There’s a lot of momentum behind stocks right now. Companies continue to beat on earnings but it’s all from operating leverage and this can’t last forever. New sectors, like Transportation, Materials, and Energy, have kicked in and taken the lead. This should carry us higher for a few weeks in the form of a slow grind and it appears like we’re setting up to take a run at the all-time highs. However, I’m concerned about the lack of revenue growth so I’ve begun to slightly cut back again on US stocks – think of it like rebalancing. Seasonally, stocks tend be pretty weak in late spring/early summer (second quarter of the year) and the trend looks to be setting up like clockwork this year as well. I’ve actually had my eye on Treasury Notes lately and may pick up a little exposure as a hedge for the next inevitable pullback in stocks.
S&P 500 ETF (SPY) – 3 years
Obamacare
Sick of rising healthcare costs? Yeah, me too. That’s why I’ve been looking for ways to hopefully profit from it. It’s taken me a while because I’ve had a tough time finding decent value. A lot of companies are trading at pricey valuations right now so I’m building a shopping list for the next down turn. The only two stocks I’ve pulled the trigger on and bought are Air Methods Corp. (AIRM) and Stericycle (SRCL).
Air Methods is one of the largest life-flight helicopter operators in the country. They act as an independent contractor hired by the hospitals. This is one company that I think Obamacare can have a huge positive impact on if the number of people with health insurance coverage actually increases as expected. Right now, about 20% of the flights they perform turn into non-payments because either the person does not have health insurance, the insurance doesn’t cover life-flight expenses, or AIRM receives a reduced payment (Medicare/Medicaid). AIRM ends up writing these off as a “bad debt” expense. It would be great if they could pre-qualify people before flying them to the hospital but that’s just not how it works when there’s an emergency. But even with these write-offs, they’ve still been able to grow revenues at 26% last year! They just added another 42 helicopters to their fleet as they pick up new contracts and have been paying down debt with the free-cash flow generated each quarter. If Obamacare actually expands the base of insured people, as it’s supposed to, Air Methods could see 20% of flights turn into profit instead of a loss – talk about a boost to earnings!
AIRM – 3 years
Stericycle is a global company that cleans up and disposes of hazardous waste for doctors’ offices and hospitals. You know those plastic bins the doctor throws the needle into after giving you a shot? Those are Stericycle’s bins. They’ve also used their existing relationships to expand their business services. With a growing number of senior citizens each year as well as Obamacare expanding the base of people able to obtain preventive care and check-ups, I think Stericycle is set to experience double-digit profit growth for years to come. It’s also a very recession proof business model. .
SRCL – 3 years
On the income side of investing, I was looking into some of the Healthcare REIT’s (Real Estate Investment Trust) but they’ve climbed too high. The yield on the bigger companies is under 4% (REIT’s used to pay over 6%) and most are trading well above the value of their underlying properties, which leaves little room for error and huge downside risk. However, this led me to their preferred stock. For anyone not familiar with preferred stock, it’s sort of a stock/bond hybrid. It falls below debt in the capital structure, but above the common stock (which is the type stock everyone thinks of when they think about the stock market). It’s considered equity but trades like a bond, making it a way for companies to manipulate their books by taking on more debt but calling it stock. REIT’s will often issue preferred stock with a 5 year call feature, meaning they can buy it back after 5 years (i.e. a 5 year bond). What makes preferred stock attractive is that they typically offer dividend yields of 6% or higher. I like to think of it like a high yield (“junk”) bond issued by a stronger underlying company. I’ve commented before that I think high yield corporate bonds are becoming dangerous so I’ve been eyeing a few REIT preferred stocks with call dates in the next few years in place.
Thanks for following!
Nick