Buying Opportunity For Seniors Housing Stocks?

October 14, 2008

October 14, 2008
We all know that the economy is going to get worse before it gets better, and that we will continue to have volatility in the stock market, most likely through the end of the year, but what is happening to the stocks of seniors housing and care companies is a bit beyond belief. Sunrise Senior Living hitting $6.31 per share? Brookdale Senior Living at $9.22 or Capital Senior Living at $4.89? We won't talk about replacement cost compared with stock values, because that is really not a meaningful reason to invest, especially in this market. It may make you feel secure, and you may think it offers some downside protection, but that is not what drives value. Cash flow and growth are what matter, and while growth may be stymied for a while, cash flow, even with another slip in occupancy, should be strong enough to warrant higher valuations.

 

Housing market woes and occupancy fears are still putting downward pressure on seniors housing stocks, and half of our universe has fallen in proportion to the overall market's decline, but the other three, Brookdale, Sunrise and Five Star Quality Care, have suffered percentage declines about double the rest of the market since the beginning of the year. But what was the market telling us when, on the day the Dow soared by 936 points, Brookdale actually declined slightly when most of its peer group jumped by 8% to 20% on that historic day? Liquidity fears, despite continuing to make its dividend payment, occupancy concerns (again) or third quarter "whisper" numbers out there? Who knows, but as a long-term investor, if you liked Brookdale at $18 per share, you've got to love it at $11. The same goes with Sunrise, currently under $8 per share, which should be an historic buying opportunity unless you believe the problems always ran much deeper than the accounting restatements. 

All six of the seniors housing stocks hit 52-week lows on October 10, but only two of the skilled nursing stocks did so. They have fared much better than the rest of the market, with three of them down by as little as 1% to 13% on the year, and one (Ensign Group) still in the black. And we thought health care REIT stocks were known for safety in a time of financial turmoil. 

If you are of the belief that the Dow still has further to decline, perhaps to 7,000, then obviously don't listen. But if you think we are anywhere near the bottom, or when the next 600-point plunge occurs, don't try to pick a stock, try buying a basket of the six seniors housing stocks, put them away for a few years (or longer) and you may double or triple your investment. And, it could occur a lot faster than that. These opportunities happen only about once or twice a decade, and unlike the last time, no one is talking about bankruptcy filings.

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