A close friend of my wife’s recently had a baby boy, and we were lucky enough to be the first non-family visitors to the hospital. The magic of childbirth never gets old, even though it’s a long and painful process that women go through to deliver a baby.
I don’t know about you, but whether I’m in a dentist’s chair or enjoying a professional sporting event or, like my recent stint holding our friend’s brand-new baby boy, at the hospital, my mind starts wandering to a bizarre place — the stock market. My mind starts thinking about which public companies are related to that particular situation.
So, in the case of our friend giving birth to a beautiful baby, I’m thinking about baby stocks, and which companies might benefit from this wonderful moment in our friend’s life.
Like I said. Strange.
However, the reality is we come across situations every day where we can profit by just being open to the possibilities. That one-hour visit to the hospital prompted me to delve further into the world of baby stocks.
Pink or blue, these are three beautiful three baby stocks to buy.
Baby Stocks to Buy: Bright Horizons Family Solutions (BFAM)
Although this is the largest of the three baby stocks to buy regarding market cap, it’s probably the least focused exclusively on kids.
Bright Horizons Family Solutions Inc (NYSE:BFAM) got its start in 1986, operating child care and early education centers for employers and their employees’ families. Twelve years later it merged with another publicly traded day care operator, CorporateFamily Solutions, to form the country’s largest child care business.
Flash forward to today and Bright Horizons generates revenues from three different segments, although its 1,041 child care centers in the U.S., Canada, the UK and the Netherlands produce the lion’s share of its overall revenue and profits.
The need for child care and back-up dependent care in the U.S. is tremendous.
Almost 50% of adults between 40-59 have a parent over the age of 65 while also caring for a child. Also, the number of women over the age of 35 having a baby (like our friend) has increased dramatically in the past 20 years.
With many dual-income households unable to handle all of the care required of their dependents, Bright Horizons’ services, from babies all the way up to the elderly, will remain in high demand for many years to come.
Over the past five years, Bright Horizons’ revenue and operating profits have grown by 61.2% and 126.4% respectively. Quarter to quarter investors might not see a lot of progress, but long-term the company’s business model has proven to be sustainable and profitable.
BFAM has performed very well over the past three years delivering an annual total return of 16.2%, almost three times the S&P 500.
Baby Stocks to Buy: Carter’s (CRI)
The Carter’s and OshKosh B’Gosh brands are an excellent one-two punch in the world of baby apparel. Who doesn’t want to get their little toddler one of OshKosh B’Gosh’s iconic pairs of overalls? OshKosh B’Gosh, acquired by Carter’s in 2013 for $312 million, was a transformational acquisition.
Another transaction that could be transformational is its $140 million February 2017 purchase of Skip Hop, a maker of diaper bags, children’s toys and other products that are a natural fit for Carter’s stores.
Accretive to Carter’s 2017 earnings and revenues snowballing, this could be the move needed to push CRI stock over $112.58, its all-time high reached in July 2016, and a level it has been unable to maintain since falling back into the high $80s and low $90s.
Like most retailers, Carter’s has experienced weaker same-store sales growth in recent quarters, as the industry continues to transform itself. That’s to be expected; despite the lull, Carter’s continues to open a lot more stores than it’s closing, which tells you management is still very confident about its place in retail.
As for Canada, where I live, Carter’s Q2 2017 same-store sales grew 5.9% with 46.8% growth in e-commerce revenue. On the wholesale front, which accounts for 32% of its overall revenue, the operating margins are double what it earns in its stores.
Carter’s revenue diversification is a real strength and a big reason why it’s one of my baby stocks to buy.
Baby Stocks to Buy: Natus Medical (BABY)
The one thing I noticed during my recent visit to the hospital is that newborns go through all kinds of tests, especially those born prematurely.
That’s good news for Natus Medical Inc (NASDAQ:BABY), some of whose products and services keep tabs on newborns. Newborn care is just one of three areas that Natus focuses on, the other two being neurology and hearing.
Earlier in 2017, Natus paid $149.2 million to acquire Otometrics, a Danish company specializing in hearing diagnostics. In the three months ended June 30, Otometrics contributed 23.6% of the company’s overall revenue; neurology accounted for 48.5% of its revenue, and its newborn care the remaining 28%.
Natus would be considered the riskiest of these three investments because if not for the Otometrics acquisition, Natus hasn’t had a lot of growth in the first half of the year.
Thanks to this lack of growth, a lower gross margin, and higher costs due to its acquisition, its bottom line in the second quarter went from a profit of $10,512 in Q2 2016 to a loss of $5 million in Q2 2017.
However, on a non-GAAP basis, it made 34 cents in the second quarter, just five cents less than the same quarter a year earlier. Long-term, the Otometrics acquisition will deliver more profits to Natus shareholders.
Down 27.6% in 2016 and 3.5% year to date through Sept. 6, BABY is the stock to buy if you’re an aggressive investor because it’s beaten down and ready for a comeback.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.