(Written by Becca Lipman. List compiled by Eben Esterhuizen, CFA. Levered free cash flow data sourced from Yahoo! Finance.)
The time has come: Baby boomers have started hitting retirement age. Analysts warn that this could cause a big sell-off in stocks as the retirees liquidate their assets. Some also speculate this headwind could create valuable investing opportunities for younger generations.
While retirees have liquidated assets for years, the sheer number of baby boomers selling investments could cause drops in stock valuations. And as more and more baby boomers reach retirement in record numbers, the valuations could keep dropping.
This change could hardly have come at a worse time. Market volatility and a wealth of other problems have already placed the United States on the brink of another recession.
Add to that the unique element of baby boomer retirement and you’re left with a situation where, according to a report by the Federal Reserve Bank of San Francisco, “real stock prices are not expected to return to their 2010 level until 2027.”
There is the possibility that the sell-off of assets will not be so disproportionate. After all, some assets will be passed down to younger generations without ever leaving the market. Then there’s the influence of Generation Y (the Echo Boomers, or successors of Generation X born between mid 1970’s to the mid 1990’s) who have by now largely entered the work force, contributed taxes, and are on the verge of making large investments of their own. (via Kapitall)
Either way, baby boomers will slowly be leaving the marketplace. But take note, this doomsday forecast is not forever, and if history is apt to repeat itself markets will soar once more. In the meantime, investors could be left with the capacity to buy cheaper stocks.
T. Doug Dale Jr., an adviser with Security Ballew Wealth Management offers his views to Reuters that depending on your investment time horizon, a plummet in stock prices may be an ample opportunity to load up on cheap equities: “You have to be willing to buy more when stocks are down.”
After all, depending on your investment strategy the long-term horizon could help young investors make up for their current losses. “Even if your own holdings take a hit, if your timeline is long enough you should bounce back, cashing into the time-value of your investment.”
So, how can you give your portfolio an exposure to America’s ageing population? Luckily for us, J.P. Morgan has compiled an ageing Population Index that tracks a selection of stocks with exposure to this group.
The index holds a list of 21 stocks, with a sector breakdown of 48% healthcare, 33% consumer discretionary, 14% financials and 5% materials.
We wanted to identify the most undervalued names on the UBS list, so we collected data on levered free cash flow (LFCF), and identified the baby boomer stocks that appear undervalued relative to enterprise value (EV).
All of these stocks have a significant exposure to an ageing population, and according to the LFCF/EV ratio these baby boomer stocks appear undervalued–do you agree?
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1. Humana Inc. (HUM): Humana Inc. offers various health and supplemental benefit plans in the United States. Levered free cash flow at $562.13M vs. enterprise value at $5.00B (implies a LFCF/EV ratio at 11.24%).
2. Omnicare Inc. (OCR): Provides pharmaceuticals, and related pharmacy and ancillary services to long-term healthcare institutions. Levered free cash flow at $510.59M vs. enterprise value at $4.65B (implies a LFCF/EV ratio at 10.98%).
3. The Talbots Inc. (TLB): Operates as a specialty retailer and direct marketer of women’s apparel, accessories, and shoes in the United States and Canada. Levered free cash flow at $34.07M vs. enterprise value at $283.26M (implies a LFCF/EV ratio at 12.03%).
4. HealthSpring Inc. (HS): Operates as a managed care organisation in the United States. Levered free cash flow at $374.38M vs. enterprise value at $2.55B (implies a LFCF/EV ratio at 14.68%).
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
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