Six weeks ago, I outlined my plans to create a portfolio of 10 companies that all have one thing in common: They provide a basic need or deliver life’s necessities. It’s my contention that basic-needs companies can offer investors stability and growth throughout any market environment thanks to consistent demand, incredible pricing power, and delectable dividends. This portfolio, which I have dubbed the Basic Needs Portfolio, will be pitted against the S&P 500 over a period of three years with the expectation of outperformance for all 10 stocks. I’ll be rolling out a new selection to this portfolio every week for the next four weeks.
You can review my previous five selections here:
Today, I plan to introduce the sixth of 10 selections to the Basic Needs Portfolio: Select Medical Holdings Corporation (NYSE:SEM).
How it fits with our theme
The first thing worth noting here is that not every company in a portfolio filled with stocks that take care of life’s necessities needs to be worth $100 billion in market value. In fact, I’d be surprised if more than 10% of readers knew what Select Medical Holdings Corporation (NYSE:SEM) is, or what it does, off the top of their head. But, sometimes the best hidden gems are those companies that are yet undiscovered.
Select Medical Holdings Corporation (NYSE:SEM) operates 110 specialty hospitals which deal with long-term acute care needs of patients and 12 inpatient rehabilitation centers within the United States. Some of you (me included) would rather be hogtied kicking and screaming before we’d go see a doctor for anything. However, when you’ve broken your arm or develop a life-threatening illness, there isn’t much of a choice but to go to the hospital.
Because it’s extremely expensive to build hospitals and purchase the medical equipment used in them, as a potential patient you aren’t exactly going to get many choices with regard to which one to go to. This gives hospitals pricing power that is pretty much unprecedented. In addition, hospital pricing per procedure — because of the complexity of insurance companies being involved — is about as opaque as it gets. This means that one hospital can charge considerably more than another for a similar procedure, yet few patients have the luxury of finding this out ahead of time before care is needed. Let’s face it — if you’re having a heart attack, you don’t have the luxury to drive 550 miles to a hospital that will treat you for half the cost.