Most investors focus only on that which is directly ahead. Meanwhile, there are far more powerful and significant tectonic shifts going on that will profoundly affect investments for years to come.
No one knows in which direction the next 10% move in the market will be. But the next 100% move will surely be higher. The primary beneficiaries of the next inevitable move higher will be those investments well positioned in front of the dominant trends. And those companies that are ideally poised in front of a megatrend will enjoy a tailwind that astronomically increases the odds of success.
There is currently a megatrend that is more pronounced and obvious than all others and will have a profound effect on the flow of money for many years to come. That trend is the aging of the population, which will drive expanded medical spending that should benefit a wide array of healthcare stocks.
The population is aging. And it’s aging at warp speed. People 50 years of age and older now comprise a third of the U.S. population. The fastest-growing segment of the population is 65 and older as an average of 10,000 Baby Boomers are turning 65 every single day. And it’s not just this country, aging is a global phenomenon.
The number of people over 65 is projected to grow from 600 million in 2015 to 1.3 billion in 2040, representing a whopping 14 percent of the world’s people. By 2050, the number is expected to grow to 16 percent. To put this in perspective, in 1950, people over 65 comprised just 5 percent of the global population.
The human demographic is changing before our eyes. The population of the country and the world is already older than ever before in human history, and the trend is accelerating. It makes a huge impact because Baby Boomers control more than 70% of the wealth in this country and they are demanding health care like crazy.
In 2012, total healthcare expenditures in the United States were $2.8 trillion. Since then, spending in the sector has increased 75% and now accounts for a staggering 20% of total U.S. Gross Domestic Product (GDP). And that number is sure to increase.
We don’t know how sticky inflation will be or what the Fed will do. We don’t know if there will be a recession this year or what the next recovery will look like, or who will be the next President. But we do know that the population is shifting and companies on the receiving end of the torrent of dollars that will flow as a result should benefit mightily.
Here are two great ways to take advantage.
Eli Lilly and Company (LLY)
Indiana-based Eli Lilly is a global pharmaceutical giant with over $28 billion in annual revenue, 38,000 employees, and sales in 120 countries. Founded in 1876, it’s one of the oldest companies on the exchange. But the company is more noteworthy for its unusually higher focus on R&D, where it allocates over 25% of sales compared to an average of high teens for the industry.
The R&D focus pays off as Lilly has arguably the very best pipeline and lineup of recently launched drugs in the industry. Back in 2014, the company faced the steepest patent cliffs among its peers. But Lilly very successfully overcame the issue and about 70% of revenue now comes from drugs lost since then. The stock has returned 728% over the last ten years, more than three times the 217% return of the overall market over the same period.
The company has a strong presence in diabetes (Trulicity, Jardiance, Humalog, Basaglar), oncology (Alimata, Cyramza, Verenio), and newer drugs in immunology (Taltz and Olumiant). Many of these drugs are difficult to duplicate and provide Lilly with more patent protection than most of its peers.
LLY has blown away the return of both its peers and the overall market in every measurable period over the last 15 years and has provided a whopping 37% average annual return over the last five years. And now, prospects look better for the company than they did at any time over that five-year period. Analysts on average are expecting Lilly to grow earnings by an average of over 22% per year for the next five years.
Drugs that await a likely FDA decision over the next year include two potentially game-changing, mega-blockbuster drugs. One is an Alzheimer’s drug (Domanemab). There is a massive unmet need for this common disease with few drugs or treatments available. Another is a current diabetes drug that has had very successful late-stage trials for weight loss. Obesity is a massive healtchare problem, and this drug has thus far shown to be superior to anything else on the market.
UnitedHealth Group Incorporated (UNH)
UnitedHealth Group (UNH) is a Dow Jones component that is America’s largest insurer and one of the world’s largest private health insurers. It’s a goliath with $324 billion in annual revenues that serves 149 million members in all 50 states and 33 countries. That’s a lot of monthly insurance premiums!
The company operates in two primary groups, UnitedHealthcare and its Optum franchises. UnitedHealthcare provides health insurance and benefits to a wide range of customers including large national employers, public sector employers, mid-sized employers, and small businesses and individuals. It also provides health insurance for Medicare and supplements as well as employers globally.
The Optum franchise provides direct healthcare, technology services, and prescription drug solutions. Direct healthcare includes an alliance with 70,000 physicians in local medical groups as well as ambulatory care systems and other chronic treatments. The technology provides data and analytics to manage complex administrative and regulatory issues with hospitals and physicians. It also provides a full spectrum of pharmacy care services.
The group provides services at just about every facet of the healthcare process and the full-scale operation provides a powerful alignment of incentives that helps clients control costs better than competitors, which is a massive issue in the industry.
It’s also a huge company and operation. Scale is hugely important in this industry. It enables UnitedHealth Group to keep costs down by virtue of volume, have cash for acquisitions, and wield significant power to adjust rates as prices increase. That’s a huge benefit during periods of inflation.
Although UNH is large in scale, the stock has managed to blow away the returns of the overall market, with nearly twice the return over the past three- and five-year periods and quadruple the return over the last ten years. UNH has also done this with considerably less volatility than the market, with a beta of just 0.69.
Healthcare is a highly recession-resistant business as people tend not to postpone addressing health issues in any economy. UnitedHealth Group is a large, safe business that provides stability in uncertain markets. Aside from that, it has the massive tailwind of the aging population and an ever-increasing number of customers.