valuation.
The stock has been rallying of late. Is this a sign that it is once again time to consider buying shares of this REIT?
Why Medical Properties Trust could turn out to be a good buy
The big reason investors are drawn to the stock today is its low valuation. Medical Properties Trust has crashed so much that the stock hasn't been trading at such low levels since the Great Recession in 2008-09. And with the stock falling so sharply, its dividend is still yielding more than 12% even after a dividend cut last year.
The possible upside is worth it if the REIT can prove its doubters wrong. If the stock price were to double to around $10 per share, that would still fall short of the high it reached in 2023. And as recently as 2022, it was trading at more than $20 a share.
To be clear, unless Medical Properties suddenly turns into the latest meme stock, it's not going to just double or triple for no reason. What its future hinges on today is what happens to one of its key tenants, Steward Health Care. The hospital operator filed for bankruptcy protection in May and put all of its hospitals up for sale. If those sales go well and Medical Properties ends up with financially sound tenants because of that, and the headaches along with Steward Health Care go away as well, this could quickly become a much safer stock to own, and a rally could follow.
In the past three months, Medical Properties' stock has shown signs of life, as it is up more than 9%. And there's room for that trend to continue, depending on how the situation with Steward unfolds.
Why Medical Properties Trust could still have more room to fall
As bad as Medical Properties Trust stock has done in recent years, investors need to remember that things can always get worse. The stock can fall lower too. Investors generally don't get confirmation that a stock has bottomed out until well after it has recovered. While Medical Properties' stock has been rallying recently, it's still far too early to know if the worst is over.
The risk is that Steward may struggle in selling its hospitals, or that it will need more money to continue operating, potentially resulting in yet another loan from Medical Properties. Earlier this year, Medical Properties announced a $60 million bridge loan to help Steward. Most recently, amid Steward's bankruptcy filing, Medical Properties committed to $75 million debtor-in-possession financing for its troubled tenant.
Meanwhile, Medical Properties' own financials aren't great -- it currently has more than $10 billion in debt on its books. And while it has more than $17 billion in assets, the bulk of the funds (more than $13 billion) is tied up in its real estate holdings.
At a market cap of nearly $3 billion, the REIT is trading at less than half of its book value. But given the transition that Medical Properties is in right now, with it selling assets to generate cash flow and the uncertainty around Steward, it's hard to assess how much the business should be worth, as its operations will look much different a year from now. And a smaller business could inevitably be priced at a much lower valuation.
Should you take a chance on Medical Properties Trust?
Nothing has drastically changed in Medical Properties' business over the past few months to warrant a more optimistic outlook on the business, and to make it a better buy. There's still plenty of risk with the stock, and investors should be careful to assume that it can get back to the levels it was trading at a year or two ago.
I wouldn't suggest even contemplating buying the stock until there's clarity about the situation with Steward and how that all plays out. Until there's a resolution on that front, there will continue to be a cloud that weighs over Medical Properties, as a bad outcome from Steward could wipe out any short-term rally in an instant.
It's true that, by waiting, you could miss out on some potential gains if the stock's rally continues. But for a volatile stock such as Medical Properties, waiting for things to improve before investing in the healthcare stock can also minimize your risk and potentially save you from significant losses should it go on another downward spiral.
