For those of you still looking for that stock with the potential to double in a short amount of time, I say this: Please re-set your internal calendar. It must be stuck on 1999.
For those with a more sensible appetite for risk and return, I have identified two industry groups (groups being subsets of industry sectors) that have the underpinnings to outperform in 2004 and beyond: industrial metals and healthcare cost containment.
On the surface, neither is much to get excited about. The businesses are humdrum, and the returns are unlikely to be anything but steady. But what these groups lack in thrills, they may make up for in long-term returns.
Metal Mania
If metals have flown under your radar screen, take note: Metals prices have been building momentum this past year after slumping throughout most of the nineties. The CRB Metals Index has already had a nice run over the past two years, but this could be just the beginning. There are a number of strong signals that we have likely entered a new bull market in industrial metals.
Metals Bust to Boom: Producers became cost conscious during the recent economic downturn. They scaled back production, and unprofitable/marginally-profitable mines were shuttered. Additionally, governments of many developed and emerging countries have allowed their metals reserves to dwindle.
Mounting Momentum: Economic lulls have historically proved outstanding long-term buying opportunities for metals, with three- and four-year gains remarkably strong. This time around, amplified by the global economic recovery, conditions are such that the long-term gains may be greater than the historical average gains.
The China Boon: China is the fastest growing, major emerging-economy in the world, and that's good news for metals demand. One revealing indicator of China's role in the growing demand for raw materials is its tenfold rise in the traded iron ore market: Over the last twelve years, China has gone from representing 5 percent to nearly 50 percent of iron ore demand. In addition, China is set to spend approximately $1 trillion on infrastructure development over the coming years. A great deal of this investment will go into electrical and telecommunications — two huge drivers of industrial metals demand. Further, in Beijing, work crews break ground on a new high-rise almost every day, and growth is not expected to diminish until 2007 (when construction cranes will be forbidden so as to not blight the backdrop for the 2008 Olympic Games). There are currently two thousand high-rise buildings under way.
China is just the biggest example of developing countries that will contribute to higher demand for metals in the coming years. The bottom line regarding metals is this: While the global economy continues to improve, demand for industrial metals continues to accelerate, and producers and holders of metals are ill-equipped to meet a large upturn in demand.
The New Game in Healthcare
More than ever before, the healthcare industry is being pressured to cut costs — by patients, by insurers, by regulators. In an effort to avoid new regulations and insurance rules that would limit their ability to control the strategic direction of their business, many healthcare are scrambling to cut overhead.
Beneficiaries: There are many, but none so prominent as those companies providing cost-effective goods and services to the industry. These companies specialize in outsourced administrative functions, medical IT software and support, home healthcare, noninvasive diagnostic testing, medical test kits, generic drugs and specialty outpatient services. (Not included are HMO's and traditional long-term care or nursing homes.)
Cost Containment Drivers: Nearly 41 million Americans are uninsured, and out-of-pocket medical expenses for insured workers are rising drastically. Consider this: CPI medical care inflation has been on the rise during the past five years, a period when broad-based inflation trends were much lower. Since late 1997, the annual rate of change in the CPI Medical Care index increased from about 2.5 percent to a peak of 5 percent just a few months ago — far greater than the pace of overall inflation. In addition, Less than twenty years ago, healthcare spending represented only about 3.5 percent of the Federal budget. Today the percentage has grown to nearly 10 percent.
Costs in Crisis Mode: An aging population in the U.S. means that federal outlays for healthcare represent a rapidly growing portion of the national budget, and this percentage will continue to grow as the population ages. The importance of controlling healthcare costs will increase over time: One year ago, total healthcare spending jumped 8.7 percent, the largest single-year increase since 1991. Projections indicate spending will double to $3.1 trillion by 2012, bringing healthcare to 18 percent of GDP, up from 14 percent currently. Add to this the fact that the over-65 population in the U.S. is growing much faster than the general population, and you've got the makings of a genuine crisis — one from which the healthcare cost-containment companies stand to benefit.
State Pressure: With budget deficits and significant Medicaid shortfalls, the states' struggles will affect the healthcare industry. State proposed freezes and reductions in reimbursement rates necessitate healthcare firms to contain costs in order to survive.
Corporate America Feeling The Pinch: Companies have been forced to pass-on rising costs to employees, resulting in increased labor tensions, work stoppages and strikes. Labor experts have predicted that the number of strikes will jump 20 percent over the next few years because of disputes over who should pay for rising healthcare costs.
Investment Implications: The healthcare sector is positioned for a period of market leadership as the population ages and demand for healthcare products and services increases. The companies in focusing on healthcare cost containment provide solutions for keeping healthcare inflation in check. As long as the healthcare industry is forced to tighten its belt, we expect the companies offering cost-effective solutions will thrive.
They're an unflashy pair, industrial metals and healthcare cost containment. This much I'll admit. But given what we know of their long-term potential, it would be a stretch to call them boring.
Unless making money for your clients makes you yawn.
