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How to Use the $2 Trillion American Compounding MachineBy Rob Fannon, editor Phase 1 InvestorFriday, December 7, 2007 Being a middleman isn't sexy... Just ask McKesson.
Earlier this year, I recommended shares of McKesson (MCK) – America's largest drug distributor – to readers of The Medical Investor. I called McKesson the most important company you've never heard of. I'd guess maybe one investor out of 500 is familiar with the name.
Just how important is McKesson? Well... without McKesson, the U.S. health care system as we know it would collapse. The company distributes more than 1.5 million drugs and supplies to more than 75,000 medical facilities each night, from Wal-Mart to the Department of Veterans Affairs. It rings up just under $2 billion per week in sales.
There are several reasons why you've probably never heard of McKesson. It's not testing a new cancer drug. It's not the center of a giant options scandal. It doesn't produce a commodity.
McKesson simply gets products from the medical manufacturer to the medical consumer... It "shuffles" drugs, surgical tools, gauze, medical information, and whatever else your hospital, clinic, or pharmacy needs to keep people alive and well.
McKesson manages the nuts and bolts of the biggest sector in the U.S. economy – a $2 trillion business.
So far, we're up a safe 13% in McKesson... while the S&P 500 is close to unchanged for the time period. As I said, being a middleman isn't sexy – this stock has close to zero chance of gaining, say, 50% in a year. Instead, it will just compound our money at low double-digit rates for years... in as critical a business as you could ever hope for.
This recommendation didn't take any special genius... You see, the medical distribution industry is run by a "tri-opoly." Three giant players control 90% of the market. Each company had solid management, strong prospects, and an overall good business. I would have gladly parked money in any three of the companies... so long as the stocks were trading at the right price. McKesson offered the best value, so we took it.
I think this is the secret to making easy money in health care...
The most important factor to successful investing in health care, or any sector for that matter, is knowing the right price to pay for stocks. Huge demand and exciting technologies are everywhere. You just have to know where to look to find great companies selling at a discount.
And in the medical industry, hundreds of great businesses, like McKesson, operate under the radar. I've written extensively about my favorites in these pages before: generics manufacturers, medical device shops, contract research organizations, pharmacy benefit managers, and drug wholesalers.
You can use this short list to find investments just like McKesson... companies most folks have never heard of whose function is absolutely critical to keeping the engine churning... companies you can park away in your portfolio and completely forget about.
Quite honestly, I don't think we'll ever sell McKesson and the other "hidden" health care investments that have made us safe, double-digit gains in less than a year's time.
These are businesses too vital to the lifeblood of the massive U.S. health care system (which represents 20% of U.S. GDP, and growing). But as I said, the key to making winning investments is to buy them at the right price.
Good investing,
Rob Fannon
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