The oldest baby boomers are now 56, and this aging demographic bulge, to use an unkind word, means that surging demand for things like hip replacements, Viagra and Caribbean cruises can't be far off. The problem facing investors is that Wall Street saw the "age wave" coming and long ago snatched the first opportunities. Nursing-home stocks, for example, had a torrid run in the early 1990s. But the industry overbuilt, and the stocks have lagged ever since. Financial-services stocks are a similar story. Wealth managers will no doubt be in increasing demand as a prosperous generation tends its lifetime savings and trillions of inherited wealth. But the investment boom around this trend started in the '80s, when the mutual-fund business exploded.
You can still profit from this powerful demographic force, which will run for decades. Indeed, the stock market's steep fall over the past two years has made some traditional age-wave investments cheap again. Pharmaceutical stocks like Pfizer and Wyeth, and financial services stocks like Citigroup, despite its Enron-related woes, and Mellon all make the cut. The real zip, though, is likely to be in less obvious places, and Charles Baird, chairman and founder of the private equity firm North Castle Partners in Greenwich, Conn., believes he has tapped into something big. Baird has invested $800 million in what he calls "healthy living," an industry built around traits that will distinguish the next crop of retirees from earlier generations that just wanted to play a little golf.
"Boomers will not grow old gracefully," says Baird, 49, who should know. "Botox will be huge." In this case, Botox--the wrinkle-smoothing injection--is a metaphor for all kinds of vanity and health products and services that Baird says boomers will want in order to look young and live young into their 70s. These range from organic food and fresh juices to alternative medicines and health spas. Baird's firm owns Equinox Fitness Clubs, Elizabeth Arden Salons Holdings and the Grand Expeditions travel company and has interests in weight control, antiaging therapies and adult education. Healthy living, he estimates, is a $400 billion industry growing 15% annually. "The typical 75-year-old will tell you they'd give up 95% of their net worth to feel 45 again," Baird says.
These aren't easy trends to invest in. Health clubs, golf courses and specialty travel companies tend to be privately owned. Cruise lines are cyclical; casinos are overbuilt; Wal-Mart is crushing the profit margins in vitamins, supplements and health food.
The smartest plays are "adult toys," says Ron Muhlenkamp, manager of the $750 million Muhlenkamp Fund. He owns stock of the recreational vehicle manufacturer Winnebago, which is a play on the second-home trend. For the same reason, he also holds shares of homebuilders Toll Bros., Meritage, Centex, NVR and Beazer Homes. Harley-Davidson is on his radar, though he considers the stock overpriced. Muhlenkamp, 58, who bought his first new Harley when he was 49, notes that many new Harley purchasers are in their late 50s. The average age is 46. A lot of folks want one after they finish with tuition and the mortgage, he says. He likes Polaris Industries, which makes all-terrain vehicles, snowmobiles and Jet Skis, and American Woodmark, which makes cabinets that go in remodeled kitchens.