While Amazon may get the most press for disrupting industries and economies around the world, there are plenty of companies making their own waves on this front. The way to go about investing on the right side of these trends is to think: what companies can Liberty investors own today that will still be around in 10 years to benefit from the growth in their free cash flow and dividends? And what sectors should be avoided?
The sectors we are currently avoiding are energy, telecoms and most utilities that don’t have much exposure to renewable energy.
Their growth could wane quickly – if it is 5, 10 or 15 years from happening, investors should do a discounted cash flow valuation of these stocks. If the valuation reaches that price, they should sell the stock.
Or they could face the “Last Man Standing” scenario, whereby the last purchaser of Nortel or Valeant stock at its peak saw the stock move only lower.
Below is a table of the current investment trends for the future. Unlike the bubble that burst in 2000 that sent technology stocks plummeting, these companies all have real and growing revenues, profits and free cash flows:
|TREND||LIBERTY STOCKS INVOLVED IN THESE SECTORS|
|Water||A.O. Smith, Lindsay Corp., Danaher Corp.|
|Agriculture||Agrium, Lindsay Corp., Raven Industries|
|Healthcare – Pharma||Novo-Nordisk NV|
|Healthcare – Medical Devices||Becton Dickinson, Atrion Corp., Coloplast A/S, Globus Medical, Stryker Inc.|
|Other Medical||Balchem, Mesa Labs, Steris|
|Fintech||Chubb, Fairfax, Great-West, TD Bank, First Cash Financial, Paychex|
|Robotics||Cognex Corp., Danaher Corp|
|Life Sciences||Danaher Corp., Thermo Fisher Scientific|
|Logistics||Dassault Systemes, Roper Technologies|
|Artificial Intelligence||Dassault Systemes, Open Text, Shopify Inc., Cognex Corp.|
|Government Regulations||Halma plc., Intertek Group, Spectris plc.|
|Renewable Energy||NextEra Energy, Novozymes A/S|
|Infrastructure||Toromont Industries, Stantec, Roper Technologies|
|Aerospace||Heico Inc.,RBC Bearings|
|Automotive Computerization||Littelfuse Inc.|
This year, the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have enjoyed an average 47% return, well above the market averages. The reason we don’t own them is three-fold:
- They make up a large portion of the Dow Jones Industrial Index and the S&P 500 Index, meaning every ETF owns them. What you usually end up with is a reversion to the mean. The more shares that must be bought with each investor purchase of an index fund, the more the performance tends to follow an “average” return.
- Stocks like that usually signal their price peak before a precipitous fall. Just ask shareholders of Nortel, Royal Bank and Valeant. They once were the largest holding on the TSX Index but soon fell in value after the peak.
- We prefer to own stocks that aren’t widely held by investors. This gives us a chance to get in early. We can enjoy gains based on the company’s own performance and when they are added to an index or grow enough to attract more eyeballs to the stock, the returns can continue to rise at a greater rate for a longer time. In our US stock portfolios are 5 names that have outperformed the FAANG stocks this year:
|FAANG Stocks||2017 Performance (YTD at 12/01/17)||US Liberty Stocks||2017 Performance (YTD at 12/01/17)|
|Average Return||47%||Average Return||60%|
|Data courtesy of Bloomberg LLP|