Click to EnlargeFor a brief moment, investors should ignore the macro environment and get back to basics. Specifically, it’s time to discuss buying into a company with a business model driven by predictable demographic trends — the aging of the baby boomers.

I should start by noting that the bulk of the baby boomers still are in early middle age and still have decades of healthy life in front of them. But the front end of that generation is indeed entering its golden years, and millions will be passing the age of 65 in just the next five years.

A growing population with the ailments of old age will require an increasing amount of home nursing care. And this recommendation provides that care:

Almost Family, Inc. (NASDAQ:AFAM) is a leading provider of home health services. The company operates through two segments, Visiting Nurse and Personal Care. The Visiting Nurse segment provides a range of Medicare-certified home health nursing services to patients in need of recuperative care, typically following a period of hospitalization or care in another type of inpatient facility. This segment also offers special clinically based protocols, including frail elderly care management, optimum balance, cardiocare, orthopedic and urology programs. The Personal Care segment provides services in patients’ homes on an as-needed and hourly basis. These services include personal care, medication management, meal preparation, caregiver respite and homemaking.

Click to Enlarge Almost Family shares have taken an absolute beating during the past two years. It’s not hard to understand why. The ultimate payer for many of the company’s services — Medicare, a.k.a. Uncle Sam — is a little strapped for cash at the moment. Medicare reimbursements have come under pressure, which has cramped Almost Family’s margins.

Tightfistedness from the federal government is a problem that won’t be going away anytime soon. Our national debt and deficits are both far too high and need to be reduced. Cuts are coming across the board, even to sacred cows like Medicare and the military.

Still, the bearishness toward Almost Family would appear to be overdone. The cut to reimbursements is expected to be 5% to 5.5%, which is bad but not catastrophic. Home health care generally is cheaper than hospital care, meaning Almost Family’s services ultimately will save Medicare money over the long haul. Never put it past Congress to do something phenomenally stupid, of course, but Congress should encourage the growth of home care providers like Almost Family as a means for keeping costs down. And again, even if margins are slightly lower, the sheer volume of aging seniors coming down the pipeline should ensure that growth is not a problem.

Let’s take a look at the company’s financials:

• Almost Family trades for just eight times expected earnings; this takes into accounts estimates of Medicare reimbursement reductions.
• AFAM trades for just 0.42 times sales and 0.7 times book value.
• Almost Family has no net debt and $3.17 in cash per share. At the current price of $14.92, this means that more than 20% of the stock price is just the cash in the bank.

Action to take: Just watch for now. Don’t try to catch a falling knife here — this stock is in virtual free fall. As an investor, the hardest lesson I have had to learn over the years is the necessity of being patient when entering a position. Choosing an entry price is not an exact science, but you like to have some amount of confidence that a deeply depressed stock like this has stopped falling. In this case, wait for the stock price to rise above the $16.50 mark. If AFAM stock falls further from current levels, I might revise the buying guidelines, but stick with this for now.

Given current pricing, I believe AFAM’s stock could be an easy double during the next 12 to 18 months. But this also is a volatile small-cap stock with a nasty downtrend behind it. So for now, just keep your eye on it.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 5 Contrarian Stocks for 2012.”