A New Trend Gets Rolling
10 Revolutionary Stocks
Hain Celestial Group (HAIN)
Today we start with a question.
Which industry spent the most money on lobbying in the U.S. last year?
Hint: It's the same industry that's topped the list over the past decade.
To make it a little easier, I'll make this a multiple-choice quiz, giving you the top 10 industries in alphabetical order.
Manufacturing and Distributing
Oil & Gas
Securities & Investment
My first guess might have been Insurance, or Oil & Gas or Securities. We all know those are big industries that have a lot of clout in Washington. But no, the biggest spender of all is the Pharmaceuticals/Health Care industry, which spent $177 million in 2014. (Second was Business Associations at $120 million and third was Insurance at $112 million.)
And why do the companies in the Pharmaceutical/Health Care industry spend so much?
Because the government has enormous power in the area of health care, and it's increasing!
From setting guidelines on how drugs are tested, to determining which ones are approved, to setting reimbursement policies for various Federal programs (Medicare, Medicaid, SCHIP, the Veteran's Administration), to regulating labels and, most recently, implementing the Affordable Care Act (ACA), the government has a huge influence over our health care system.
Thus it makes perfect sense that the industry would spend heavily to influence the results.
But the winds of change are blowing, and my sense is that some of these health providers and pharmaceutical companies are going to get hurt.
You might say it started with the implementation of the ACA, also known as Obamacare. The primary goals of the ACA are to expand access to health insurance, improve quality of health care by shifting focus from treatment to prevention, and reduce costs.
Until now, the U.S. has had the most expensive health care system in the world, yet we weren't the healthiest people, so obviously, something was wrong!
It's too early to say that the ACA is working fine, but it appears that overall, the ACA is moving trends in the right direction.
Just two weeks ago, in fact, Gilead Pharmaceuticals (GILD) plunged 14% in one day when Express Scripts, our country's largest pharmacy benefit manager, dumped the company's hepatitis C drug Sovaldi, in favor of a cheaper drug (newly-approved Viekira Pak) from AbbVie.
The reason for the switch is simple from Express Script's perspective; the company is working to reward its shareholders by reducing costs. And it's working hard to do this because the ACA is putting pressure on the company (and the whole health insurance industry) to stop, or even reverse, the long uptrend of health insurance premiums.
So what's one obvious place to reduce costs? Given that people in the U.S. spend nearly $1,000 per year on pharmaceuticals-which is close to 40% higher than the second-highest country on the list, Canada-one big target is drugs.
Until now, insurers in the U.S. were paying $84,000 for a 12-week course of Gilead's Sovaldi (or $1,000 per pill), while the cost in Germany is $66,000 and the French Ministry of Health negotiated a price of $51,000.
So Express Scripts' decision to shift to a cheaper drug is a sign (at least to me) that "we're not going to take it anymore."
And as a student of the market, where trend analysis pays dividends, it seems to me that this is very likely to be the beginning of a major trend!
Today, the victim is Gilead, but tomorrow it will be somebody else, perhaps one of these five big-ticket drugs.
Soliris, made by Alexion Pharmaceuticals (ALXN), which costs $536,629 annually per patient.
Naglazyme, made by BioMarin Pharmaceuticals (BMRN), which costs $485,747 annually per patient.
Kalydeco, made by Vertex Pharmaceuticals (VRTX), which costs $299,592 annually per patient.
Cinryze, made by Shire (SHPG), which costs $230,826 annually per patient.
Or Acthar Gel, made by Mallinckrodt (MNK), which costs $205,681 annually per patient.
(Note: Many of these companies benefited from the Orphan Drug Act-thanks to lobbyists-another factor that helps make our health care so expensive.)
But I don't recommend selling these stocks wholesale. Looking at the charts, I see that the only one in trouble now is Shire (SHPG), which fell off a cliff in mid-October after its deal to be acquired by AbbVie fell apart as regulators cracked down on tax inversion deals.
Still, I do think the industry has had a great run, and is thus ripe for a consolidation phase, and I'd welcome a period of cooling off, especially if it's accompanied by falling-or at least stable-health care costs.
Furthermore, if the ACA really starts to have a significant effect, we may see a growing shift in our culture toward healthy living, a shift that could result in dramatically lower demand for many of our health care treatments and drugs. And that's part of the story of today's Revolutionary Stock!
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10 Revolutionary Stocks
Moving on to my series of 10 Revolutionary Stocks, it's time for number four, beginning with this anecdote.
Christmas dinner this year was once again at my house, somewhere after noontime. Thanks to my father-in-law, long-standing tradition dictated that the menu was once again grapefruit, English muffins, homemade baked beans and sirloin steak, which I grilled outdoors.
But in recent years, a new dish has found its way onto the menu. It's a frittata-mainly eggs and vegetables-designed to satisfy the increasing numbers of people who are pursuing a vegetarian diet.
Which includes me. But instead of calling myself a vegetarian, I simply say that I always try to make the best choice. Which means basically favoring vegetables, fruits and nuts and whole grains, getting protein from fish, eggs and cheese, and avoiding as much as possible things like meat, sugar, fried foods, white flour and processed foods.
I do this above all for my health, and I think it's working, as I take no prescription drugs, I don't get sick, and my weight is the same as it was when I graduated from high school.
Now, I don't expect most Americans to be as disciplined (to use a polite word) about healthy eating as me, but I do see increasing numbers of Americans trying to improve their eating habits (and exercising more too). In fact, obesity has finally reached a plateau in this country, and I'm optimistic that as this trend continues, this slow revolution will lead to better overall health and less demand for drugs and expensive health treatments.
And I expect one winner in this revolution to be:
Hain Celestial Group (HAIN)
Hain Celestial is the leading distributor of natural and organic food products in the U.S., with $2.3 billion in revenues over the past 12 months.
The company's brands include Celestial Seasonings, Terra, Garden of Eatin', Health Valley, WestSoy, Earth's Best, Arrowhead Mills, DeBoles, Hain Pure Foods, FreeBird, Hollywood, Spectrum Naturals, Spectrum Essentials, Walnut Acres Organic, Imagine Foods, Rice Dream, Soy Dream, Rosetto, Ethnic Gourmet, Yves Veggie Cuisine, Linda McCartney, Realeat, Lima, Grains Noirs, Natumi, JASON, Zia Natural Skincare, Avalon Organics, Alba Botanica and Queen Helene.
In 2014, the company added two more brands to its family.
First was Rudi's Organic Bakery, based in Boulder, Colorado. Rudi's is the leading organic and gluten-free baker in the U.S., and also sells in Canada.
Second was Tilda, founded in the U.K. in the 1960s to serve the food needs of Asian immigrants. The company's core product is basmati rice, but it has diversified into other rice products and now sells far beyond the U.K. in the Middle East, India, North Africa, continental Europe, the U.S. and Canada.
Revenue growth at Hain Celestial in each of the past four years has ranged from 21% to 26%, while earnings growth has ranged from 25% to 37%. For 2015, analysts are looking for 21% earning growth and for 2016, 14%, but both numbers are probably conservative, given that Hain is likely to acquire more brands in that time.
And those brands could come from anywhere in the world! Today, 60% of Hain's revenues come from the U.S., while 30% come from the U.K. and 10% from the rest of the world.
The stock does not yet pay a dividend; the company is still in good growth mode, as illustrated by its chart.
HAIN has been trending higher for years, reflecting the company's fundamental growth, and that uptrend accelerated in the second half of last year, kicked off first by an excellent earnings report in August and then the acquisition of Annie's (previously traded as BNNY) by General Mills (GIS).
Short-term, therefore, HAIN might be a bit high, and if you wait long enough you might be able to get it on a pullback to its 200-day moving average, currently at 48.But the stock may be even higher then!
So, if you want to simply buy here and hold for the long term, I think that will work out if you're a very patient investor.
But if you want regular updates on the stock, you'll find them in Cabot Top Ten Trader, where Mike Cintolo originally recommended HAIN back in September.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Wealth Advisory
Publisher, Cabot Wealth Advisory