NEW YORK (MONEY Magazine) -
Track the big spenders. Baby boomers account for more than half of U.S. spending, and the older they get, the deeper their pockets.
Those over age 50, who make up only 12 percent of the total population, will account for more than a fifth of total U.S. spending in 2005. As more boomers approach retirement, forecasters expect a huge bump up in certain kinds of expenditures.
Two that should see the biggest jump are travel and health care. In 2003, travelers ages 55 to 64 ponied up $15 billion for vacations, spending 40 percent more on average than other age groups. People 50 and older account for more than half of all health-care spending. And another boomer reaches the big five-oh every seven seconds.
National health-care spending, which hit nearly $1.8 trillion in 2004, will increase as a percentage of GDP by 22 percent over the next 10 years. For that the health-care industry can thank the boomers, who are just beginning to enter the time of their lives when drug, hospital and other expenditures rise dramatically (see the chart at right).
Picking winning companies here isn't as easy as it might appear. With power in numbers, the boomers could put pressure on prices, making new medical developments less profitable for some companies.
So consider capturing the broad opportunity with the Vanguard Health Care fund (Research), which invests in all areas of the industry and has a 0.28 percent expense ratio. Manager Ed Owens has racked up a 19 percent annualized return over 15 years, putting the fund at the top of its category.
If its $25,000 minimum is too steep, try T. Rowe Price Health Science fund (Research) with a more reasonable $2,500 minimum (but higher 1 percent expense ratio). Manager Kris Jenner is a physician by training, and over the past five years his fund's average 7.4 percent return beat 71 percent of its peers.
If you invest in individual stocks, consider Amgen (Research), one of Jenner's top holdings. Amgen has a dominant position in the cancer marketplace thanks to two drugs that alleviate side effects caused by other therapies, including chemotherapy.
Cancer treatment, unfortunately, looks to be a high-growth industry as the boomers age. People over 55 represent 76 percent of all diagnoses. Over 1 million new cases are expected in 2005, and cancer has surpassed heart disease as the leading killer of Americans under 85. Amgen shares aren't cheap: They trade at 22 times estimated 2005 earnings, compared with the average health-care stock's 18.
But that's still cheaper than the other mature biotech giant, Genentech, which trades at 43 times earnings. And Amgen has posted average earnings growth of 20 percent over the past 10 years; analysts expect more of the same.
"As people get older, they lose interest in mountain climbing or skiing," says Mark Greenberg, the manager of the AIM Leisure fund. So where will aging boomers head for fun? Vegas, baby!
Casino and other gaming companies, which make up 15 percent of the fund's holdings, have been on a winning streak, and Greenberg expects that to continue. After all, older tourists, which Vegas keeps getting more of, stay longer and spend more. In 2003, three-quarters of the city's visitors were over 40; and they budgeted a third more cash than younger visitors to play the tables and slots.
Greenberg likes Harrah's Entertainment (Research) as the best way to bet on Las Vegas and the gambling industry. The company runs 28 casinos in Las Vegas, Atlantic City and other parts of the country and will soon add Caesars Entertainment to its portfolio.
"They know their customers better than any casino company in the world, and they know the boomers are coming," says Greenberg.
At $69, shares trade at a P/E of 19. Earnings growth is expected to average 15 percent over the next five years. Greenberg's fund owns $60 million worth of Harrah's shares. He started buying in 1998 at $15 a share and believes that the stock could hit $125 in the next five years.
Next: Strategy 2: Work the brain drain