TCS Daily


Boom Time

By James K. Glassman - May 28, 2004 12:00 AM

Baby boomers, as all of us born between 1946 and 1964 know very well, constitute the most important generation of the most important country on the most important planet in the most important universe in all of history.

Call us narcissists, but you have to admit that we've always been the focus of attention of marketers, journalists, politicians and psychologists. And even as we get old (our vanguard starts turning 60 in a couple of years), we will "remain the most influential segment of the population."

So, at any rate, says a fascinating new 68-page report on the implications of the state of the post-World War II baby boom for investors in the year 2010. The report is called "The Next American Dream," and it's issued by Citigroup Global Markets. This is not some dry tome, ruminating on sociology and economics. It's got stock tips.

The most persistent investment cliche about baby boomers is that, as they start retiring, they will pull their money out of the stock market. Because of this decreasing demand, stock prices will fall and keep falling, so you should start moving into bonds and cash right now. The Citigroup report throws cold water on this hoary hypothesis. Baby boomers plan to keep working and earning longer than their parents, they are remarkably good savers, and they have embraced the "equity culture."

The stock-to-bond shift is only one of the myths that the report challenges. For example, the authors, Edward Kerschner and Michael Geraghty, write that "poorly positioned industries" for retiring baby boomers "include some surprises such as large pharmaceutical companies, jewelry retailers, bookstores, and traditional mortality protection insurers."

What are the well-positioned industries?

Before you get the answers, you need to understand the Citigroup thesis. It goes like this: As baby boomers age, "their mind-set and attitudes" will change, too. Their goals are to be "healthy, wealthy and active," but there will be a "gap between these aspirations and reality." And within that gap, excellent stock-buying opportunities will emerge.

Take health. Sixty percent of people ages 45 to 54 say they are "concerned about trying to stay in shape," compared with 37 percent in 1994. But just 12 percent of boomers say they have attained their goal of "adopting a healthy lifestyle" and fewer than half are doing anything about their weight.

Instead of discipline and sacrifice, boomers see drugs and cosmetics (and cosmetic surgery) as the way to health, or the appearance of it. As a result, says the Citigroup study, "many boomers find themselves in the paradoxical situation of living an unhealthy lifestyle and taking a handful of drugs to remain active."

Still, Kerschner and Geraghty are dubious about pharmaceutical stocks. They see the large drug companies as caught between pressure to hold down prices from new health savings accounts (HSAs) and competition from generics and imported medicines. I am not sure I agree, but I'm intrigued by the Citigroup list of companies "well-positioned to benefit" from boomer trends in health. Among them:

Darden Restaurants (DRI), which owns the Red Lobster chain, a beneficiary of a move toward higher seafood consumption, and Brown-Forman (BF/B), Robert Mondavi (MOND) and Constellation Brands (STZ), alcoholic-beverage companies that will gain as boomers move away from soft drinks toward liquor and wine, a historic trend as people age that Kerschner and Geraghty write will be more pronounced this time, perhaps because of "heightened stress levels."

Instead of suggesting the large pharmaceutical houses, the Citigroup analysts prefer biotechs such as Genentech (DNA), for cancer drugs, as well as Allergan (AGN), maker of wrinkle-removing Botox, and Endo Pharmaceuticals (ENDP), a leader in pain-management medications.

HSAs were set up under the Medicare reform bill that passed last year. They have nothing to do with Medicare but -- as the health equivalent of 401(k) plans -- "will likely have profound implications for health care consumption." Likely beneficiaries, write Kerschner and Geraghty, include such giant health-management firms as Anthem (ATH), UnitedHealth Group (UNH) and WellPoint Health Networks (WLP).

As for wealth, boomer savings rates are high, the Kerschner/Geraghty report says -- about 20 percent of income at age 50, extrapolated from data from the Bureau of Labor Statistics' Consumer Expenditure Survey. Even if that high rate declines at age 60 and beyond, it "is still likely to be relatively high, given continued growth in real incomes" both because boomers will work longer than their peers in previous generations and because productivity will rise. "So where," asks the Citigroup report, "will that money go?"

Lately, it has gone to banks, but that may change as the effects of the bursting of the 1990s bubble wear off. Among the winners will be brokerage firms. Kerschner and Geraghty specifically point to Merrill Lynch (MER), "whose financial advisors are among the most productive (in terms of annual revenues)," and Charles Schwab (SCH), "which routinely brings in more assets than any of its peers." Among asset managers, the report cites T. Rowe Price Group (TROW), the mutual fund house.

Boomers are conservative investors, says the report. They want good returns, but they are worried about losing their capital. Hartford Financial (HIG) "may have stumbled onto a 'killer app' for the financial needs of today's boomers," write the Citigroup authors. It's called a Guaranteed Minimum Withdrawal Benefit (GMWB), a new kind of variable annuity. The deal is that, for a cost of a half-percentage point a year, you can invest in a range of financial assets, including stocks, with a guarantee that your entire principal will be returned to you -- provided that the principal is not withdrawn at a rate greater than 7 percent annually.

I have no view on the GMWB itself, but there's no doubt that annuities -- especially if their fees come down -- should be enormously appealing to baby boomers. Other financial firms with GMWBs, recognized as "well-positioned" by the Citigroup study, include Lincoln National (LNC) and Prudential Financial (PRU).

The final goal for aging boomers is remaining active -- or, more precisely, "lazily active." Boomers will stay in the labor force longer but will also engage in leisure activities, especially, the report predicts, home improvement, travel and gambling.

If Citigroup is right, it won't be hard to figure out the stocks that will benefit: Home Depot (HD) and Lowe's (LOW) in home improvement; Magna International (MGA) and Harman International (HAR), which upgrade the interiors of automobiles and trucks; Fairmont Hotels (FHR), Four Seasons (FS) and Starwood Hotels (HOT); and, for gambling, International Game Technology (IGT), which makes sophisticated slot machines, and Mandalay Resort Group (MBG), perhaps the best of the casino chains.

Another sector that could experience an explosion in boomer demand isn't mentioned by the Citigroup report. It's for-profit education. Boomers, it's logical to assume, will want more education, both to upgrade their skills so they can stay working longer and as a leisure pursuit, to expand their experience, intellectual and otherwise.

Right now, no major education company, as far as I can find, is concentrating on the aging-boomer market, but it's a good bet that the smarter players -- most of which have developed strong online programs -- will start making the shift. Among them: Apollo Group (APOL), the biggest of the for-profit educators with its University of Phoenix chain; Career Education (CECO), which operates 74 campuses and runs the Cordon Bleu cooking program; Strayer Education (STRA), whose students are mainly working adults; and Baltimore-based Laureate Education (LAUR), which last week changed its name from Sylvan Learning Systems and already has made some imaginative changes in its business, focusing on universities outside the United States. (The Washington Post Co. owns Kaplan Inc., a competitor to these firms.)

Finally, think housing. Boomers spend a much higher proportion of their disposable income on housing than the previous generation did when its members were 45 to 54 years old. As they get older, boomers are likely to indulge this in different ways -- through owning what Robert Toll of Toll Brothers (TOL) calls "jewel boxes," smaller homes with expensive kitchens, bathrooms and electronic amenities, and through living in small gated communities near cities with mild climates and cultural attractions. Pulte (PHM) specializes in such housing.

I remain enthusiastic about home-builder stocks, despite recent increases in interest rates, and a surge in boomer buying could provide a secular, or long-term, lift to the industry.

And that brings us to the safest way to make boomer investments: Look for companies that should prosper anyway, and hope that boomers provide a delightful kicker for the next 20 or 30 years.


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