Aging Population - Health Stocks
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?
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