Six months ago I wrote about the investment opportunities in companies specializing in home health care and hospice services in the column, "Investing in a Touchy Subject." Today I'll review what's happened since then and consider the trajectory for the companies discussed: Chemed (CHE), Amedisys (AMED) and Gentiva Health Services (GTIV).
In the past six months, the stock prices of these companies have risen about 23%, 25%, and 100%, respectively. As good as this performance has been I think a continuation is probable (I'll expand on why later).
The long-term performance of each has been mixed. The two smaller companies, Amedisys and Gentiva, are trading at about a third and a half of their all-time highs, respectively. Amedisys hit its all-time high of about $64 in July 2008, fell about 50% in the post-Lehman crisis market selloff, rebounded to about $60 in April 2010 and had steadily declined to the $10 range in April 2013. It has been steadily rebounding since.
Gentiva had a very similar trajectory, hitting its all-time high in late 2008, also losing about 50% in the post-Lehman market environment, rebounding to a new high in April 2010, and then losing 90% of its value into late 2011, from which it has been rebounding since.
Part of this volatility is driven by the fact that these are small-capitalization stocks; therefore, they haven't had the institutional interest necessary to provide liquidity and reduce volatility. The market caps of both are growing, however, and have roughly doubled in the past six months, from about $350 million to about $700 million each, due to stock price appreciation coupled with an increasing number of shares outstanding.
Chemed, on the other hand, with a market cap of about $1.8 billion, up from about $1.5 billion six months ago, has had a considerably better run. The small-cap's stock price has steadily increased since the post-Lehman market bottom, tripling during that period. If the current rate of appreciation continues, the market cap will exceed $2 billion before year's end and the company will become a mid-cap stock, which will make it eligible for an even broader group of institutional investors.
The narrative concerning all three companies has both a defensive and growth angle to it.
On the defensive side, as I've addressed several times concerning grocery stores and food producers, the services provided by these companies are going to be required by all of us at some point; that means a steady stream of customers, regardless of economic activity.
Unlike grocery stores and food producers, though, these companies are not income generators. Chemed pays a dividend yield of only 0.8%, and Amedisys and Gentiva pay none. Thus, they are not investments but may be considered defensive speculations simply because the consumption of their services is much less affected by economic activity than most of the rest of the publicly traded equities available. It is even logical that demand for the services provided by these companies increases as economic activity fades.
The growth angle is a demographics play. The aging demographic profile of the U.S., and especially the bulge of the baby boom generation, means that the stream of customers for the services provided by these companies is going to be steadily increasing over the next 10 to 15 years. Further, the increasing cost of institutionalized health care is going to cause many families to try to manage senior care within their families and with the help of in-home care providers.
Although the principal reason for this shift will be mandated by simple income and cash flow considerations, it will be supported as well by the attempt by families to protect the residual asset base and resulting inheritance they may receive by managing end-of-life services within the family, rather than externally.
Anyone who has faced the prospect of securing institutionalized health care or end-of-life services for a family member has learned that the entire industry (along with associated professional services and government regulatory schemes) seems to be predicated on extending the lives of individuals until their assets have been fully transferred to the service providers, and to facilitate that transfer as rapidly as possible.