Published July 29, 2013
The world waited on pins and needles for the birth of Prince George Alexander Louis, the future king of England. And thanks to the media following Kate Middleton’s every move, we got the play-by-play leading up to his birth (whether you loved it or hated it). But even in the overabundance of coverage, not too many folks were considering the investment angle of it.
Believe it or not, the baby business really is a tradable trend thanks to a new Baby Boom afoot around the English-speaking world.
Birth rates in Australia, the UK, Canada, Ireland and other places have spiked over the last year or so, in some cases to the highest levels seen since the 1970s. There are plenty of theories as to why, but whatever the reason, the trend is real.
However, this isn’t the case for the United States, but there are indications the boom may follow here as well. The birth rate has dropped to an astounding 8% in the post-recession period and has now flattened out for the first time since 2007. I believe that this is because women are waiting until the economy gets back on track before starting a family. After all, children are expensive. .
But as the economy improves, the biological clock will start ticking even louder. Independent research firm Hedgeye estimates that as regional economies improve and the unemployment rate for women declines, we could see 700,000 to 1.4 million “backlog births” over the next three to five years.
Simply adding those babies back into the population curve translates into a 9% organic boom in demand for everything they and their families will need to consume.
In the next few years, I’m expecting the number of pregnancies, births and toddlers to be on the rise. And as you may know, children need a great deal of care, and the companies that can provide these necessities will do well. I’m talking from pre- and post-natal care to education and entertainment. Companies that can offer these services and investors who follow the census numbers should find long-term opportunities to spare. Here are two worth looking at right now:
Two Companies Bound to Profit
When the number of births rises, I expect the obstetrics equipment and natal care providers to get a nice secular lift in the next year or so. Mednax (MD) is one such company, and when patient volumes rise, high reimbursement rates means its fundamentals will strengthen very quickly.
Remember, the average American hospital birth costs twice as much ($30,000) as the royal delivery cost the British taxpayer. Multiply by over 1 million backlog births and MD has a huge opportunity here. I’ll be watching MD’s earnings report (scheduled to report around July 30) to see if it has started to materialize.
Another company to watch is Natus Medical (BABY), a birth center equipment maker. While the chart is not as strong as what we’ve seen from MD, hospitals are evidently buying in order to expand and deepen their ability to care for tiny patients. First-quarter sales were up 44% over last year but consensus estimates are still a little high given management’s recent confession that growth in the second quarter “only” hit 32% to 34%. BABY could offer a good investment opportunity on weakness.
One Stock to Avoid
Hologic (HOLX) develops, manufactures, and supplies diagnostics, medical imaging systems, and surgical products for women. Although more pregnancies will probably line the pockets of the country’s OB/GYN medical practices and encourage new doctors to enter the field, HOLX will be one of the beneficiaries are probably exaggerated. While the company is nominally focused on women’s health, the equipment and testing kits it sells are not actually geared toward the pregnancy side of the specialty. If you’re looking for baby boom exposure, mammograms and HPV exams don’t qualify.
For me, I’ll be focusing on the long-term. Since today’s babies will grow into next year’s toddlers, look to a baby boom to do great things for companies like Leapfrog (LF) and its tot-oriented learning toys. And then there’s Carter’s (CRI) and The Children’s Place (PLCE) with all their adorable little outfits. CRI hit a bump recently after confessing to weaker results for its core Oshkosh brand, so the return of the baby should give it exactly the jolt of confidence it needs.
Hilary Kramer is the editor in chief of the subscription newsletters: Game Changers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return Portfolio and Inner Circle. Formerly, Hilary was the CIO of a $5 billion global private equity fund. She has an MBA from the Wharton School at the University of Pennsylvania and began her Wall Street career as an analyst at Morgan Stanley. Hilary is the author of The Little Book of Big Profits from Small Stocks (Wiley) and Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends (Free Press). To learn more about Hilary Kramer visit: http://GameChangerStocks.com.