Great Financial and Economic Problems and Great Fortunes to be Made
Companies / Investing 2009 Feb 09, 2009 - 06:05 PM GMTBy: Q1_Publishing
“Peak oil, my a**. I've got hundreds of millions of barrels of the stuff in the Gulf [of Mexico]. We know where the oil is…we just can't get to it. I can't even get a contractor that can do the work to take my call.”
That's what an oil company executive told me (with a Texas drawl and an arm around my shoulder for balance) a little over three years ago.
At the time oil was $60. There was no telling how high it could go. The aged scotch was flowing in celebration of good times - and even better times to come.
The conference was in New York City, but a few hundred oilmen from across the country came to celebrate, swap stories, and complain. About 9 out of 10 people in the room were wearing a three-piece suit and cowboy boot combination. Your editor was just another face in the crowd. But I was a face with a lot of questions and looking for a lot of answers.
Good Companies and Great Stocks
It was a good time. More importantly, it was a good place to start. I wasn't going to jump in and start buying away after a single man's certainly somewhat exaggerated tale. But he had an idea and one which made sense. So I delved a bit deeper.
It turns out our new friend wasn't the only person having problems tapping into his deep sea oil. Practically every oil company was. The deep sea oil service sector was backed up for years. Some companies had crews and equipment booked through 2011 (this was 2006).
“Clearly there are some big problems, but who had the solution? That's where I want to have my money,” I thought.
It turns out not too many companies did have a solution. There are four companies which made up 87% of the deep sea oil service market. It's a small club and the companies in it had huge “moats.”
The industry was doing exceptionally well too. The proof was the in the margins. Operating margins, one of the best indicator's of a company's true health, were steadily growing wider. Basically, these companies were getting more profit for every new dollar in sales. When sales are growing at a 30% clip, you can bet earnings are growing even faster.
We see great companies all the time though. Not all of them are great stocks to own. Acergy (NASDAQ:ACGY) , one of the four in the club, was underpriced considering it was booked out for years and steady profit growth was pretty much assured by customers like ExxonMobil and BP willing to pay any price for its services. This was a great company and great stock.
It returned a 150% in the next year and a half or so. Now, the situation has changed quite a bit. A few years, hundreds of billions of dollars in capital investment, and economic downturn have relieved a lot of the problems faced by the oil industry. There is, however, a similar situation (and probably even more profitable) forming in healthcare.
Ripe for Innovation
The healthcare industry is facing huge problems. Just look at the United States for proof. Between 2000 and 2007 personal income rose 23 percent and healthcare insurance premiums soared 98%. The U.S. spends twice as much on healthcare per person than anywhere else in the world. Yet, the U.S. isn't even in the top 30 countries when it comes to life expectancy.
We could cite stats all day, but you get the point. Basically, the U.S. healthcare system is outdated and ripe for change (change can be good).
Dr. Jason Hwang of the Innosight Institute says, “Disruptive innovations, like we've seen in other industries can bring complex and expensive healthcare products to greater levels of affordability and accessibility.”
I agree completely. There's a lot of room for improvement across the entire sector. Below are just three growing trends which are starting to change healthcare:
One Size Fits All – The era of mass-marketed drugs is coming to an end. Big Pharma built itself on sales of blockbuster drugs. The likes of Lipitor and Enbrel ($14 billion and $4 billion yearly sales, respectively) have led to huge profits for their Big Pharma developers.
That's all starting to change thanks to personalized medicine. Basically, you'll know whether a drug will be helpful before you even take it due to personalized medicine. Managed Care magazine states, “Typically, a drop of blood, saliva, or tissue used in genetic tests can distinguish between patients who will benefit from drugs from those who will suffer adverse effects or have no improvement.”
It's the next step up. As a result, more drugs will get approved (safety/side effects will be less of an issue) and there will be more competition for each customer. Also, doctors won't have to write unnecessary prescriptions.
The one size fits all drug development and marketing strategies are on the verge of extinction. Big Pharma is in for some big changes.
Visa or MasterCard – Healthcare is a weird business. At a hospital, no one knows what the bill is going to be. You don't know. You're insurance doesn't. The hospital doesn't either.
There's a lot to be considered before reaching a final tally. How long, any complications, whether your insurer has a deal with the provider, etc?
Once a price is finally determined the process gets even more inefficient. The bill is mailed from the hospital to your insurer who then bills you. There's a lot to process. It costs billions of dollars in time, postage, and paper. And it's all unnecessary.
Automation is going to speed up all these processes, save billions of dollars, and provide all the costs and billing info in near real time. Then you'll have to pay at the point of purchase, just like most everything else in the world.
The Choice is Yours – In the U.S., for most people, there aren't too many options when it comes to healthcare (this is part of the problem, but that's a topic for another day). If you need surgery, you go to the hospital. If you've got insurance, you go to one in your insurer's network. It's a system with limited choices.
That too is changing. There is one quickly growing trend which does provide you a choice of provider, medical tourism. It's really come a long way in the past few years. Harvard Medical School goes as far to say it “is now commonplace.” It gives patients (consumers) choice. More and more of them are choosing to leave the U.S. for care of similar quality for 30% to 50% less cost. And there are quite a few brokers willing to help medical tourists do it – for a price, of course.
Again, those are just three growing trends rapidly changing the face of U.S. and global healthcare systems. There's a lot more on the way. The healthcare systems around the world have a lot of problems. It's going to require some changes and innovations to get them righted. I can't help but get excited because, as the oil exec showed us, with change comes opportunity.
A Great Fortune
As far as I'm concerned, the bigger the problem -the bigger the opportunity. Considering the size and importance of the ones facing healthcare today, the rewards will be great. The companies who can find, develop, and market the solutions (and investors who get behind them early) stand to do very well in the years ahead.
You've got to realize though, when I was at that oil conference, we were right in the middle of the oil boom. However, the combination of a good idea, strong rationale, and a disciplined investing approach (you've got to sell when a stock moves too far against you) worked out reasonably well.
When it comes to healthcare now, we're still in the early stages of this boom. The problems run deep and we've got at least a five to ten year run ahead of us.
There's an impending crisis in the U.S. and global healthcare system coming. We all know it. But there are lots of smart, entrepreneurial people putting the solutions together as we speak.
In the end, great problems require great solutions and great fortunes will be made in between. I'm not going to sit here and tell you everything is great, but there is some greatness out there. You've just got to know where to look.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
P.S. Just to let you know, I'll be attending a conference this week with AstraZeneca (NYSE:AZN), Bayer (XETRA:BAY), Pfizer (NYSE:PFE), Proctor & Gamble (NYSE:PG), Merck (NYSE:MRK), and dozens more.
This isn't your average investor conference though. It costs about $1,900 to attend. I'm not trying to complain, I just want to explain the high cost keeps a lot of people away and promotes a good bit of candor from the companies because it's mostly industry insiders.
It's just another way to get the “inside” edge in getting to know what these companies are doing. More importantly, we'll get to know their biggest problems and who is providing the solutions. I'll let you know what I find in an upcoming Prosperity Dispatch .
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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