As The Great One, Jackie Gleason, used to say, And Away We Go.........
Doctor, Doctor, Give Me The News.........
Just about every scene in The Godfather is a classic, but the last time I watched the movie (my annual viewing) I took particular note of the hospital scene where Al Pacino comes to check on Marlon Brando, who is recovering after being gunned down on the streets of New York by a rival family. I was intrigued by Francis Ford Coppola's depiction of a late-1940s hospital setting, totally lacking in all of the monitors and technology gizmos that seemed to fill my daughter's hospital room when she gave birth to my first grandson almost four months ago. Hospitals and health care delivery facilities have come a long way with technology since Don Corleone needed their services, but one area in health care has lagged behind. When I visit my doctor's office, the nurse still places the manila folder containing my charts and patient records in a tray on the examining room door so that my physician can peruse it before telling me that it is time for my annual prostate exam. It's the same type of manila folder my pediatrician would carry into the examining room when I was just a little tyke back in the 1960s.
The federal government would like to see more pervasive adoption of Electronic Health Records (EHR), and to that end they're offering up both a carrot and a stick. This is part of the Health Information Technology for Economic and Clinical Health Act (HITECH), which is part of the American Recovery and Reinvestment Act (ARRA). To put it more simply, there are positive incentives for health care providers to adopt the technology now, but penalties for those who fail to get on board by 2015. A recent study estimated that only about 20% of doctors' offices and 10% of hospitals currently utilize some form of Health Care Information Technology (HCIT). The idea behind all of this has to do with efficiency (cost-savings) and improved quality of care. If I check into a hospital with this technology, everyone in the health care food chain can tap into my medical records on a computer screen or wireless device instead of having to wait for the contents of the manila folder to be delivered or faxed. Two of the companies that provide the systems are Cerner (CERN, $61) and Allscripts Healthcare Solutions (MDRX, $19). The technology such companies provide has been around for some time, but their business may get a boost from the federal mandates. They'll also benefit from service and upgrades to the installed base.
Falling Off A (Patent) Cliff
Big pharmaceutical companies such as Merck (MRK, $37) and Pfizer (PFE, $20) saw a long period of glory days as investments when they were coming out with patented blockbuster drugs (Pfizer's Lipitor is one example). Many of those drugs are now going off patent (this is known as the "patent cliff"), and there don't seem to be many promising new drugs in the pipeline that would restore the luster of blockbuster status. Generic versions of the once-patented drugs are either here or on their way, and that means major price competition for the "big pharma" drugs that once were monopolies for their developers. Patent protection is crucial for the development of new treatments, because companies wouldn't take the risk of spending hundreds of millions of dollars on research and development if they couldn't have the pricing power that comes with temporary monopoly status.
There are a number of companies in the drug delivery chain that stand to benefit from the onslaught of generics--basically, everyone except the pharmaceutical companies that developed the drugs in the first place. Obviously, a company such as Mylan Labs (MYL, $21) that specializes in generic drugs will see more business to the extent that they roll out inexpensive new versions of drugs that are already widely prescribed. Companies in the wholesale drug distribution business will benefit also, because they tend to make higher profit margins on generics than they do on the patented drugs. The three main players in drug distribution are AmerisourceBergen (ABC, $36), McKesson (MCK, $78), and Cardinal Health (CAH, $41). I tend to favor ABC because it is the purest play here, likely to see the most benefit to its bottom line from generics.
Also involved in this drama are the Pharmacy Benefit Management (PBM) companies that administer and process prescription drug claims for health plans. Express Scripts (ESRX, $44) plans to buy rival PBM Medco Health Solutions (MHS, $56), and if the deal is approved it will create the nation's largest PBM. The arrangement between ESRX and Walgreens (WAG, $33) ended at the end of 2011 when the two companies could not agree to terms for renewing their contract. Starting January 1, 2012, Express members will not be able to have their prescriptions filled at Walgreens. This likely will benefit WAG's chief competitor, CVS (CVS, $41), which a few years ago bought its own PBM, Caremark. This makes for a lot that is yet to be resolved, but some time during 2012 we will know whether the ESRX/MHS deal will go through and what will happen with ESRX and WAG. Shares of WAG have taken a hit recently due to the earnings that the company will likely lose with the loss of ESRX customers.
Finally, I'm not counting out the big pharmaceutical companies. Merck bought Schering Plough in 2009, and this combination will help beef up Merck's formerly weak pipeline of new drugs. I also like MRK's "paid to wait" dividend yield of 4.5%.
Waiting For A Housing Recovery
I don't know when we will see a truly strong housing recovery, but I am certain of one thing. By the time a genuinely robust recovery in housing is underway, it will be too late to buy many of the stocks that will benefit. The housing stocks will rally in anticipation of a recovery, just as stocks always move in anticipation of what is expected to happen in the future.We are already seeing some signs of life here, as the economic numbers are showing some improvement and the homebuilder stocks are showing strength. Just because the worst may be over, though, does not mean that the best is knocking at the door. My strategy is not to buy the homebuilder stocks, but to seek out those companies that will further benefit from a housing recovery but are doing well with the status quo. One such company might be Stanley Black and Decker (SWK, $67), the combination of the old Stanley Works and the Black & Decker corporation. They make and market tools for the retail consumer and industrial markets. I may not be very handy with a toolbox (my wife reminds me of this constantly), but everything in mine comes from Stanley. SWK has further diversified with the recent purchase of Niscayah, a European security-systems company.
What is interesting right now is that in many markets it is becoming cheaper to buy than to rent. Mortgage rates are at historic lows, with rates for a 30-year mortgage around 4%, and house prices remain depressed. Of course, home ownership comes with many other costs (insurance, property taxes, maintenance), but comparing the monthly payment (principal and interest) on a mortgage with monthly rent is getting pretty compelling. We've also seen a collapse in the rate of household formation. The number of U.S. households increased by 600,000 in 2011, compared with an increase of 1.5 million in 2006. Grandpa and Grandma are moving in with the kids, and the kids' kids are moving back home after college (they can't find jobs, partly because they majored in gender studies instead of getting engineering degrees). If this keeps up, we'll be a nation of The Waltons (Goodnight, John-Boy!). What we are experiencing is a classic supply/demand imbalance, where the market has to absorb the "shadow inventory" of distressed properties that will be coming on the market post-foreclosure. This will still take time to work through.
My wife recently was shopping for our youngest daughter, who graduated from college in May and has her first apartment, in New York. I learned that Dollar Tree (DLTR, $83) is a great place to get things like Pyrex dishes and spatulas on the cheap. At the higher end, continuing with our "Tale of Two Cities" theme, Williams Sonoma (WSM, $38) sells all kinds of products for feathering the nest. I expect that whatever housing recovery we have will proceed along the lines of a thriving high-end market with a middle that continues to struggle.
Cloud Nine
The world is getting smaller, or at least it seems that way as we now have the potential to be connected to everything, all of the time. I am not even going to pretend to know everything about the trend in cloud computing, but I read so much about it that I am compelled to issue a "Hype Alert." I can foresee stocks that claim to be associated with the cloud trading the way stocks with a "dot com" name worked their way into a speculative bubble before crashing in the early 2000s. Here, though, is what I do understand about the cloud. IBM introduced the first Personal Computer (PC) in 1981, while I was a junior at Rhodes College (then known as Southwestern at Memphis). I was majoring in economics and business administration after a very successful attempt my first two years at majoring in Jack Daniel's. To work on our econometrics projects, we would go to the computer room in the basement of the library. Running a program for, say, regression analysis required some rudimentary knowledge of a computer language, such as BASIC or FORTRAN. The computers, which were really just screens and keyboards, were hooked up to the mainframe computer, which was the brain, in another building. We had to go to that location to retrieve our printouts (on big green and white sheets). The PC revolution moved the power of the mainframe to the desktop, and the advent of Microsoft's Windows and other software meant that you no longer needed to write your own programs. The overall trend in technology has been for computers to get smaller at the same time they are getting more powerful. This is what is, roughly speaking, known as "Moore's Law": the number of transistors than can be placed on a given integrated circuit doubles every two years (named for Intel co-founder Gordon Moore). The big shift now is that computing power is moving away from the desktop, not back to a centralized mainframe, but to a dispersed network of servers that collectively constitute the "cloud." A very simplistic example is the difference between Microsoft's Outlook Express and Google's Gmail. Outlook Express is software installed on my computer, and it downloads my emails from the mail server at my Internet Service Provider (ISP), Comcast. My wife, on the other hand, uses Gmail, which involves no software on her computer. All she needs is an Internet connection to send and receive emails. It's all "out there" in the cloud.
The Cloud is not something some company invented and owns, but instead just a way that everything is connected and accessed. What is does mean, though, is lots and lots of data, so a company that interests me here is EMC (EMC, $21). EMC is the leading data storage company, so they should benefit from the shift towards the cloud, as all that data needs to be stored, accessed, and protected. EMC also owns 80% of VMware (VMW, $83), which specializes in "server virtualization." The cloud makes computer processing function more like a utility, where users pay for what they use, accessing it over the Internet instead of having it installed on their computers. Not surprisingly, the enthusiasm over the cloud has hurt the stocks of Microsoft (MSFT, $26) and Intel (INTC, $24) because those two companies together made for the dominant standard in personal computing. I wouldn't expect the companies to just stand still while the market moves away from them, but it is just not clear at this point how--or if--they will regain their status as technology leaders.
Pay As You Go
The wireless revolution is about everything being connected without being tethered. The next big thing in wireless, it seems, it that your smartphone is going to be your credit or debit card. Mastercard (MA $373) and Visa (V, $102), we should note, are payment processors, acting essentially as toll collectors. If you look at your credit card, it's the issuing bank that's taking the credit risk, not MA and V. (American Express [AXP, $47], on the other hand, does take credit risk.) Believe it or not, cash is still the most widely used payment instrument around the world, so there is plenty of room for growth here. Verifone (PAY, $36) now has its point-of-sale terminals in taxi cabs, and pretty soon, at least in major cities, you'll be able to watch television and buy theater tickets while sitting in the back seat of a cab. The more people use forms of electronic payments, mobile or not, instead of cash, the more fees the processors will collect.
Are You Talkin' To Me?
I am very excited about the prospect of my grandson saying his first words, probably about a year from now. I wonder, with wild anticipation, what his first words will be to me (maybe, "Buy some more Disney, Pops!"). Unlike my grandson, smartphones and other technology devices are already starting to talk, and no review of such trends would be complete without a mention of Nuance Communications (NUAN, $25), a leader in voice-recognition and speech technology. I think we can expect to see a lot more of this. I do think, however, that if my smartphone is going to talk to me, I should get to choose its voice. I want either the raspy and sexy Lauren Bacall or the authoritative James Earl Jones, depending on the setting. (Great. Now Darth Vader is telling me about that prostate exam.)
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Speaking of the movies (and I know, I'm always speaking of movies), Lauren Bacall is still around and still one of my all-time favorite actresses. She was great in those movies with her real-life husband, Humphrey Bogart--To Have and Have Not, The Big Sleep, and Key Largo (that one even inspired a song). I may just have to conclude my New Year's Day as a couch potato by popping The Big Sleep in the dvd player. Lauren Bacall's last major and memorable film was in a supporting role as James Caan's agent in Misery (1990), based on the Stephen King novel. James Caan, of course, was Sonny in The Godfather. And Kathy Bates is from Memphis. You see, Uncle Walt was right: It is a small world, after all.
Life is short. Get busy.
Jim
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