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Special Report: How To Invest In The 'Graying Of America' (Part II)
8/2/2013 3:30:00 PM
This week, we looked at three stocks in position to profit -- in an under-the-radar way -- from the coming shift in U.S. demographics and the developed world. These three companies sell to the needs of the 80 million baby boomers, more than 10,000 of whom are reaching the age of retirement every day.
The combined spending power of 80 million-plus retiring boomers will dramatically change demand across a variety of sectors, and while the market is focused on health care and housing, the smart money is getting ahead of the curve with other segments.
You need to invest in companies that provide basic needs to the demographic. My previous article looked at three companies that profit from companionship, leisure and a holistic approach to health care.
I've come across two companies that profit from one of the most basic human needs: security. These two companies are market leaders in their sector and have the potential to profit big, even without the oncoming wave of retirees and the promise of higher sales. These are my favorite ways to profit from the changing demographics because of the potential over the next decade.
Protection Against An Unlikely Threat
Japan is further along than the United States in the graying of its population, so it's helpful to study that country to preview possibilities for our own. In Japan, crimes committed by the elderly have doubled in the past decade, with shoplifters now more likely to be over 65 than in their teens. In 2012, shoplifting accounted for nearly 60% of the reported offenses by the elderly, and the number of unreported crimes may be higher.
Before I get a ton of hate mail, I am not saying that all elderly people are thieves. What I am saying is that 87% of retirees in the United States depend on Social Security as a major source of income and the program is not keeping up with living costs. The median income for people over 65 years old in 2010 was $25,704 for men and $15,072 for women, which is tough to live on.
With a growing national debt and spending cuts to social programs, the need for loss prevention and electronic security is going to get a boost over the next decade from more than just the elderly demographic.
Checkpoint Systems ( CKP ) is a $660 million provider of technology-driven loss prevention, inventory management and labeling solutions for the retail industry. The company has direct operations in 29 countries, with 40% of revenue coming from Europe, 27% from North America and 28% from Asia.
Most of the company's sales (65%) come from its diversified line of security and inventory management solutions that help retailers combat theft and increase inventory accuracy. The remaining revenue comes from radio-frequency identification (RFID) tags and label products. The company estimates the global market for inventory management and labeling solutions at more than $7 billion, with projected annual growth of 2% in developed markets and 7% in emerging markets.
But Checkpoint isn't without its problems. The company reported a loss of 46 cents per share on a 10% decline in revenue last year, largely associated with continuing economic problems in Europe. As a result, the company is restructuring and reducing its headcount by 2,400.
Management expects revenue to be flat this year, but it also expects a profit of 71 cents a share on better expense management and other restructuring initiatives. Despite the rocky road, institutional ownership is extremely high at 96% of shares outstanding, and the stock has more than doubled over the past year.
Safe And Sound At Home
By 2020, when the 65-and-over group is expected to reach 55 million, the number living alone could approach 20 million. This estimate could actually be on the low side, as new technology is allowing more to stay in their homes but still enjoy the security of health and safety monitoring.
This company has the potential to help millions of seniors stay in their homes, multiplying its customer base from 6 million in 2012.
ADT Corp. ( ADT ) is the largest provider of electronic security and home monitoring in North America, with a huge growing market for home automation. The company estimates the market for residential and small business security system sales and monitoring in North America at $13 billion in 2012 with annual growth of about 2% over the next five years. About 19% of U.S. households have a monitored security system, with ADT serving 25% of the market.
The company's inclusive program, ADT Pulse, allows customers to remotely monitor and manage their homes through the security systems, adjusting mechanical systems and monitoring video on smartphones and tablets.
Not only is ADT a good stock to profit from the aging demographic, but it's also a good safety stock for your portfolio. Revenues are less cyclical because spending on security is often seen as a necessity rather than a discretionary expense.
The company is still working through expenses related to its 2012 spinoff from Tyco International ( TYC ) and its management as an independent company. There are bound to be stumbling blocks, but sales have grown at a 13% pace since 2009, with net income growing at an annual pace of 17%.
Risks to Consider: These stocks are not without the possibility of short-term problems. While higher demographic-led revenues might drive growth over the next decade, management missteps and macroeconomic issues could mean additional volatility over the next couple of years.
Action to Take --> The investment theme behind these stocks is long term, so you don't have to rush into a full position. For these holdings, I like to accumulate small chunks before and after earnings announcements. This strategy allows me to catch some of the big upside on a surprise earnings call or to save some cash to get in at a lower price.