Thursday, July 19, 2007
Starting in 1998, at a price of around $12 a share, Amgen (AMGN) went on one of the greatest runs in stock market history…
In just over two years, shares of the company gained more than 550%, making many average investors millionaires. But as the stock mania of the late '90s turned into a rout, Amgen shares were cut in half in about two years... wiping out billions in market value.
Since the huge sell-off, Amgen and other bellwethers of biotechnology have endured a five-year-long roller coaster. Huge gains for several months… followed by huge declines.
In other words, stocks in these businesses are not suitable for the rent money.
The key to successful biotech investing is timing. You have to pick and choose when to hop on the roller coaster. The ride up is great, but the drops can be fierce. Some say – why bother? Too risky. Too much uncertainty.
Of course, you knew biotech stocks were volatile… But what most investors don't know is that there's a type of income-producing vehicle that allows you to safely collect the rent money from drug-development specialists like Amgen.
In fact, these investments allow you to collect checks not just from drug developers, but from nursing homes, hospitals, research facilities, and the back offices that support the entire U.S. health care system… without the volatility of a risky biotech bet.
I'm sure you've heard of real estate investment trusts – or REITs – which must distribute at least 90% of taxable income to shareholders. That can make for some very large dividend payouts. And particular REITs – ones that focus on labs, hospitals, and the like – are an ideal way to profit from the health care boom.
Health care REITs were formed in the mid-1980s when a few medical-service providers spun off their real estate assets. From a financial standpoint, the REITs got the better end of the stick…
Health care leases are normally three to 20 years long and are often "triple net" structured, meaning the operator is responsible for utilities, taxes, and insurance. Moreover, most leases automatically increase rents, typically 2%-4% a year. So health care REITs have the best of all worlds: They have stable, long-term revenue that's effectively hedged against rising energy costs and inflation.
And it turns out, being a health care landlord is going to be a fantastic business for a long time… According the recent U.S. census data, the number of 65-84 year olds will increase by 40% between 2010 and 2020, totaling close to 50 million people. On top of this, the 85-and-over crowd will double every 10 years.
Demand for long-term care facilities will increase annually by about 100,000 beds. However, only 10,000 beds are added to the system per year… Private-pay retirement homes are adding new capacity for 20,000 per year, less than 80% of expected demand. Likewise, skilled nursing facilities are building out at 89% of demand.
Supplies are falling so short because a significant number of U.S. states have strict licensing and permit requirements that artificially limit the number of builders, operators, and REITs involved in the medical real estate market. That's prompted industry consolidation and created high entry barriers… reducing competition for the big players.
The best part? Now is a great time to invest. For the last seven years, the primary U.S. REIT index has absolutely crushed all equity indexes, up approximately 300% since 2000. But recently, commercial real estate – along with health care REITs – has dropped dramatically as investors anticipate a major correction in line with the slowdown in residential real estate. The biggest health care REIT is down more than 25% from its February high.
While I don't disagree that commercial real estate in general has gotten overvalued, I think health care REITs are an exception. Strong future demand as the population ages, coupled with artificially constrained supply, should make health care REITs prime property for retirement savings for at least the next decade.
The oil-service rally continues. America's largest drill rig maker, National-Oilwell Varco hits new all-time high… Up 93% in past 12 months.
The biggest of Big Oil, ExxonMobil, at new all-time high.
Telecom New Zealand hits new 52-week high… yielding 5%.