Omega Healthcare Dropped: What You Need to Know


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Healthcare REIT Omega Healthcare Investors (NYS: OHI) dropped as much as 13% in Monday trading, hurt by fears that the "grand compromise" Washington has worked out to solve the debt mess will result in Medicare cuts and rob Omega of profits.

So what: It's never easy investing in an industry where government can upend profit margins with the twist of a legislative pen, and Omega investors are getting a taste of that uncertainty today. The saddest part, though, is that they probably never should have been in the stock in the first place.

Now what: I mean, just look at these numbers. Omega costs 88 times earnings. That's a pretty high price to pay for the privilege of collecting an 8.1% dividend.

Now, Omega has a 9 times forward P/E ratio, true, but is only pegged for 5% long-term growth. Again, I don't think there's a whole lot of "reward" here for investors who take a risk on Omega. Long story short, the stock was expensive to begin with. It had regulatory risks that investors weren't being compensated for taking -- and now those risks have come home to roost.

My advice: Take your lumps, and consider it tuition-paid for an investing lesson learned.

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At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of Omega Healthcare Investors. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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