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The Hidden Baby-Boomer Investment The Graying of America
In October, she was the first boomer to sign up for Social Security benefits. Behind her is a bulge, like a giant knot making its way down a garden hose in one of those old Bugs Bunny cartoons. Some 80 million Americans will follow her. All of them born between 1946-1964 — the Baby Boomers. And they are getting older — fast. To give some more perspective to these numbers, think about this. The boomers will turn 62 at a rate of about 365 per hour next year. That kind of rapidly aging population has economists sounding alarms. “This,” says Brian Riedl of the Heritage Foundation, “is the single greatest economic challenge of our era.” It’s pretty clear that America will add significantly to its older population over the next several years…a trend that will continue for decades. This is not something we can avoid. Demographics never lie. The investment ideas that flow from this are many and varied. Older populations have more significant health care needs than younger populations. It’s a simple concept, but also a powerful one — as the best ideas usually are. The usual suspects for investment ideas include managed care facilities, pharmaceutical companies and the like. But I’m not interested in those companies. The actual caregivers have lots of business risks. And the dynamics of the pharmaceutical industry have changed a lot. It takes more and more money to create a drug. The time to approve such drugs is longer than ever. Potential liabilities are huge. Add to that the fact that pharmaceutical companies always seem to fall in the crosshairs of some politician looking to make a mark. ************Special Alert************ I Call it the “Paddle Strategy”… In the flood of falling stock prices we’re headed for this year... This is the one controversial market tool you’re going to want to have in your canoe. Why? Out of the handful of moneymaking options you’ll have, this “paddle strategy” may be the only one that allows you to lock in triple-digit gains over a short period of time. Get yours now… *************************************** The Wall Street Journal recently ran a front-page story about Big Pharma’s grim prospects. Many blockbuster drugs are coming off patent over the next five years — that’s about $67 billion in sales. As generics eat into that, the drug companies face a lot of pressure to replace those big drugs. The piece also pointed out that the industry brought out 43% fewer chemical-based drugs from 2002-2006 than in the last five years of the 1990s — and that’s despite a doubling of research and development costs. So I’ve been looking for something that’s more of a facilitator. Something like a picks-and-shovels idea. I want an enabler, a company that will benefit from increased spending on drugs, but that doesn’t make or administer the drugs. I think I’ve found one such company… The business model here is pretty simple. You know how a retail pharmacy works — say, a Walgreen’s or CVS. You walk in, you hand over your prescription and you wait awhile, maybe picking up some toilet paper in aisle five or grabbing some toothpaste. They call your name. You go to the counter, pick up your drugs and pay for everything and off you go. The company I’m recommending we buy today is a pharmacy, but it’s what’s called an institutional pharmacy. The bulk of its customers are businesses. In this case, 90% of its revenue comes from servicing nursing homes. It’s basically a pharmacy for nursing homes. The key to the business is to make life easier for the nurses. Logistics are important — getting stuff where it needs to be efficiently. Most people in nursing homes take 10-12 medications per month. So the packaging is important, too. It has to be easy to keep all this stuff straight and save dispensing time for the nurses. So an institutional pharmacy distributes prescription drugs on a contract basis to businesses, mostly nursing homes. The good thing about this industry is you don’t need to know what drug people will take. In fact, as investors in this space, we really don’t care what drug company makes it, either. We are interested only in volume. And we want what we invest in to capture a good share of that volume. We also have to look at the ability of our potential customers to pay. That’s easy. Medicare and Medicaid cover most of this stuff. In fact, Medicare Part D, which took effect in 2006, greatly expanded the number of seniors eligible for government reimbursements. That’s like throwing another log on the fire of drug demand. In fact, if you just look over the institutional pharmacy industry, Medicare made up only about 20 cents out of every dollar of sales as recently as 2005. But today, that number is up to 54 cents, and still growing. If anything, the political trend is to expand drug coverage. The other thing we have to look at is market share. If this were a crowded field with lots of national players, it would look less attractive. The fact is there are really only two national players. It’s basically a two-horse race. I’m not betting on Omnicare, which has been around for a while. So that brings me to my recommendation…which is a company that has all of the opportunity in front of it…but it also trades at a deep discount compared with what other recent acquisitions in the institutional pharmacy space suggest it should trade at. I believe that’s due largely to the dynamics of spinoffs… *************************************** Penny Stock Payback 99% of the time, new government regulations cost you money. But not today… Here’s the “1% scenario,” in which you get revenge… On April 2, 2007, a U.S. Supreme Court mandate handed these two $5-per-share stocks a chance to triple in value or more on a new wave of clean air regulations. *************************************** A spinoff is what happens when a large company decides to take a business it owns and make it independent. It creates new stock and gives it to existing shareholders. It’s sort of like how a television show made up of a cast of six or seven actors, like Cheers, can then spin off a new, separate show about one of its characters, like Frasier. In the land of spinoffs, most of the time, it’s a big company that spins off a little company. I love spinoffs. Why? Simply because as a group, they tend to do well. If you fish in waters full of spinoffs, you’re bound to come up with moneymaking ideas. There’s lots of research on this point, but in general, spinoffs outperform the market during the first three years of independence. Part of this is because spinoffs unlock pent-up entrepreneurial energy. You have a management team that gets to show its stuff. It no longer shares the spotlight with some giant parent. A business buried in a giant can suffer neglect. A business, like a houseplant, needs some care to grow to its potential. Whatever the reasons, spinoffs tend to do well. They are classic special situations. The thing is, you can do even better by cherry-picking some of the most promising spinoffs. And then, if you wait a few months, you can usually pick up shares even cheaper. That’s because once a company is free, big institutional holders will often dump it. They want to own the big company — that’s why they own the shares to start with — and to get a few shares of a small spinoff is just a pain in the neck for them. They have to assign an analyst to follow it, and often because the spinoff position is so small, they have little motivation to spend any resources to figure it out. It just doesn’t really matter to the big piles of money. They have bigger fish to fry. That’s an opportunity for an individual investor. This company separated from its parent in August. So we’ve given it more than enough time for “seasoning.” It so happens that the market has been weak of late, too. All told, the stock has drifted down a good 25% from that initial spinoff price. Now we’re about to enter that sweet zone where spinoffs start to gain traction. Regards, P.S.: The healthcare industry is one of those industries that brings thousands of different ideas to the market. You can own ambulance services, hospitals, drug companies, etc. You name it, there’s someone trying to make money on it. But this institutional pharmacy idea is a pretty unique play. And this company is about to make some big money. Check out this report on six invisible investments, and you’ll get everything you need to get in on it while it’s still small… |
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Chris Mayer, the editor of Capital & Crisis, began his career in banking, specifically, corporate lending, after earning an MBA with a concentration in finance, He later started writing Capital & Crisis, a monthly newsletter that gave Chris' unique brand of financial commentary a more regular and expanded format. With an unusual fondness for old books, old investors and old ideas, Chris fits perfectly into the Fleet Street mold. |
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