Bet on Biomet
05/07/2004 12:00 am EST
“The 2004 election year rally is about to begin," says Gary Alexander , who offers an analysis of market performance during the second half of election years. He also offers a favorite stock to benefit from this expected strength, as well as from long-term demographics
"Don't jump into the bearish camp. Rather, investors should get ready for the real election rally:
Fact #1: In 73% (19 of 26) of the election years since 1900, the Dow rose from May 1 through election day, compared to rising only 56% of the time in non-election years. In the average election year, the market rose 5.8% from May 1 to October 31, compared with only +0.9% in non-election years.
Fact #2: It gets even better when you measure from June 1 to the end of the year, in election years. Ned Davis Research looked at the Dow in all election years since 1900 and tells us that the Dow fell by an average 0.75% from January 1 to May 31 in election years, but then soared by an average 10.68% from June 1 to year-end. That would take us to an 11,500 Dow.
Fact #3: Election year gains are 10% larger (14.7% vs. 4.2%) if the incumbent wins, but the June-December gains are still 10% better than the January-May gains either way–whether the incumbent or challenger wins.
Fact #4: Market leadership changes from tech stocks in pre-election years to blue chips in election years. In every pre-election year since 1979, the more speculative growth stocks grew the fastest–hence the superior performance of NASDAQ (+50%) over the S&P (+25%) last year. In election years, however, the reverse is true. The more 'boring' stocks do better in election years, while the tech stocks tend to stabilize or go down.
"The likely reason for this May-to-December gain in most election years is that the market hates uncertainty. The primary process in February and March is a time of fermenting the candidates into nominees. Once the likely slate is known, the market can anticipate the conventions and then…happy days are here again.
"Meanwhile, I would note that investing in a stock is far more than investing in a piece of paper, or even a business. It really is about investing in people, and a dream of a better world, as envisioned by those people. In that light, Biomet (BMET NASDAQ) is one great company off the beaten path that is doing business right. Biomet was founded in 1977 by a group with a vision. In its first full year, the firm had sales of $17,000–and a net loss of $63,000. A quarter century later, in fiscal year, 2003, Biomet was among the leaders in sales of orthopedic equipment, with sales of $1.4 billion a year, and no debt.
"Biomet has one of the strongest balance sheets in the orthopedic industry, with no long-term debt, $418.6 million in cash and investments and shareholder equity of $1.3 billion. This cash flow has allowed them to make this many strategic acquisitions. They also bought back two million shares this fiscal year. Since the end of 2001, they have bought back $436 million in shares. Since 1978, Biomet has notched 26 years of record sales and earnings. Over the past 15 years, Biomet’s net sales increased at a 19% compounded annual growth rate. I also like Biomet best because its main competitors, Stryker and Zimmer, each have $19 billion in market cap–about twice the size of Biomet. But Biomet is the only company, which can brag of a top-4 market position in the US in all seven major product lines.
"I want to hold this stock for a long time, partly because the people involved in the founding of the company are still only 52 to 62 and will be at the helm for at least another decade. As they (and I, and the Baby Boomers who follow us) age, the medical-device market will grow to be one of the strongest healthcare sectors. In addition, almost half of the nearly 600,000 joint replacements in the US in 2002 were for people under 65. In the 1980s, the percentage of recipients under age 65 was only 20%. It’s pretty rare for any quartet of innovators to stay friends and partners for over 25 years. But the four founding fathers of Biomet are still on the job, running one of the greatest success stories in America. Follow their dream, down the beaten path, and buy shares in Biomet."