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This Healthcare Stock Could Be a Winner For Decades to Come

By Matthew Frankel, CFP® and Jason Hall – Dec 8, 2021 at 2:33AM

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Favorable demographic trends and good management can be a winning combination.

The U.S. population is aging rapidly, and senior housing owner CareTrust REIT (CTRE 3.51%) could be a big beneficiary over time.

In this Fool Live video clip, recorded on Nov. 15, contributor Jason Hall explains to colleague Matt Frankel why he's planning to hold CareTrust in his portfolio forever. 

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Jason Hall: This is CareTrust REIT, CTRE is the stock. This is a pure play. This is a pure play on seniors housing. You make this a little bit bigger here, so you can see this chart right here. This is yellow section here, and a little bit into the blue. This is where CareTrust specifically focuses. The company says that it focuses on this because Danny, one of the things you were talking about is cost of care and quarters and that thing. This is an area where costs are a little bit lower, and that means the addressable market overtime should be bigger.

Matt, you were talking about the demographic trends, the aging trend, the baby boomer trend. The last baby boomer turns 65 at the end of 2029. When that happens, the 65 plus population in the U.S. is going to be around 80 million. It's going to continue growing for at least another five years as gen-Xers start turning 65. Then at some point without continued to current population rates, it's going to be pretty stable for a long period of time. That 80-plus age cohort is going to grow. You start thinking about things like memory care, with Alzheimer's being a major disease of old age. The demographic trend is very big.

Why do I like CareTrust in this? Because there are specialists, and also because they're quite small. CareTrust owns around 230 properties. There are more than 10,000, maybe 12,000 facilities of this type in the U.S. Most of them are not owned by great big companies. Most of them are owned by small individual owners or regional healthcare companies that they might own three or five or 10. Being very small, it's in a great position as an acquirer to consolidate this industry. There has been a lot of consolidation. I think they also have a little bit of a competitive advantage when it comes to finding great operators.

This company came out of Ensign Group (ENSG 3.26%), which is one of the largest operators of these facilities. Its CEO is a co-founder of Ensign Group. He co-founded Ensign group, it's really good at skilled care. He built the portfolio that they took out of Ensign Group. I think that they understand care and that's a bit of a competitive advantage to find the right care partners to avoid some of those bad actors out there that aren't good business operators, and end up cutting corners with care and have problems. Those are the things for me why I like this company. I just want to quickly show the returns. I know I said we're running low on time and I'm taking more time.

You look at since 2015, 15.2% compounded annual growth rate. Then you start looking at it and it's cohort. It's been the best healthcare sector over the past year. Top three the past three-years, second-best over the past five-years and it's not even close. The financial results are there. It's just very well-run. I think at some point you just have to acknowledge the financial results for this good. They know what they're doing, and then they generate really great returns. Matt, tell me why I'm wrong.

Matt Frankel: I've said this on the show before. I'm not interested in owning a pure-play senior housing stock at at the moment.

Hall: I get it too.

Frankel: As far as forever stocks go. There's just too many unanswered questions regarding the future of the senior housing industry at this point, for me, that's why I prefer Healthpeak (PEAK 3.00%), which was way down on the spreadsheet to show it by the way. You told me when I was wrong. But I really don't have much to add other than the trends definitely makes sense for it. It's just the regulatory risk in the senior housing industry and the condition of a lot of the operators, which you've mentioned briefly are scaring me off from just buying a pure-place in your housing company.

Hall: Those are very good reasons because at the end of the day, I think it was Peter Lynch that said, great business and a mediocre industry is a mediocre business. That is the risk. It's a tough industry. It really is.

Jason Hall owns shares of CareTrust REIT. Matthew Frankel, CFP® owns shares of Healthpeak Properties, Inc. The Motley Fool recommends Healthpeak Properties, Inc. The Motley Fool has a disclosure policy.

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