Betting on Demographic Trends Only Looks Easy

When the government announced last week that a record 51.7 million American children will be in school this fall--breaking a record that had held for 25 years--dollar signs undoubtedly flashed in some entrepreneurial eyes.

The report is a reminder that a new demographic boom is upon us, the “echo” of the post-World War II baby boom: Their children now are crowding into the preteen and teenage groups, with tremendous implications for the economy.

The kid explosion is all around us, of course, but there has been so much coverage of the “graying of America” as baby boomers and their parents age that the new youth wave has been largely ignored.

Yet the numbers are huge. Consider: The Census Bureau estimates that Americans ages 5 to 17 will total 53.7 million by 2005, up 19% from 45.3 million in 1990. That would be the same percentage growth as in the over-65 age group, which is expected to expand from 31.2 million people in 1990 to 37 million by 2005.

For investors, these concurrent demographic waves--surges in the numbers of young and old--would seem to offer enriching possibilities over the next decade. If you can figure out what a large and growing population is willing to spend money on, after all, you might be able to get ahead of the curve and cash in as those dollars begin to flow in earnest.

Investors who foresaw the current mutual fund mania, for example, could have purchased shares in fund giant T. Rowe Price Associates for as little as $3.63 in 1990. The stock has since risen sevenfold, to $29.50 now on Nasdaq.

Similarly, baby boomers’ ongoing love affairs with golf and with big motorcycles have helped lift club maker Callaway Golf from $2.25 a share in 1992 to $31.63 today, and Harley-Davidson from $11 in 1992 to $41.88 now, both on the New York Stock Exchange.

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Admittedly, examples such as those make age-trend investing look too easy. It can be far tougher than that to score big by trying to ride demographic waves.

The graying-of-America trend, for instance, has been in place since 1980 and has been one of Wall Street’s most-discussed themes. Plenty of research reports were written in the early 1980s touting hospitals and nursing homes as sure bets for long-term investors, given the aging population.

Yet shares of Beverly Enterprises, the nation’s largest nursing-home operator, today are half their 1980s peak price of $22.50, reached in 1986. What happened? The industry’s heavy dependence on federal Medicare and Medicaid payments, especially in the 1980s, left it vulnerable to Uncle Sam’s penny-pinching (although that may sound like an oxymoron).

Nursing homes “are a great demographic play, but every time we get excited about it [as investors], the government sticks a knife in its back,” says James Goff, manager of the Janus Enterprise stock fund in Denver.

Goff’s attitude toward the demographic mega-trends is that they can be beneficial to many companies but that they simply aren’t enough. “It’s more important to me that a company be in a good business and have a strong franchise,” he says. Excellent management and execution, he notes, can overcome macroeconomic problems in an industry, while poor management or poor execution may limit a company’s ability to benefit from even the most powerful mega-trends.

That said, some big investors say they are nonetheless excited about the moneymaking potential in industries that cater to the needs of the developing youth boom.

Ron Baron, manager of the Baron Asset stock fund in New York, is a fan of Oakbrook Terrace, Ill.-based DeVry Inc. ($45 on Friday, NYSE), the chain of technical training schools. He expects a growing share of high school graduates to turn to technical schools as the traditional college education becomes too expensive for many families.

Likewise, Baron owns a big stake in Owings Mills, Md.-based Youth Services International ($21.88, Nasdaq), which operates reform centers for troubled kids. The societal downside of the coming surge in the teenagers, Baron notes, is that the group is increasingly involved in serious crimes that demand serious punishment and reform efforts.

From purely a consumption point of view, there are plenty of potential company winners as parents and relatives spend more on young children and as teens spend more on themselves.

Eric Miller, investment strategist at Donaldson, Lufkin & Jenrette Securities in San Francisco, wonders about the long-term prospects for athletic-wear makers like Nike Inc. ($107.38, NYSE) if they can capitalize both on the youth wave and on aging but still physically active baby boomers.

Likewise, retailers that target the youth market could see a renaissance. Already this year chains such as Claire’s Stores ($33.63, NYSE), Pacific Sunwear ($21.75, Nasdaq) and Wet Seal ($32.25, Nasdaq) have seen their stocks rocket on expectations of continued healthy sales.

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The big risk with those retailers (and even with Nike), however, is that they are subject to Americans’ fashion whims. God help the retailer whose clothes teens suddenly decide are uncool.

Partly for that reason, some pros stick with more conservative plays. George Mairs, manager of the Mairs & Powers Growth stock fund in St. Paul, Minn., said he recently added to his stake in Minneapolis-based Jostens Inc. ($19, NYSE), the leading producer of class rings and school yearbooks. “With high school classes growing again, this looks like a very attractive issue to us,” Mairs says.

Finally, if you want a good mystery to unravel, try this: Which industries, and companies, will be the big losers as the 25-34 age group shrinks over the next 10 years, even as the numbers of kids and older people soar? Some Wall Streeters warn that home builders, many retailers and perhaps auto makers will be hurt as that key consumption-oriented age group is downsized.

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Two Booms, One Bust

The story of the U.S. population over the next 10 years is two booms and one bust: The numbers of children ages 5 to 17 will soar, as will the over-45 group. But the number of 25-to-34 -year-olds is shrinking dramatically. U.S. population by age group, in millions:

Note: 2005 projections are mid-range estimates based on varying assumptions about fertility rates, life expectancy and immigration levels.

Source: Census Bureau