At one point in my career, I used the services of an asset management group in Scotland. Its principals worked in a castle, all seated at one extremely long table. Computers were not allowed.

The group's analysts were meant to "get the gut feel" of an investment by analyzing its numbers manually. And it selected investments on a "theme" basis.

One "theme," for example, might be the global surge of immune-deficiency diseases and the mounting demand for curative drugs. Another might be the demographic spike of people in the 20-to-30 age bracket in Southeast Asia and the likely surge in demand for housing materials and concrete there.

The group's invest-by-theme strategies were sometimes debatable, but produced handsome results. I believe there is an important "investment theme" taking shape in the U.S. that also has great promise.

I'm referring to the fact that the American population will age mightily over the next two decades. The "graying of America" is a powerful investment theme that you can still capitalize on.

According to the U.S. Census, 77 million American "baby boomers" -- people born between 1946 and 1964 -- will turn 65 over the next 20 years. Right now, there are approximately 38 million Americans age 65 and over. By 2020 there will be 55 million people age 65 and over (and almost 100 million people age 55 and above). And one out of four of you reading this article will live to be 90.

Clearly, our population is aging and life spans are extending, which will affect investments in forceful ways.

Powerful changes are already taking place in the investment markets due to demographics. For example, we may be seeing more market volatility and the formation of more speculative "bubbles" -- such as the dot-com bubble, then the real estate bubble, and now the emerging-market and precious-metals bubbles -- because soon-to-retire boomers are becoming anxious about their savings and intensifying the scramble for windfall returns.

But the impact is just beginning. Aging demographics are bound to affect everything from the profits of insurance companies to the demand for mobile homes and golf clubs.

If you're a long-term investor, this may be an excellent time to invest in health-specific sectors likely to benefit from America's aging.

Stocks Set to 'Boomer'ang

Here are four pharmaceutical and health care stocks that have attractive earnings and quite low price-to-earnings ratios. (The financials are as of Thursday's opening.)

Poised for a Boomer Boost?
Bayer AG (BAY) 16.6 1.75 12.1% 43.6%
Bristol-Myers Squibb (BMY) 15.7 4.87 13.6% 6.2%
Johnson & Johnson (JNJ) 16.6 2.12 1.1% (4.3%)
Merck (MRK) 16.9 4.78 17.9% 26.0%
Source: Morningstar

I happen to like Merck ( MRK), Johnson & Johnson ( JNJ) and Bristol-Myers ( BMY) for their yields and good pricing. What is striking overall is that these stocks have low P/E ratios because the sector has been beaten down in recent years. This may be the time to buy and hold them.

Likewise, keep watch on orthopedic-implant manufacturers like Zimmer Holdings ( ZMH), Medtronic ( MDT) and Biomet ( BMET). These companies have reasonable P/Es, though they have year-to-date and 12-month losses.

I believe that the stocks of manufacturers of diabetes products and orthopedic devices will fare exceptionally well over the long term. But many of these stocks happen to have very high P/E ratios and poor recent performance at this time. Their prices are simply too high relative to earnings. So when it comes to orthopedic stocks, wait until prices improve and the Department of Justice winds up a probe of orthopedic specialists.

Healthy REITs

Health care real estate investment trusts derive rent income from nursing homes, hospitals, medical offices and clinics. They also are a good way of capitalizing on the aging of boomers -- but there are decided risks.

I've found 14 health care-focused REITs, and here are a few that stand out:

The Right REITs
Health Care Property (HCP) 24.3 6.57 9.1% 5.7%
LTC Properties (LTC) 20.4 6.13 8.4% 6.7%
National HealthCare (NHC) 19.8 1.54 21.0% 34.1%
Senior Housing Properties (SNH) 22.9 7.57 11.0% (0.2%)
Universal Health (UHT) 16.4 6.94 4.7% (12.3%)
Ventas (VTR) 27.2 4.50 10.7% 16.4%
Source: Morningstar

Pricing for these REITs can be high, as you can see from their P/E ratios. Of the 14 health care REITs I identified, the average year-to-date return has been 8.3%, while the average one-year trailing return has been 5.3%. The average P/E ratio for the entire group is currently 26.9 -- and that average excludes Windrose Medical Properties ( WRS), a trust having, according to Morningstar, a P/E of 124.3.

In 2005, many health care REITs sustained losses. The average January-June return for all health-care REITs in 2005 was a drop of 11.1%. Three of the 14 health care REITs still show negative 12-month returns thus far in 2006.

Several factors have added to this checkered performance. A prime contributor is concern that health care REITs rely heavily on Medicare/Medicaid reimbursements for cash flow. And there are issues regarding the solvency, promptness and possible reductions of Medicare's reimbursements over the long term.

That doesn't put me off this investment category. It simply tells me that health care REITs with less Medicare dependency are likely be lower-risk, better investments. And it also reinforces the importance of checking out the property content of any REIT very carefully before you buy into it.

When you consider any REIT, read its prospectus or use online research to see its holdings. You want to avoid REITs with a lot of mortgage content (because higher interest rates may make those mortgages risky). You also don't want REITs that have a lot of residential content in high-appreciation locations. (The prices of properties in Florida, California and Arizona could, after all, come down.) And, as I mentioned, you want to avoid health care REITs that are heavily dependent on Medicare revenue.

Investing in health care REITs will, I am confident, be extremely attractive for the long term, provided you avoid Medicare risk. The dividends are attractive. The pricing is good. And the improving performances of many health care REITS may represent an exciting buying opportunity.

Health-Focused Funds

If you prefer funds, the following health care mutual funds and exchange-traded funds should likewise be strong and more diversified over the long term.

Health Care Funds
Kinetics Medical (MEDRX) 21.10 4.99% 13.29%
Fidelity Select Pharmaceuticals (FPHAX) 20.70 4.34% 16.95%
Evergreen Health Care (EHABX) 21.80 1.04% 9.76%
Pharmaceutical HOLDRS (PPH) 16.15 1.21% (1.67%)
Vanguard Health Care VIPER (VHT) 19.00 (3.28%) (0.23%)
Source: Morningstar

You may be looking at the year-to-date results of these funds and telling yourself you want higher returns. However, this may be precisely the time to buy into these funds if you are a long-term investor. Demand for pharmaceutical and health care products is surely set to rise.

Give some thought to investing in health care stocks and funds if you do not already hold them. The low prices and good ratios of many pharmaceutical and health care issues (but not orthopedic stocks just yet) are dynamite "buy" opportunities.
Jim Schlagheck is a wealth management professional who has counseled ultra-high-net-worth families, endowments and pension funds in the U.S., Europe, and the Middle East. He is a former senior executive of American Express Bank, UBS AG, Bank Julius Baer, and TAIB Bank. During his career, Schlagheck launched a family of mutual funds (now holding $4 billion), led teams of financial planners and investment advisers based in New York, Bahrain, and Geneva, Switzerland, and helped many high-profile clients to protect and enlarge their wealth. Jim has a blog on investment topics and is the author of "Show Me The Money!", a soon-to-be-published book that synthesizes his novel views about investing for retirement.

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