More than 10,000 Americans reach the age of 65 every day and move the demographic needle further to a change in spending power, preferences and political clout. In five years, over 50% of the U.S. population will be over the age of 50.
But you've already heard this story, right? The demographic boom is just building up steam, and for years, investors have been rushing to find every retirement housing and health care stock under the sun.
Wall Street has been talking up the coming change for quite a while, and the usual suspects all trade at pricey levels. Senior Housing Properties (NYSE: SNH) trades at almost 34 times trailing earnings and has missed earnings expectations in 11 of the past 12 quarters. The SPDR S&P Pharmaceuticals Fund (NYSE: XPH) trades for an expensive 19 times trailing earnings, a premium of almost 20% on the rest of the market despite uncertainty over the Affordable Care Act (aka Obamacare) and future pricing power.
Meanwhile, the combined spending power of a group of 80 million people is growing every day. There is little doubt that the aging demographic in the United States and across the developed world will have huge consequences for companies that can sell to the space.
Although the usual suspects of boomer-inspired stocks may eventually pay out big time for people buying in at today's prices, the real money is in stocks that have yet to be discovered by the Street. Investors need to dig deeper into the trends and lifestyle changes that will drive the stocks that aren't yet on the market's radar.
To do this, you need to think outside the usual sectors of senior housing and medical care -- the millions of people approaching their retirement years, the activities they will pay for, and the products they will buy.
Companionship, Leisure And Holistic Health
The need for social involvement and connection leads many to pet ownership. Almost half (46%) of people over 65 have pets. If that percentage holds, by 2030 more than 33 million seniors will be caring for at least one pet. That translates to big potential for companies like PetMed Express (Nasdaq: PETS) that offers prescription and over-the-counter medications over the phone or online. As an added competitive advantage, PetMed Express is also able to deliver on the group's limited mobility and need for convenience through their home delivery service.
The American Pet Products Manufacturers' Association estimates the dog and cat population at 165 million, with 62% of all households having a pet. Spending on pets in the United States reached $53 billion in 2012, a 6% increase from the prior year. Spending on OTC medications showed even faster growth of 7.4%, to $12.7 billion.
The shares pay an attractive 4.2% dividend yield and sales should get a boost in the near term from the reintroduction of Novartis products. Sales have been under pressure over the past year as competitors entered the space, but sales should rebound as unprofitable firms without strong customer loyalty are driven out.
|Carnival Corp. operates in North America, Europe and Asia, where demographic trends are favorable, and is the dominant player with 45% of the global cruise market and over 100 ships.|
Anyone who's ever taken a cruise knows the opportunity the aging demographic presents for the large carriers. Data from the Florida-Caribbean Cruise Association shows an average cruise passenger age of 50, well ahead of the median age of 35 for the general population. More than a third (36%) of passengers are 60 years or older, compared with 16.2% in the general population. Carnival Corp. (NYSE: CCL) operates in North America, Europe and Asia, where demographic trends are favorable, and is the dominant player with 45% of the global cruise market and over 100 ships.
The shares have been rangebound over the past three years, largely a result of receiving 35% of sales from the stagnant European market. The European Union is expected to show its first positive GDP growth in six quarters in the current quarter and should significantly support sales in the near term. The shares pay a healthy 2.7% dividend yield and trade just above the book value of assets.
Nature's Sunshine (Nasdaq: NATR) is a $289 million natural health and wellness company engaged in manufacturing and direct selling of nutritional and personal care products. Traditional medical care is focused on reactive care, treating health problems after they arrive. As baby boomers age, they will increasingly look to supplements to prolong and improve quality of life, meaning a boost to sales for companies like Nature's Sunshine.
Beyond the promise of higher long-term revenue from the aging demographic, the company looks like a potential target to be acquired or taken private. Director Mesdag Willem bought up an additional $10.2 million over the last year and now owns more than 15% of the company. Besides Willem, a large chunk of the shares are owned by hedge fund and private equity players like Prescott Capital Management and Red Mountain Capital Partners.
The shares trade cheaply at just 12.6 times trailing earnings and a price-to-sales ratio of just 0.8, extremely cheap compared with closest competitor Herbalife (NYSE: HLF) at 1.4 times sales. Nature's Sunshine pays a 2.2% dividend and increased its income by 44% over the past fiscal year.
The best is yet to come
Investors willing to wait out any short-term volatility in these three stocks should be rewarded over the long term as the Street's view catches up to the promise of sales to the aging demographic. Look to management discussion in the annual reports of these companies to follow how they are positioning to profit from the demographic.
And these companies aren't even the best of breed when it comes to investing for the coming boom in the aging population. In the next part of this series, I will tell you about two more stocks that have an even greater potential. These two companies not only have huge upside from the aging demographic but also some serious catalysts in their current business model.
Risks to Consider: Despite the fervor for senior housing and medical stocks, the trend toward an older America is a long-term change. The stocks above all have strong current fundamentals and growth but will only gradually see their sales rise due to a larger elderly population. Investors should be ready to be in it for the long term and let stable and strengthening cash flows lead to higher prices over time.
Action to Take --> The graying of America is probably the strongest and most valid trend facing the country. Investors looking for stocks with secure, long-term tailwinds that haven't already been bid up should look into the spending and lifestyle decisions of this massive group.