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Inside the Market Why it’s time to bet on geezers (especially if you’re an income investor)

Make way for the geezer portfolio.

Since the start of the year, there has been a notable bounce in the stocks of several Canadian companies linked to, um, the golden stage of life.

Consider the retirement-home operator Sienna Senior Living Inc., up nearly 20 per cent since January. Or cemetery owner Park Lawn Corp., which has risen 23 per cent. Or long-term care provider Extendicare Inc., a 28-per-cent gainer. Even Chartwell Retirement Residences Inc., not ordinarily the most exciting of stocks, has climbed almost 9 per cent.

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Coincidence? Maybe. But the simultaneous jumps may reflect an outburst of interest in stocks that are insulated from geopolitics and possible recessions. The slow-motion aging of the Canadian population is the rare trend that investors can confidently project years into the future.

All these stocks are bets on that inevitable fact of life. They are predictable in other ways, as well. New technology is unlikely to disrupt their underlying businesses. Even a brutal recession wouldn’t dampen demand for their services.

Admittedly, there is a dark side to this apparent stability. None of these stocks is obviously cheap. Each of their underlying businesses demand heaping amounts of capital. They are expanding, but growth, apart from acquisitions, is typically slow. In some cases, notably when it comes to providing long-term care for residents with significant nursing needs, they depend on the whims of government regulators.

Still, it’s easy to see the appeal, especially for investors looking for steady income. Sienna, Chartwell and Extendicare all boast yields above 4 per cent, while Park Lawn offers a 1.6-per-cent payout along with the prospects for growth.

If that sounds attractive, buying a diversified portfolio of these stocks is not a terrible idea. Better, though, may be applying a discriminating eye.

Extendicare, for instance, offers a tempting yield of nearly 5.9 per cent, but must manage a high level of debt. In addition, its focus on long-term care means it operates in a heavily regulated environment, where even minor swings in government funding can have big effects on the bottom line.

Investors should not expect much in the way of immediate share-price gains, according to Douglas Loe, an analyst at Echelon Wealth Partners in Toronto. He has a “hold” rating on the stock and a target price of $8.25, pretty much where the shares are now trading. However, he notes that the company’s dividend yield looks attractive relative to its peers, and says “upward price momentum could ensue” if the company continues to make progress in coming quarters.

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Sienna Senior Living offers more immediate prospects for gains. It operates retirement residences, which are less regulated than long-term care facilities and can therefore generate higher profit margins. Chris Couprie, an analyst at Canadian Imperial Bank of Commerce, labels it an “outperformer” and has a price target of $20.50 on the stock, compared with its current level around $18.85.

Certainly, Sienna faces its own challenges, including a flood of new retirement accommodation streaming into the market.

“Units under construction from the top 15 operators alone exceeds 5 per cent of the inventory in Ontario and Alberta, and just under 4 per cent in Quebec,” Mr. Couprie writes. “Nationally, annual demand has typically grown at just under 4 per cent, suggesting that occupancy challenges in certain markets could persist as new supply is absorbed.” Still, he is confident the added units will eventually be absorbed by an aging population.

Chartwell Retirement Residences, the largest seniors’ housing operator in Canada, will feel some pressure from the building boom, but should be able to prosper in years to come, according to Troy MacLean, an analyst at Bank of Montreal. He has an “outperformer” rating on the stock, which he calls a “long-term play on the grey tsunami.” His $16-a-share price target is well above the stock’s current trading range around $14.90.

“Our positive thesis is based on the company’s attractive valuation,” he writes, as well as the positive outlook for the sector, where the key demographic segment is growing at more than 3 per cent a year.

Another sector experiencing slow but steady growth is funeral services. Park Lawn, which operates cemeteries and funeral homes in Canada and the United States, is seeking to capitalize on that trend through acquisitions. It recently bought businesses in Denver and St. Louis, and the relatively unconsolidated funeral industry offers plenty of additional room for deal-making.

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“With a balance sheet that remains the most flexible in the sector and an active external growth pipeline, we have full confidence in management,” writes Johann Rodrigues, an analyst at Raymond James. He has a “strong buy” rating on the stock, with a $32 price target. It is now trading around $28.40.

The demographic argument for all these companies is intriguing, but investors should remember that valuation is what ultimately matters, says Stephen Takacsy, president of Lester Asset Management in Montreal. What is notable about the current period, he says, is that “there are some good, reasonably priced companies on the Toronto Stock Exchange that benefit from the aging trend.”

His company owns shares in Sienna Senior Living and Park Lawn. It is also a shareholder in three other companies that stand to benefit from a growing number of older people.

One is Savaria Corp., a Quebec maker of personal mobility devices ranging from home elevators to wheelchair lifts. Another is Centric Health Corp., which runs a specialty pharmacy service that caters to seniors centres. Finally, there is K-Bro Linen Inc., an industrial laundry firm that serves both the hospitality industry as well as hospitals and senior centres.

"Each of them is different, but they’re all buys at these levels,” Mr. Takacsy says. “If you want solid businesses that are going to be around in 20 years, they’re good investments.”

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