Two Stocks to Consider in an Industry Where Growth is Almost Certain
In this current downturn, growth has become a dirty word. Growth stocks in general have suffered enormously as fears have grown about slower expansion in emerging markets dragging down the developed world. The thing is, though, not all growth prospects are dependent upon economic expansion. Some are the result of long term, lasting demographic shifts, and when stock in companies whose growth is the result of factors like that get dragged down with everything else, it creates opportunity for buyers with a long-term horizon.
The most noticeable demographic shift in the developed world over the last twenty years or so has been the increase in life expectancy and the aging population. The medical advances that are responsible for that have resulted in strength in some areas, such as healthcare. The market action over the last few weeks would suggest that many believe that strength has been overdone, especially given a political focus on drug pricing. There is, however, one industry that will be a huge beneficiary of that trend, yet would not be affected by any pricing regulations - senior care.
When most people think of growth they think in terms of the sexy sectors like tech or social media, but senior living offers the prospect of almost inevitable long term growth that is not subject to trends or fads. More people are living into their 80s and 90s and, as a result, the number of people suffering from debilitating conditions that often come with old age and that demand specialist care is increasing rapidly. Despite the obvious long term prospects, however, the stocks in the industry have declined along with other growth stocks in this selloff.
Kentucky-based Almost Family (AFAM), for example, is the fourth largest home healthcare provider in the U.S., has a history of solid growth, both organic and through acquisition and has positive free cash flow. Despite all of that and being in an industry that is destined to grow the stock has lost around 20 percent in the last couple of months. It has likely been targeted by sellers because it is a fairly thinly traded stock that has shown volatility in the past and as such is seen as risky, but from a fundamental perspective the risk in owning AFAM looks minimal.
I guess you could make a case that with funding battles looming in Congress, the industry’s reliance on Medicare payments makes it somewhat risky, but if that is a concern you may want to consider another, smaller player in the space. Capital Senior Living (CSU) offers no Medicare-funded services, so is not subject to that risk. That is not to say that CSU is without its own risk factors, however.
That lack of Medicare business makes collecting receivables more of a challenge, for example. In addition the company has lost money for the last four years, but that is the result of an aggressive long term growth strategy and a series of small acquisitions. The company intends to continue with that strategy. These are risks for sure, but once again the stock has been hit hard enough (down around 20 percent over the last four months) to make it an attractive proposition for bargain hunters.
When many people think of senior living they think of the more popular REITs, like HCP (HCP), but at the beginning of what looks to be a period of rising interest rates those traditional investments in the space have less appeal than companies like AFAM and CSU, whose focus is on growth, not distributions. Investing in senior care isn’t as sexy as finding the next big thing in tech, but it does offer the prospect of solid, long term growth. You never know, there may be another advantage as well. Hopefully you will reach an age where you may need services like this, so investing in the industry may have hidden even longer term benefits!
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