2018 Investing Trend No. 3: Baby Boomer Beneficiaries

GMP Capital (TSX: GMP) Savaria Corporation (TSX: SIS) Covalon Technologies Ltd. (TSXV: COV) Biosyent (TSXV: RX)

Why We Think This Trend is Going to be Massive

A pig-in-a-python doesn’t necessarily conjure up the most appealing images but that’s exactly the dynamic that the “baby boomer” generation represents when it comes to North American demographics. Indeed, the generation that was born between the years of 1946 and 1964 is one of the largest of all time. As of 2014, in the US alone, approximately 75.4 million baby boomers were alive, a figure only eclipsed by the much younger millennial generation (1981 – 1997) and its 83.1 million. From 1946 – 1964 about 77 million babies were born in the U.S. alone and this had reverberations throughout the economy. Still does. After all, if you’re a business seeking mass appeal, where else are you going to target than the most robust portion of the population. Today, this target remains squarely affixed on the baby boomer generation, and has been joined by the millennials.

Given the age discrepancy between the two, the targeted offerings are, shall we say, rather differentiated. Thing is, it doesn’t take much in the way of deep analysis to derive what’s in demand at this stage of life by the baby boomers.

Perhaps the most obvious area is healthcare. I doubt this needs much in the way of explanation. But consider, bringing this into a Canadian context, seniors, which the baby boomers are fast becoming, currently account for nearly half of our country’s health care costs. And as this demographic continues to age, this percentage is only expected to move higher.

There are of course social implications to this dynamic, especially given our publicly funded system, but this also spells opportunity for new and innovative products that are ideally more effective than traditional practices. The less expensive the better. We expect the appetite to pursue this kind of innovation has only one way to go (increase) and therefore, companies that are aligned with this pursuit are likely to benefit.

Another area that’s set to balloon is that of financial services. According to a CIBC report, baby boomers in Canada will inherit an estimated $750 billion over the next decade or so in the country’s largest ever transfer of wealth. I promise a similar estimate in the U.S. would dwarf this figure. This has all kinds of implications from a financial markets standpoint, but what it boils down to is that those receiving an inheritance of any means are likely to need help. And while we Fools rail against its practices and fee structure, the financial services industry is, for the most part, here to help. Especially with this kind of scenario. Another area then to zero in on as we focus on this demographic is one that we Fools are very familiar with.

Foolish Bottom Line

Healthcare and financial services are but two areas that will benefit as the baby boomers continue to evolve. But for bottom-up stock pickers, they make for relatively easy hunting grounds given they’re more or less hidden in plain sight. Finding the businesses within that will most benefit is where we can best apply our skills and you’re about to uncover four companies that rose to the top of the list as we combed through the Canadian market with this theme in mind.


Our Top Four Small-Cap Stocks Leading the Way in Baby Boomer Beneficiaries

GMP Capital (TSX: GMP)

Why GMP Capital is potentially a Hidden Gem: An out of favour company currently in the process of reinventing itself as a go-to for crypto- and marijuana companies seeking capital.

Headquarters: Toronto, Ontario
Website: www.gmpcapital.com
Industry: Financial
Recent Price: $3.53
Market Capitalization: $271.1
LTM Revenue: $182.0
LTM Revenue Growth: 16.0%
3-Yr Revenue Growth: (13.1%)
Cash/Debt: n/a
Insider ownership: 14.3%
Dollar amounts in millions except for recent price
LTM = last twelve months
Data as of: January 12, 2018
Data provided by S&P Global Market Intelligence

Meet GMP Capital…….

From what the movies might have us believe, often times the best way to catch a criminal is to follow the money. Turns out, in a lot of cases, the same can be said when it comes to investing. And as we stand in front of what could become a veritable stampede of money chasing the burgeoning areas of all things crypto- and marijuana, the trail of bread crumbs leads us directly to GMP Capital.

Here we have a business divided in two. On one hand is a wealth management business, Richardson Securities, that brings relatively stable, predictable, fee based income to the mix. On the other hand is GMP’s legacy capital markets business. A business that’s traditionally lived and died with Canada’s resource sector.

When resources were booming and “investors” couldn’t get enough, GMP’s capital markets business was also booming as evidenced by the $251 million in investment banking fees the company hauled in during 2010. Thing is – in case you didn’t know – resources have been in a multi-year slump. And this has been especially hard on junior resource companies, which are the ones that need outside capital (arranged by GMP’s investment bankers) the most. The $92 million in investment banking fees generated over the past twelve months indicates that the slump continues.

However, not known to let moss grow under their leather shoed feet, GMP’s investment bankers are busy building new roads, so to speak. While still carrying a significant presence in Canada’s junior resource space – something that has increased with the purchase of Calgary’s FirstEnergy Capital – GMP has been carving out a niche especially on the emerging cryptocurrency/blockchain front.

Indeed, at least 50 firms tied to blockchain and cryptocurrencies are set to list on Canadian stock exchanges in the year ahead and GMP expects to garner a big piece of the action. Similarly, though perhaps more established, GMP also stands to gain as more capital flows in the direction of marijuana companies as well.

While the company’s CEO doesn’t expect either to become more significant than traditional commodities, if indeed the scenario plays out as expected, this company’s going to receive a shot in the arm that the market doesn’t currently appreciate. Tack on the potential for commodities to continue to normalize and we’ve a one-two punch in the making that could result in a very significant return given the stock’s still discounted valuation.


 

Savaria Corporation (TSX: SIS)

Why Savaria is potentially a Hidden Gem: This is a small-cap with a big market opportunity, as one of the most significant demographic shifts in the history of North America gets underway.

Headquarters: Laval, Quebec
Website: www.savaria.com
Industry: Industrial Machinery
Recent Price: $18.80
Market Capitalization: $775.5 million
LTM Revenue: $157.3
LTM Revenue Growth: 36.4%
3-Yr Revenue Growth: 25.0%
Cash/Debt: $11.6/$40.4
Insider ownership: 35.13%
Amounts in CAD millions except for recent price
LTM = last twelve months
Data as of: January 12, 2018
Data provided by S&P Global Market Intelligence

Meet Savaria…

As technology continues to advance and services the world over begin to adapt to on-demand, Uber-esque business models, living at home well into old age is becoming more and more possible.

This phenomenon also happens to coincide with the beginning of one of the biggest booms in the older demographic North America has seen in some time.

For instance, in 1965 Canada, the average recorded age rang it at just 25.5 years old. Fast-forward to today, and it’s 40.5 with estimates that it’ll reach 44.2 in 2063. A shift this dramatic has been made possible by the fact that, for the first time Canada’s history, seniors now outnumber children!

Back in July of 2017, there were more than 5.7 million Canadians 65 years of age or older, rising to an expected 13 million by 2063!

For long-term investors like us, those numbers are simply far too difficult to ignore. And that’s where a company like Savaria Corp. comes into play for us…

It’s no secret that, as age creeps in, a decline in mobility typically follows rather closely. This has long been one of the reasons for transitioning to assisted living facilities at the later stages of life. However, now many of the services that were once most easily delivered in these facilities are more widely available in our on-demand, app-based economy.

Living at home longer is now much more realistic, leading to the potential that Savaria could see demand for its in-home mobility offerings really take off.

You see, Savaria is in the business of providing “accessibility solutions for the physically challenged” such as: home elevators, wheelchair lifts, stair lifts, ceiling lifts, van conversions, and more. And, baby, business is a-boomin’.

Booming to the tune of 73% growth in its most recent quarter compared to the same three-month period in 2016. Now, that’s thanks to both organic and acquisition-based growth, but it’s certainly not an outlier.

We don’t expect it to be moving forward either, given Savaria’s incredibly strong balance sheet and its recent foray into the Australian market with the purchase of Master Lifts for CAD$3.1 million back in December.

With financial flexibility and a demographic tidal wave at its back, Savaria is one small-cap we believe is presenting long-term investors with opportunity that’s rather hard to deny.


 

Covalon Technologies Ltd. (TSXV: COV)

Why Covalon is potentially a Hidden Gem: In a market comparably void of biotechnology stocks to the United States, Covalon Technologies gives Canadians a homegrown opportunity for long-term gains.

Headquarters: Mississauga, Ontario
Website: www.covalon.com
Industry: Biotechnology
Recent Price: $5.70
Market Capitalization: $122.5 million
LTM Revenue: $27.31
LTM Revenue Growth: 315%
3-Yr Revenue Growth: 44.4%
Cash/Debt: $4.156/$0.0
Insider ownership: 61.97%
Amounts in CAD millions except for recent price
LTM = last twelve months
Data as of: January 12, 2018
Data provided by S&P Global Market Intelligence

Meet Covalon Technologies…

Here’s a Canadian biotechnology company that has really caught investors’ eyes over the last year or so, and the last four, especially.

With product line-ups targeting three distinct areas of the global health market, Covalon appears to be exposed to multi-billion dollar opportunities in: advanced wound care, infection control and medical device coatings.

If 2017 is any indication, momentum is picking up. Just last month, management announced a record fiscal year. Not only did the company’s top line revenue skyrocket, it also turned a profit, no small feat for a biotech of its size. In this case, it was made possible by a gross margin that ballooned from 70% a year ago to 85% in 2017.

Contributing to this success were numerous product launches during the year and announcements of regulatory approval that opened new doors. The company also brought in revenue from new countries around the globe, something management expects to continue in 2018.

To open the new year, management is expecting to open up sales channels in Latin American markets like Chile and Mexico. And, with a pristine balance sheet, acquisitions are likely in the company’s future as it is working with an advisor to examine strategic opportunities.

Like other companies in our crosshairs, we appreciate when financial flexibility like that is coupled with heavy insider ownership. Since so much at stake for them, as well, we feel that management’s best interests will aligned with shareholders when it comes to play that card.

All-in-all, Covalon Technologies is a worthy entrant to our small cap competition, especially given its exposure to a relatively tiny slice of the Canadian market.


 

Biosyent (TSXV: RX)

Why Biosyent is potentially a Hidden Gem: A lightly followed, and lightly traded company smartly allocating capital and building a portfolio of niche pharmaceutical products.

Headquarters: Toronto, Ontario
Website: www.biosyent.com
Industry: Healthcare
Recent Price: $9.46
Market Capitalization: $137 million
LTM Revenue: $19.871
LTM Revenue Growth: 18.6%
3-Yr Revenue Growth: 20.7%
Cash/Debt: $16.509/$0.0
Insider ownership: 20.7%
Dollar amounts in millions except for recent price
LTM = last twelve months
Data as of: January 12, 2018
Data provided by S&P Global Market Intelligence

Meet Biosyent……..

There may be no more challenging sector in the Canadian market than Healthcare. Much of the sector in our market is comprised of tiny companies that have products that will never see the light of day or generate a dime of revenue due to the strict regulations that exist, even though, upfront, they generally sound incredibly promising.

Yet, though it has its challenges, the rewards associated with investing in the Healthcare sector can be very lucrative. After all, many of the multi-billion dollar behemoths that dominate the U.S. Healthcare space were born out of similarly humble beginnings. We also know that it’s an incredibly important sector when it comes to society in general. An ageing society that relies on this sector for all that this dynamic entails.

Biosyent provides us with a vehicle that helps to bridge the gap that exists between our low level of comfort with the industry in general and the opportunity that exists. Here we have a company, guided by an experienced management team (with a sizeable ownership stake), who’s in the business of either acquiring outright or in-licensing proven pharmaceutical products that are generally too small for the multi-billion dollar behemoths to care about.

The company is structured under four categories: Community and Women’s Health, Hospital, International and New Specialties/Therapeutic areas. Under these categories, the existing product suite, responsible for the company’s revenue base, totals five. In addition, two products are currently seeking Health Canada approval and one, FeraMAX, is looking to expand into international markets.

Organic company growth will be fueled by the existing suite gaining traction, as well as the approval of the two pending products and international success of FeraMAX. We expect however additional products will be added to this mix, and that’s where the real growth will occur.

Because Biosyent is somewhat of a scavenger, seeking more or less orphaned products, it’s unlikely that it will ever become one of the aforementioned multi-billion dollar behemoths itself. But as the existing products become more widely distributed and new products are added to the mix, we expect this company will generate a very nice, relatively low risk return for shareholders over the next three- to five- years.


Iain Butler owns Savaria Corporation and GMP Capital.