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Aging Population - Health Stocks

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April 23, 2008 – Comments (10) | RELATED TICKERS: WLP , GSK

My thinking when I first started investing was that with an aging population anything to do with the types of services they would use would probably do well.  I've rethought my thinking...

Take today, Wellpoints' profits declined 25% and they reduced guidance. When I think about it, health care simply has increasing costs and reduced inputs.  There is increased demand for health care, so with that health care workers.  With a rising demand is usually a rising wage.  As for the reduced inputs, I have American friends who traditionally would have been the ones carrying health insurance.  The are well educated, and simply because their lives have had a few bumps that has made costs impossible, health care is one they've elected to dump.

American health care is so expensive, if it isn't part of your employment plan, or if your life doesn't execute perfectly in that you were lucky that you didn't get caught in housing burst, you got a good job, you didn't have relationship breakdown, and any of the things that really set people back, it is truly on the table as to whether people chose that it is an expense people want to pay for today in case they might need it.

It seems to me that much of health care is paid for by people paying for it but not yet using it and with an aging population more are going to be using it.  Not being American I probably have more misunderstanding in how it works than average.

I am sure health insurance have not put aside adequate reserves to pay for their liablities, like banks didn't for loans.  The nature of business, imho, is to fudge results today to make profits look better and get bigger bonuses.

So, it seems to me that the health care as an investment has these things working against it:

1)  Increasing costs due to wages, etc.,

2)  Reduced inputs due to financially strapped consumers,

3)  Increased demand on limited resources. 

It seems to me the real winners in health care will be workers.  There is going to be downward pressure on many wages but it seems that with the demand for health care workers their will be less downward pressure.

The other winners could be suppliers of goods to the health care sector.  But, then again, maybe not.  If the business has increasing competition and had good margins, then probably not.

Big drug companies will probably have increasing challenges.  They've maintained profit margins with patents.  Right now there is an arsenal of medications that are adequate and free for competition as patents expire.  So, in order to improve big drug companies have to deal with declining sales and margins of existing business with new products.  The weight of what's pulling them down seems so excessive I can't see how they can make up for it with new products.

I notice in the link they mention the cervical cancer vaccination.  The price of that is so expensive, and look at the company and you can see why.  They expect that product to make up for declining business elsewhere.  This product isn't priced anywhere near to its real costs, but it is priced to pay for the woes of the world, or at least the woes of this kind of company's pyramid business model.

Egads, how many virtual pyramids has this world been built on? 

So, now, the question becomes do I underperform Glaxo and Wellpoint. 

Wellpoint has taken a 50% haircut and I doubt people appreciate the ponzi nature of the business model and their thinking is that it has taken that much of a haircut and now it will be business as usual, whereas my thinking is that the company is in for a long term decline in profitability.  So, I pick it and it is highly likely that for a period the other kind of thinking will push the price up.

My thoughts are similar for Glaxo.

I think long term these companies will be less profitable and the share price will be less.  But, an underperform isn't about whether the share price will be less, it is about whether it beats the S&P and I think the S&P is heading down further.  So, the question becomes do I think these companies will be lesser losers or bigger losers?

10 Comments – Post Your Own

#1) On April 23, 2008 at 9:50 AM, dwot (39.29) wrote:

Oh gee, I just posted about my expectations of interest rates rising yesterday and what is in the news today?

Mortgage applications plunge as rates rise

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#2) On April 23, 2008 at 9:53 AM, dwot (39.29) wrote:

More news, Ambac posted a loss equal to about 1/4rd of its current share price...

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#3) On April 23, 2008 at 10:39 AM, AnomaLee (28.68) wrote:

I'd say the nature of business is to profit, but it's the nature of corporate accounting to make those profits look better.

I wouldn't buy Wellpoint, but I wouldn't be surprised if some of these companies come under government backing to become GSE's much like Fannie Mae and Freddie Mac so that there is more federal influence on health care and then its costs.

I haven't seen such poor opportunities to invest in pure-play pharmaceutical development in years(ever). Too many drug pipelines are swallowed by the pharmaceutical conglomerates and you get a big pile of meager, but I was wondering about your thoughts on Medical Equipment suppliers like Stryker(SYK) who make hip replacements and similar...

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#4) On April 23, 2008 at 10:54 AM, mandrake66 (45.23) wrote:

I've been negative on healthcare since Wellpoint's miss, though I didn't make any picks either in CAPS or RL. I too get tired of hearing the endless refrain of "aging population, healthcare is a sure thing". The fundamentals look pretty bad right now, but election season in the U.S. creates too much uncertainty for me to either go long or short.

And that darn Ambac, I sold out of it in CAPS a couple days ago with a nice gain but had no idea they were about to report earnings. I probably would have waited had I known, but again the ridiculous market reactions to bad news and the ever-present prospect of govt bailouts makes it a hot potato. 

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#5) On April 23, 2008 at 10:57 AM, mandrake66 (45.23) wrote:

Er, make that since Wellpoint's last miss, or rather I suppose their last warning, back in March or late February.

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#6) On April 23, 2008 at 1:18 PM, TMFHelical (99.06) wrote:

Dwot,

You want to pick up a couple of Paul Zane Pilzer's books including 'The Wellness Revolution' and 'The New Health Insurance Solution'.  These will both clarify the opportunities and sadly show how complex the whole health care issues are.

Zz

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#7) On April 23, 2008 at 1:23 PM, DemonDoug (34.03) wrote:

You should have gone into nursing, dwot.  Guess what industry I work in? :-D

Here's a fun little tidbit for you:

My starting hourly wage, 2002: 26.00/hour.

My current hourly wage, 2008: 38.80/hour

over 8% increase in wages per year for the past 6 years... and oh btw i'm scheduled to get another raise this June.

I'd not thought of the big pharma companies issues until now.  You bring up a real good point, future growth looks like it may be hampered.  A better play might be device makers, for example Smith and Nephew (SNN).  I like JNJ but still like it closer to 60 than 70.

As far as health insurance, the industry is broken in so many ways.  Micheal Moore over-dramatized it, and the whole cuba-canada thing was pretty one-sided to his view, but the issues are really true.  That one guy who had to choose which finger to sew back on because he could only pay for one when he sawed it off, not surprising at all.  I would not invest in any health insurer because I just don't know what is going to happen politically and in society with insurance.

One more good play to look at: Cardinal Health (CAH).  Kind of a picks-and-shovels of health care, they supply things like tubes and gloves and IV bags.  I'm currently holding a sterile tongue depressor with the name "Cardinal Health" on it.  It's currently beaten down near a 52-week low and I recommend it at the very least as a green thumb on caps.  There are a few others that are also viable there, MMM, COV, MCK, and KMB. KMB is also one to look at, in fact I might green thumb it today as it is also near a 52 week low.

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#8) On April 23, 2008 at 2:56 PM, phi16 (29.72) wrote:

I would tend to agree with you, dwot.  An aging population means a continuous, growing demand for healthcare.  But the system is so screwy that companies who can't navigate the regulation, insurance, HMO landscape don't stand a chance.  All these factors spell RISK.    Pfizer, who invented and started testing a drug in 1991 for heart conditions, and then started selling the same drug (given the trademark Viagar) in 1998 and made a billion dollars in sales the first year, back when a billion meant something, was selling for $50 at its peak.  By the way, Pfizer went from $5 to $50 from 1991 until 1999 probably due in large measure to anticipated earnings from the drug.  But in the next eight years, from 1999 until today, it has been on an almost steady decline.  Even with an aging population, if the company selling Viagar can't make it work to the upside, who can?

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#9) On April 23, 2008 at 6:22 PM, 292972826 wrote:

My 2 cents is the front line documentary sick around the world:

http://www.pbs.org/wgbh/pages/frontline/sickaroundtheworld/ 

I will not invest in any heatlh care related stock in the US. In my opinion, the US system is broken, the cost are insane and the benefit are ridiculisly low. Even if an insurance company is able to make a profit, i don't see how there can be a potential growth in a sector where the satisfaction of the client is so low.

 At contrary, I didn't do any research but i suppose investing in health care in Europe can be interesting.

 

 

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#10) On April 23, 2008 at 8:34 PM, dwot (39.29) wrote:

AnomaLee, I haven't looked at SYK.  I think a P/E of 25 is high in this market, especially for a $26 billion market cap company.  Me, I'd have to find very compelling reasons to look at it as an investment.  It is simply difficult to grow a $26 B market cap company.

mandrake66, I notice further down Doug talks about the wage increases in the industry, that does make bad fundamentals for investors.

Helical, sounds like good book recommendations.  I should read a few more books.  It seems my reading preference these days is online.

Doug I almost went into nursing.  I did volunteer work with people who were being evaluated for continuing independent living and it was awful.  First, it was before smoking bans, so I am volunteering in a health field and I'm expected to dole out cigarettes to the patients.  Ethically it completely turned me off and health wise it disgusted me to stuck sitting with someone blowing smoke at me.  I suppose I showed up 3-4 times and decided that wasn't for me.  And the nurses just stood around talking in groups complaining and didn't interact with the patients at all.  That didn't impress me either.  I suppose that was around when nursing moral was at an all time low because our government had recently slaughtered nursing with cuts.

I should check out those picks.

phi16, Viagra has so much generic competition and they priced themselves so high they made it easy for internet illegal generics to be popular.  And now with competition from products that are longer lasting and have less side effects, well, they've got all they are going to get priced in.

I am with you slycal.

 

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