Few Winners Among The Publicly Traded Companies
One of the problems with investing in public equities is that many, if not most, of the investors do their buying and selling for reasons that sometimes bear no relationship to fundamental values or inherent company strengths. The timing of their purchases and sales also is influenced by more global reasons and not what may or may not happen to a particular company. Obviously, all investors want to make money in their equity investments, but a fund manager, for example, may go into or exit a stock or sector for reasons that often have little to do with that stock. Often, there is a need to book a gain, or to direct dollars to another sector that has turned hot, or they may simply give up on a regulatory and reimbursement-challenged industry that has shown little consistency in recent years.
As we know, timing is everything, and picking market bottoms and tops is very difficult even for the best of investors. Perhaps the worst case of timing we witnessed was during a roadshow lunch for a seniors housing company IPO in the 1990s. We were curious about the turnout (large), so when asked why he was investing in this particular company, one fund manager said, “Demographics, the baby-boomers are going to knock the leather off this sector.” Are you kidding? At the time, the oldest baby-boomer had just turned 50 and was worrying about upcoming college tuitions and not where he was going to live in his “golden years,” which were 25 years in the future. The unfortunate thing was that this investor was not alone, and bankers peddling the IPOs at the time did their fair share of perpetuating the myth (at least back then) of the baby-boomers and seniors housing. It was like the “plastics” tip in the movie The Graduate, for those of us old enough to remember Dustin Hoffman’s break-out movie role. Yes, the elderly population is growing, but perhaps what was missed 15 years ago was that the “old” would continue to age, and all the care needs that go with it, while the young old are healthier and making their lifestyle decisions at an increasingly later age. This is but one of the factors influencing occupancy rates at seniors housing communities and CCRCs today, not to mention the changing nature of the skilled nursing business.
For 2011, the timing of investing in seniors housing and care was crucial, and small fortunes could have been made with great investment timing during the year, while bad timing could have had some investors deciding cash under the mattress was the best way to go. Investing in skilled nursing stocks in April or July comes to mind for jumping-out-the-window feelings, as well as anytime from July through September for seniors housing. Now, if anyone purchased almost anything at the beginning of the fourth quarter in both sectors (in particular, October 4), there would have been serious New Year’s celebrations. Just like in 2010, the fourth quarter rally of 2011 saved a few stocks from having disastrous years, but there was little that could save some others.
The SNF Sector. It is not a coincidence that in some years the best performing stocks were those at the bottom of the heap the year before, and 2011 was no different. In the skilled nursing sector in 2010, Advocat (NASDAQ: AVCA) had the worst performance with a 32% decline but ended up on top with a meager 6% increase in 2011. Meager was good last year, as the company had to deal with Medicare cuts, shareholder revolts and a bit of turmoil in the executive suite. Its small size, with just a $33 million market cap (and now the smallest of the seven), obviously results in limited trading activity and is off the radar screen of most sector investors. But those institutional investors who have hung in there still want to see the company sold or merged into a larger private company (reverse merger) to give it some heft in the market. That may finally happen this year, but we are not sure whether there are many benefits of being a publicly traded skilled nursing company in an environment where earnings forecast will last as long as the next reimbursement cut.
Just behind Advocat in the 2011 rankings was AdCare Health Systems (AMEX: ADK), the fastest growing company in the sector and one that also has an assisted living component. In 2010 it was second from the bottom with a 1% decline in value but went into the black in 2011 with a 4% increase. Partly because of its size, ADK is not attracting any real institutional interest, and small investors who know the industry probably want to wait and see if management will be able to profitably operate its growing inventory of properties and whether there is a meaningful plan beyond growth for growth’s sake. Right now, rapid growth is important for the company to establish itself and one of the keys to its success will be the low capital cost basis of most of their acquisitions, especially on the skilled nursing side of the business…Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today