Real estate investment trust Diversified Healthcare (DHC) — which focuses on the residential care subsegment — needs to come with a warning: DHC represents a high-risk, high-reward penny stock venture. Priced at just under $3, the security already suffers from a Moderate Sell rating. In this case, the best individual assessment is a Hold.
If you want to avoid high-risk ventures that could easily become a money pit, I’m providing a clear exit right now.
For those who are adventurous, the only reason that DHC stock even made it on my radar was that it flashed in Barchart’s screener called Hot Penny Stocks on The Move. As the trading resource and financial publication states, this is a list of publicly traded penny stocks that have made the biggest moves over the last five days.
After running a guided Monte Carlo simulation — which uses market realistic parameters based on the actual historical pricing dynamics of DHC stock — I discovered that among the many shaky securities that made up the list, Diversified Healthcare seemed somewhat promising. Of course, I mean that in a relative sense: we’re still talking about extremely volatile ideas.
Further, no one should be misled about the risks. For one thing, DHC stock goes through wild ebb-and-flow cycles. There is a chance to make money but you can also lose it very easily. Second, the financial situation isn’t all that great. Sure, analysts do anticipate mild growth for the current fiscal year and the next. However, the company is projected to incur losses on a per-share basis, though in fairness, this loss is expected to be pared down.
At the same time, good news also exists and this largely centers on the portfolio of senior living and healthcare facilities. Given the aging population, Diversified could benefit from long-term demographic trends. Should occupancy rates continue to improve post-pandemic, rental income could rise, potentially strengthening the REIT’s financials.
Running a Forward Simulation on DHC Stock
Another interesting fact that caught my eye about DHC stock is that it’s an optionable security. Therefore, Barchart Premier members can get additional market intelligence as to what the professional money might be thinking about its prospects.
To be sure, hardly anyone is trading DHC stock options relative to derivatives of more popular entities. However, in DHC’s unusual options activity screener on Friday, there was a sole entry for 12 contracts of $2.50 calls expiring June 20 of this year. The ask was 60 cents (or $60 when applying the options multiplier). Because we’re talking about $720, this was probably a retail trade.
Interestingly, though, DHC stock on occasion attracts money from larger players. For example, on Feb. 25, Barchart’s options flow screener — which focuses exclusively on big block transactions — revealed 730 contracts of $5 calls expiring Jan. 16, 2026 being purchased. Granted, the premium was only $7,000 so it’s difficult to say who was behind this transaction.
It could have been retail money but here’s the thing: investors don’t like to throw thousands of dollars around if there’s a high risk that it could end up in smoke. This doesn’t prove anything but this transaction could be at least somewhat significant.
Either way, curiosity got the best of me and I ran a more detailed analysis. Statistically, DHC stock carries a negative bias. Using data from January 2019 onward, a position entered at the beginning of the week has a 44.55% chance of rising by the end of it. Over an eight-week period, this baseline probability slips to 42.99%.
However, DHC stock does seem to respond to extreme-greed events. Whenever the security gains between 10% and 20% in a one-week period (it moved up roughly 14% this past week), the subsequent week’s long odds are still poor at 45%. Surprisingly, though, over an eight-week period, the long odds rise to 60%.
With these probability dynamics in mind, I ran a Monte Carlo analysis featuring three pathways: a median pathway, an upper 75th percentile pathway and a lower 25th percentile pathway. The median projection ended up at $2.59 eight weeks from today, which I consider realistic. That would be an 8.5% loss from Friday’s close.
Why Bother Thinking About Diversified Healthcare?
Now, my Monte Carlo simulation features 10,000 permutations, which is substantial. If at 10,000 times the computer still sees DHC stock dropping to $2.59, what’s the point about Diversified Healthcare?
Generally speaking, if you are a conservative investor, you are better off avoiding DHC stock as it’s extremely volatile. On the other hand, simulations are one thing; reality is obviously quite a different matter.
Unlike other penny stocks that frankly appear hopeless, DHC might have the goods to rise under the right circumstances. It’s impossible to say when those circumstances may materialize. That’s where you will ultimately have to make the decision.
