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Penny Stock Fortunes Two MORE Stocks to Own in 2010 Opportunity No. 1: Profit From Our Latest High-Growth Baby Boomer Value Play We’re all but guaranteed that stocks are going to continue to swing wildly for the foreseeable future. And in the process, investors are going to spend most of their time and resources following the market and trying to hang onto what’s left of their money after what’s amounted to a very tough couple years for investors. But while the majority of people spend their time chasing the market, we’ve run across a company that’s ahead of it — and it’s one that could turn your fortunes in a very big way in 2010. This play offers guaranteed market growth in the next few years and a share price that’s currently trading right around the company’s cash balance at the bank. Five Star Quality Care Inc. (AMEX:FVE) operates senior living communities in 30 states. The company was founded in 2000 by the Senior Housing Properties Trust REIT (NYSE:SNH) to run 56 of the real estate investment trust’s properties that had been repossessed from tenants and was spun off to the trust’s shareholders as public shares in 2001. Today, Five Star operates 210 communities with 22,264 units all over the United States, alongside complementary rehab and institutional pharmacy divisions. The company’s senior communities basically fit into one of three broad categories: independent living, assisted living and skilled nursing facilities. Independent living communities let seniors live independently while keeping resources like dining and community centers at close call. Assisted living facilities provide an increased level of medical attention, and skilled nursing facilities — better known as nursing homes — provide a higher tier of medical care. If you think that the senior living business isn’t sexy, you’re dead wrong. An aging baby boomer population and ever-increasing life expectancy here in the U.S. guarantee that the market for senior living communities is due to swell in the coming years. Between 2000–2050, the U.S. Census Bureau expects the population in the United States to increase by 49%. During that same time, the 65-and-over population is projected to increase by 147%, to 86.7 million men and women — a full 21% of the population. Growth in Population Age 65 & Over With healthy occupancy currently in place for most 25 senior communities, it’s clear that aggressive expansion will be necessary in order to keep up with demand. With limited leverage and a highly expandable business, Five 20 Star is one of the best-positioned senior living companies to expand its footprint. 15 Currently, Five Star leases the vast majority of its communities from its former parent company, Senior Housing, and holds the mortgages on the remaining 14.5% of independent and assisted living communities and 4.3% of nursing homes. That mix affords Five Star ownership of a material tranche of its facilities, while still freeing the company’s balance sheet for further acquisitions. 1 Percentage of U.S.Population Over 65 10 5 Source: SeniorJournal.com 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 over, please… PENNY STOCK FORTUNES The relative ease of taking on additional leases and strong business ties to the Senior Housing REIT — Five Star provides 63% of SNH’s rent revenues — are basically a best-of-both-worlds scenario as the company focuses on growth in this environment. And it’s one that the company benefits from on the income statement as well. While competitors often choose to defray the construction and acquisition costs of a senior living facility by selling units to residents, Five Star’s residents rent its units, a fact that’s insulated the company from the impact of the real estate bubble’s burst. Rent income and occupancy rates haven’t been significantly affected by the economy in many of Five Star’s major markets. The company’s return on equity — 13% in its latest quarter — brings in proof positive that Five Star continues to deliver value to shareholders. As a result, UBS is now obligated to buy them back at par value, which actually represents a gain over the recorded book value of the ARS. Despite the presence of ARS on Five Star’s books scaring off some investors, the decision to purchase the ill-fated investments looks solid for shareholders who are just getting into their positions now. As long as UBS, one of the biggest financial services firms in the world, stays in business long enough to redeem the ARS, the deal should result in a one-time gain on Five Star’s income statement. Like any small-cap company right now, Five Star faces the risks of a tough economy and difficult credit market. That is mitigated somewhat by a Nov. 22 filing by Five Star that authorizes the company to sell up to $1 billion in stock and bonds on the open market in the future should the company need to meet its operating expenses. With an appetite for growth, that freedom to generate excess cash is very important for Five Star. Trading at Cash With a share price of $3.50, Five Star is currently a significant value play. The company is essentially trading for cash and short-term investments right now, which means that after FVE-owned properties and other assets are considered, the company is selling for a 12% discount to its book value. Part of the reason for that strong balance sheet position is the debt reduction that the company has been undertaking this year. In the last year, Five Star issued $126.5 million in bonds to increase its balance sheet liquidity amid a tough credit environment. In the months since, the company has already paid off $51.5 million of that debt, sending a strong signal to creditors. And with a trailing price-to-earnings ratio of 3.9 currently, Five Star is also priced 2.9 times lower for its income level than the rest of the health care facility industry. Resistant to Recessions…and Politics It’s hard to find a stock that’s resistant to recession and to politics, but Five Star appears to have skirted both. With the health care storm still going strong in Washington, Five Star’s shareholders should be relieved in that a very small percentage of the company’s revenues come from government-sponsored sources, like Medicare. Five Star Quality Care does incur some government revenues in its institutional pharmacy division, alongside payouts from private health insurers. At present, Five Star’s institutional pharmacy provides just under 10% of the company’s sales — a big enough chunk to appreciate the stable revenue stream, and a small enough chunk to not be overly concerned about what the impact of health care reform could be on our stock. Action to Take: Buy Five Star Quality Care Inc. (AMEX:FVE) for $4.00 per share or less. Ranking the Risks While Five Star does offer significant market growth at a tremendous value, there are risk factors in place that could impact the stock in the future. One of those is the company’s decision to invest $66 million in student loan auction rate securities (ARS) sold by UBS. Auction rate securities were the subject of quite a bit of attention in early 2008 as the auction market that many of these complicated investments traded in failed. 2 Opportunity No. 2: Profit From the World’s Fattest Population Welcome to America, the fattest land on Earth… The media seemingly can’t get over obesity in the United States — from the latest “healthy” option at the nation’s biggest fast-food chains to the latest breaking Two MORE Stocks to Own in 2010 Leanest State Colorado 18.4 Percentage of Obese Adult Population (3-year average from 2005–07 CDC Behamicol Risk Factor Surveillance System data) 20.7 22 24 26 28 Fattest State Mississippi 30.6 31.6 Wash. 24.5 Ore. 25.0 Mont. 21.7 Idaho 24.6 Nev. 23.6 N.D. 25.9 S.D. 26.0 Neb. 26.5 Kan. 25.8 Minn. 24.8 Wis. 25.4 Iowa 26.3 Mich. 27.7 N.H. Vt. 23.5 21.1 N.Y. 23.5 Me. 23.7 Mass. 20.9 R.I. 21.4 Conn. 20.8 N.J. 22.9 Del. 25.9 Md. 25.2 D.C. 22.1 Wyo. 24.0 Colorado 18.4 Utah 21.8 Calif. 23.1 Ariz. 23.3 N.M. 23.2 Okla. 28.1 Texas 27.2 Ala. 27.3 Ill. Ind. Ohio Pa. 25.7 25.3 27.5 26.9 W.V. Mo. 30.6 Va. 27.4 Ky. 28.4 25.5 Tenn. 29.0 N.C. 27.1 Ark. 29.3 S.C. Miss. Ala. Ga. 29.2 La. 31.6 30.1 27.4 29.5 Fla. 23.3 Source: Calorie Lab Hawaii 20.7 research in the $55 billion weight loss industry, the focus on fat has reached new levels. But while most companies focus on fighting obesity, we’ve found one small company that’s turning America’s indulgences into cold hard cash. Here’s everything you need to know to profit from the world’s fattest population… According to studies from the Centers for Disease Control and Prevention, 67% of U.S. adults are overweight or obese, a number that’s risen dramatically since studies in the 1970s. Unquestionably, the obesity epidemic is a problem in desperate need of a solution. On average, men and women are nearly 20 pounds heavier now than they were just 30 years ago. And the fattest Americans have gotten heavier still — at present, more than 12 million Americans have a body mass index (BMI) of 40 or greater, a number that categorizes them as Obese Class III, severely obese. That weight gain has had very tangible effects on the world we live in: While we begrudgingly shell out cash for flights, complaining about the increasing cost of air travel, Americans’ extra weight costs the airlines an estimated $250 million each year. Specialty casket 3 makers are beginning to offer “jumbo-sized” options for your eternal resting place. And online retailers like LivingXL.com offer things like an extended-reach “Pistol Grip No-Bend Toenail Clipper” for consumers who have trouble reaching their feet. One of the root causes of the obesity problem is pretty straightforward: overconsumption. Since man’s early days as hunter-gatherers, we’ve been programmed to seek out calorically dense foods as a mode of survival. And while that worked well in a society in which physical labor was part of a typical day on the farm or at the factory, the abundance of inexpensive foods and the transition to more service-based office jobs have meant that Americans are getting a little too big for their britches. And once we get hooked on food, it’s hard to get off. Researchers have recently discovered that high-sugar fatty foods (like bacon cheeseburgers and ice cream) actually have addictive properties similar to drugs’. In a study published in the journal Nature Neuroscience, scientists discovered that unbridled access to human junk food actually causes changes in the brain similar to those of a cocaine or heroin over, please… PENNY STOCK FORTUNES addict — albeit on a smaller scale. It’s no surprise, then, that obesity has ballooned in the last couple decades. But while scores of investors have put money on the next weight loss gimmick, relative few have harnessed the huge demand on the other side of the scales — junk food stocks. become more cognizant of the impact of obesity on health, the company should see an uptick in this segment of the market. Where Inventure’s branding and innovation efforts fall short of better-capitalized competitors, the company has another strategic ace up its sleeve — licensing. Back in 2000, the company acquired an exclusive license to produce and market snacks under the T.G.I. Friday’s brand. Since then, Inventure has grown T.G.I. Friday’s to more than 60% of its sales and added other national brand names, like Burger King, to its portfolio. Another major area of focus is distribution. At present, Inventure’s products are available nationwide, thanks to partnerships with major retailers — including Wal-Mart, Sam’s Club and Safeway — as well as a number of large independent distributors. Those partnerships also happen to be key to Inventure’s growth as the company looks past 2010. As with many of its competitors, Inventure’s profit margins currently sit in the single digits. In order to increase margins, the company needs to increase productivity and efficiency at its factory locations in Indiana and Arizona (which currently operate at just 40% and 50% of their respective capacities). To achieve that, Inventure is looking at partnering with retailers to create private label snack products. While private label brands are traditionally lower margin, they would bring plant efficiency up considerably, and lower fixed manufacturing costs for their higher-margin brands. In total, the company expects new deals to generate as much as $150 million in additional annual sales volume. Action to Take: Buy Shares of Inventure Group Inc. (NASDAQ:SNAK) for $3.60 or better… Junk Food Is a Quality Investment While the $55 billion weight loss industry is able to post some impressive numbers, the $60 billion snack food industry has some even more impressive offerings. And although fierce competition has scared away many of the smaller contenders in the industry — leaving giants like PepsiCo (NYSE:PEP) subsidiary Frito-Lay to rule the roost — our small-cap snack food maker stands out from the crowd. Inventure Group (NASDAQ:SNAK) is a tiny snack food maker based in Phoenix, Ariz. The company sells snacks under the names T.G.I. Friday’s, Burger King, Tato Skins and a number of other brands. Inventure prides itself on being “Intensely Different” — and its business model certainly lives up to that standard: Instead of going head-to-head with high-powered brands like Frito-Lay and Nabisco, the company focuses on higher-margin niche brands that provide retailers with category growth. By creating unique products, a company like Inventure, which has a market capitalization that’s less than Pepsi’s daily sales, is able to outperform many of its peers in the competition for shelf space and consumer dollars. Although Inventure benefits in a big way from increased snack consumption, saying the company focuses solely on high-fat junk food isn’t really fair. Inventure’s product line includes Boulder Canyon Natural Foods, a line of health-conscious snack foods, and Rader Farms, a frozen berry producer. As Americans © Copyright 2010 by Agora Inc. 808 St. Paul Street, Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced by any means or for any reason without the consent of the publisher. The information contained herein is obtained from sources believed to be reliable; however, its accuracy cannot be guaranteed.