Stock Picks for the "Baby Boomer Effect"

By on July 27, 2006

Originally published in April 1997:

At last some volatility….the fuel of timing systems has been a long time coming. I’m happy to report this downdraft gave the Tactical Timing System a buy signal. Don’t expect the tough times to last, though. Things will settle down when the economy starts to weaken, as it surely will with higher short and long term interest rates. The Federal Reserve made their strike against the stock market and economy and will be quite successful in subduing both. This mini-correction will probably look a lot like the one during the summer of last year. In fact, it might be over by the time I finish writing this. However, we haven’t experienced a really large volume day yet. Something on the order of 800-900 million shares traded on the New York Stock Exchange would be a good sign that the end of the correction has been reached. Still, the fundamentals that got this bull going in the first place are very much intact and will probably carry the market to unprecented valuations in the next several years.

Stock Picks for the “Baby Boomer Effect”

To make above average profits in the coming decade will require an investor to look at more than the old standbys price/earnings, debt/equity, price/book value and price/sales ratios. As mentioned in past issues, one area I feel will provide investors with an advantage is the study of demographics. Demographics is the analysis of population by various criteria. To gain an edge, the demographic criteria to concentrate on is how population is distributed by age. Due to the massive number of births in the U.S. from 1948 to 1963 following World War II, there are a very large number of 35-50 year olds. In the future there are going to be a growing number of old people because people are living longer and the “baby boomers” are moving closer to their retirement years. Researching this effect is simple….where you see older people spending their money is where you should look for investment prospects. Concentrate on value in this area and it will be hard not to make above average returns.

The investments to concentrate on and make core holdings are those which will benefit from the “baby boomer” effect. Below I have chosen 23 companies which should profit handsomely from the aging population. There are many more that I did not include, but may mention in future issues. When I get a buy signal, I will look closely at this list and try to pick the very best prospects for inclusion into the “real world” portfolios. The companies range in size from tiny (Exactech; market cap $33 million), to huge (Merck; market cap $107 billion).

Security
Symbol
Price
Mkt. Cap Millions
P/E
Growth Rate
Principal Business

American Home Products AHP
60
39,914
21
7
Pharmaceuticals

Boston Scientific BSY
60 7/8
11,342
65
20
Medical Instruments

Carnival Corp. CCL
37
10,916
19
15
Vacation Cruises

Clayton Homes CMH
13 1/8
1,555
15
15
Manufactured Homes

Coachmen Industries COA
18 1/4
285
9
9
Recreational Vehicles

Drew Industries DW
11 1/8
129
9
12
Building Products

Exactech EXAC
6 7/8
33
41
N.A.
Artificial Joints

Fleetwood Enterprises FLE
25 1/8
875
11
9
Recreational Vehicles

International Game Technology IGT
15 1/2 2,065
16
12
Slot Machines

Ivax IVX
8 7/8
1,245
n/m 16
Pharmaceuticals

Johnson and Johnson JNJ
54 5/8 72,411
25
13
Health Care Products

Kevco KVCO
14 5/8 107
15
N.A.
Building Products

Lilly LLY
84 3/8 47,992
30
12
Pharmaceuticals

Living Centers of America LCA
34 1/8 701
16
14
Nursing Homes

Merck MRK
86 7/8 107,538
27
11
Pharmaceuticals

Mylan Labs MYL
12 3/8 1,509
24
16
Pharmaceuticals

Oakwood Homes OH
17 1/8 799
11
15
Manufactured Homes

Patrick Industries PATK
14 5/8 89
8
N.A.
Building Products

Pharmacia Upjohn PNU
35 3/4 18,863
25
10
Pharmaceuticals

Royal Caribbean RCL
30 5/8 1,970
13
13
Vacation Cruises

Schering Plough SGP
75 3/8 27,968
23
11
Pharmaceuticals

Service Corp. International SRV
32 1/2 7,335
27
16
Funeral Service

Skyline SKY
22 1/8 226
11
10
Manufactured Homes

Although the data has been gathered from what are believed to be reliable sources, completeness and accuracy cannot be guaranteed.

A Buy Signal, At Last

As mentioned in the editorial, the Tactical Timing System provided a buy signal on March 31. The system called for a 15 percentage point increase in the allocation to equities for each of the “real world” portfolios. Thus, I purchased Carnival Cruise Lines (NYSE: CCL; 36 1/2), Fleetwood Enterprises (NYSE: FLE; 25), and Clayton Homes (NYSE: CMH; 12 5/8) for the conservative portfolio. For the aggressive portfolio I purchased Keane Co. (ASE: KEA; 31 1/4), Royal Caribbean (NYSE: RCL; 31), and Callaway Golf (NYSE: ELY; 27 1/4). I placed approximately 5% of each portfolios equity in each of these picks.

Portfolio Updates

Oppenheimer cut earnings estimates on Mylan Labs (NYSE: MYL; 12 3/8), knocking the socks off the stock. Mylan should be a good long term holding, but its relative strength has been extremely poor the last couple of months.

Due to the recent demerger of The Energy Group (NYSE: TEG; 32 1/2) from Hanson PLC (NYSE: HAN; 22 5/8), the conservative portfolio was left with a very small position in each company. Hanson is offering a special “dealing facility” to holders of less than 100 shares in each entity. For a very minimal transaction cost, stockholders can sell back their positions to the company. I’m going to take them up on this offer for both companies and take the cash.

Recommended Allocations

I recommend aggressive portfolios be invested in 90% equities, 10% cash. A conservative portfolio should be 70% equities, 30% cash.

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