3 Top Stocks in Senior Living

By Cheryl SwansonFool.com

Courtesy of Flickr, Creative Commons.

It's a fantastic time to be a senior healthcare housing landlord. In fact, thanks to the aging of the population, it's not a bad time to take a close look at senior livingstocks.

Continue Reading Below

The entire industry has a strong outlook, since the largest generation in U.S. history is now retiring en masse. For the next 18 years, a staggering 10,000 baby boomers will turn 65 every day, increasing demand for everything from golf clubs to assisted living facilities.

Consolidation and mergers and acquisitions are also thriving in home healthcare. Let's look at three potential winners with respect to market drivers, restraints, and opportunities.

HCP HCP is a real estate investment trust, or REIT, focused exclusively on the healthcare sector.HCP's real estate portfolio includes hospitals and medical office buildings,but the bulk of its assets aresenior living facilities.

For long-term investors, the timing is particularly good to take a close look atHCP.To begin with,itrecently increased its exposure tosenior living,buying35 private pay senior housing communities for $847 millionfromChartwell Retirement Residences.The acquisition is a joint venture with the current operator of the properties, Brookdale Senior Living.Going forward,HCP will own 90% of the venture.Brookdale will continue to manage the properties and holda non-controlling10%.

The acquired portfolioshould give HCPaplatform for continued growth.The portfolio is currently 89% occupied, with a mix of 46% assisted living, 45% independent living, and the rest skilled nursingfacilities.With no third party debt, HCPhas said it anticipates the portfoliowill generate a first year cash yield of around6.6%.

The core financial metric for REITs is funds from operations, rather than earnings per share. Based on that metric, HCP grew funds from operations by a satisfactory 5%year-over yearlast quarter.

REITs have had the wind at their back for several years,due totheir ability to lock in record low interest rates on existing debt and realize strong pricing on their assets. ButHCP has seen its share price drop, along withother REITs, as fears mount thatan anticipated interest rate hike could curbprofits in the near future.However,HCP has seen rate hikesbefore and hasprovento be extremely durable.The company has increased its dividend for 30 consecutive years, making it the only REIT in the S&P 500 Dividend Aristocrats index.

As Motley Fool Chris Walczak pointed out, the company has shown amazing growth for three decades, and there is still plenty of opportunity ahead. HCP's first-quarter earnings were broadly good, and the company now sports a 5.7% yield.

Between the current dividend yield and an average dividend growth rate of 4% for the past decade, HCP investors can expect an annual return in the ballpark of 9%-10% going forward. If you're looking for sources of solid income to get you through retirement, it's a credible candidate.

Ensign Group If you live in the Sun Belt, you might be familiar with Ensign Group. The company owns 143 skilled nursing facilities, 12 hospice companies, 13 home health businesses, and 16 urgent care clinics --many in Sun Belt states.

Acquisitions have been the key catalyst for Ensign's growth, and there's no reason to believe it intends to stop the buying spree. So far in 2015, the company has acquired 18 new operations, including nine skilled nursing, five-assisted living operations, and two urgent care businesses.

In first-quarter 2015, the company's revenue increased 28% year over year to a record $306.5 million, compared to the industry average of 13.1%. Net income increased by 12.2% from the same quarter one year prior. Management also increased both its annual revenue and net income guidance for 2015.

Ensign has been powered upward by a strong pattern of earnings-per-share growth over the past year. Expanding its customer base and market share has been a winning strategy for this company, and the outlook for the sector is bright, helping to justify the higher price.

Still, with investor enthusiasm sending the share price up 70% in the past 12 months, waiting for a reasonable pullback makes sense with this stock.

Almost Family Kentucky-based Almost Family was founded nearly 40 years ago. The company is the fourth-largest home healthcare provider in the United States, with 234 branches in 14 states.

Like Ensign, Almost Family is in the sweet spot of rapid expansion, and it's picking up speed. The company recently completed several major acquisitions that should enlarge its footprint across the nation. In late February, management announced the second-largest acquisition in its history, paying $53 million for WillCare HealthCare,a home services provider that had $72 million in revenue during 2014.

With this acquisition, Almost Family hopes to generate close to $600 million in 2015 revenue, up from a record $495.8 million last year. The acquisition should also offer synergies of between $5 million and $7.5 million, according to management.

Almost Family's EPS of $0.49 last quarter beat the forecast by $0.04, and revenue beat by $3.15 million, on net revenue of $128,399 million, up 6.8% year over year. Operating income jumped 34%.

Almost Family's stock rose strongly during the past year. But a recent sell-off dropped it almost 10% on no news, possibly due to small investors taking profits. Like many thinly traded stocks, Almost Family occasionally goes through upheavals for which there seems no rational explanation.

Since the sell-off appears excessive, the drop could open a buying opportunity for those who believe the WillCare acquisition will pay off. Be careful here, since integration issues might stall it further over the short term. But this is a solid company with excellent prospects that justify its rise over the long term.

Almost Familyhas a history of beating expectations in quarterly reports. In particular, it has done a great job of holding the line on costs, despite ongoing Medicare rate cuts. (Last year, the company's efficiency gains improved EPS by $0.31, more than offsetting Medicare rate cuts, which reduced it by $0.21.)

There's little reason to think investors are too late to the party for the health home-care stocks. But with recent volatility, there's no need to be in a hurry.

Senior livingis a lean, mean, profit machine. Don't ignore it.According to theNational Council of Real Estate Investment Fiduciaries,the value of senior living facilities surged 18.7% in 2014, outperforming retail (13.1%), office (11.5%), and apartment (10.3%) value increases. As more Americans head into retirement, the demand for these facilitiesshould only increase.

Whilesenior livingstocks don't get a lot of press,given the bullish fundamentals and growth opportunities, investing in this sector coulddeliver substantial returns for many years.

The article 3 Top Stocks in Senior Living originally appeared on Fool.com.

Cheryl Swanson has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.