In the Age of Disruption Which Sectors Offer Investment Opportunities?

Disruption of incumbent businesses or entire industries is the latest strategy sweeping Silicon Valley. Thousands of young and highly educated professionals working in the startup world are finding ways to do things efficiently and cheaply. For example, Uber and Airbnb are examples of two disruptors that have cracked the taxi and hotel industries respectively. For ages local taxi companies were oligopolies in the regions they operated that resisted change and charged very high rates for consumers. Unable to find alternatives consumers were forced to pay up. Then came Uber and changed the whole game for the once omni-potent and politically well connected taxi industry.

While in the past it took many years to disrupt industries these days the number of years has declined. Powered by limitless venture capital and technological advances thousands of startup firms are working to shake up not just certain companies but entire industries. The following chart shows the number of years it took to disrupt incumbent businesses:

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Source: Are Robots Disruptive? … or could they be the saving grace for ageing societies?, July 2017, The Absolute Return Letter, Absolute Return Partners

Since disruption can crush incumbent companies to go out of business investors have to decide which sectors to avoid and which sectors to invest in. This is especially important for growth-oriented long-term investors. Two industries that will struggle moving forward are the media and advertising industries as digital companies uproot their dominance with better products and reach for every ad dollars spent by advertisers.

Despite the threat of disruption, certain sectors or sub-sectors of industries are difficult to be disrupted. Hence they offer investment opportunities. In a recent article, Sammy SuzukiKent HargisChris Marx of Alliance Bernstein identified pockets of sectors that investors can research for potential growth stocks. From the article:


Amazon has built a near-indomitable shopping machine, with its recent $13.7 billion takeover bid for Whole Foods marking its latest foray. It’s not hard to imagine this e-commerce behemoth taking over all retail itself.

But, while in-store traffic is declining, there are certain items consumers still prefer to buy in a physical store (Display). Off-price apparel and home-goods chains, auto-parts retailers, and sellers of items such as men’s suits and luxury goods are holding up well amid the retail gloom. They’ve crafted business strategies focused on personalized services and encouraging customer loyalty and frequent store visits.

Examples include off-price apparel retailers, which lure shoppers to their doors by offering ever-changing, limited-lot designer-brand assortments and a treasure hunt appeal. Auto-parts stores benefit from an aging car fleet and do-it-yourselfers who don’t have time to spare when making repairs and want to talk to someone knowledgeable if they have questions.

Another takeaway: consumers are buying experiences over stuff. That insight inspired makeovers at some restaurant chains and the major US movie-theater chains, which have buoyed attendance and profits with upgrades such as cushy recliner seating; premium concession items, including alcohol; and alternative content, such as live events and classic films on slow nights.

Source: Defying Disruption: Three Ways to Profit, June 26, 2017, Alliance Bernstein

Some of the companies in the sectors identified above are listed below:

  • AutoZone(AZO), O’Reilly Automotive Inc(ORLY) and Advance Auto Parts, Inc.(AAP) in the auto-parts industry.
  • Home Depot Inc (HD) and Lowe’s Companies(LOW) in the furnishings/hardware sector.
  • Western Alliance Bancorporation(WAL) and CVS Health Corp(CVS) in the drug sector.
  • Kroger Co(KR), Wal-Mart Stores(WMT) and Costco Wholesale Corporation(COST) in the food sector.

The key takeaway is that not all industries will be disrupted and that consumers will order everything they need online. So investors can still find excellent companies to invest in for the future. A few of such companies are listed above.

Disclosure: No Positions

US Non-Immigrant Visas Issued by Nationality 2016

The U.S. issues millions of visas each year in two categories – immigrant and non-immigrant visas. Most of the visas issued are the later category which includes all types of visas such as tourist visas, business visitor visas, work visas, etc. In Fiscal Year 2016, nearly 10.4 million such visas were issued worldwide. About 45% of the total visas issued were given to persons from just three countries: China, Mexico and India.

US Non-Immigrant Visas Issued by Nationality 2016

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Data Table:

Source: U.S. Department of State

It is interesting that almost all of the above countries are developing countries. None of the developed European countries appear in the list. Compared to the top three countries, the number of visas issued to Russians is very relatively small.

Though non-immigrant visa holders are expected to return to their country of origin before the expiration date of their visas, some of them inevitably don’t leave the country. These people simply over-stay their visas and go underground adding to the millions of illegals already living the country.

Two Charts Show Stocks Offer The Best Long-Term Returns

Equities offer the best returns over the long-term over other asset classes. For instance, stocks can yield inflation-beating returns. There are very few asset types that can yield returns that beat inflation.

The chart below shows the long-term global GDP growth and the performance of various asset types. Stocks easily beat cash and bonds over the long-term.

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Source: Datastream, Barclays. List of indices used: Equities MSCI World (USD) until 2001, MSCI AC World (USD) from 2001 onwards; Bonds Merrill Lynch US Treasury 7-10 years until 1980, Datastream
10 year US treasuries from 1980 onwards; Cash Federal Reserve US treasury bill 3 month

In addition, stocks have yielded positive returns more than 50% of the time in the long term. Stocks are the only asset class that can offer the best return over other asset classes over long periods.

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Source: In Focus: Markets as we see them, Barclays

The main point to remember is that holding stocks in a well-diversified portfolio is important to earn higher returns over the long-term especially earning a high real return (which accounts for inflation) and not just nominal returns.



U.S. Utility Sector Has The Lowest Exposure To Foreign Revenues

Utility stocks have long been the favorites of income seeking investors. As monopolies in the markets they operate utilities offer stable growth and excellent dividends. In terms of adverse market conditions these stocks can offer stability and downward protection to a well-diversified portfolio.

Another advantage of holding utilities is that they have the lowest foreign revenue exposure. Hence this sector will not be too much impacted by volatility in emerging and other developed markets. The chart below shows the foreign-revenue exposure of S&P 500 sectors:

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Source: GLOBAL EQUITY OUTLOOK – Spring 2017, Janus Henderson

As shown above, the tech sector is the most exposed to foreign markets while utilities have the lowest foreign revenue exposure.

The Dow Jones Utility Index is up by 7.17% year-to-date excluding dividends. This is slightly lower than the 8.24% price return for the S&P 500. Investors looking to gain exposure to the utility sector have plenty of options on the US market. Ten utilities are listed below with their current dividend yield for further research:

1.Company: Duke Energy Corporation (DUK)
Current Dividend Yield: 4.09%

2.Company: NextEra Energy Inc (NEE)
Current Dividend Yield: 2.80%

3.Company: Dominion Resources, Inc. (D)
Current Dividend Yield: 3.94%

4.Company: Southern Company (SO)
Current Dividend Yield: 4.85%

5.Company: Exelon Corporation (EXC)
Current Dividend Yield: 3.63%

6.Company: American Electric Power Co. (AEP)
Current Dividend Yield: 3.40%

7.Company: PG&E Corporation (PCG)
Current Dividend Yield: 3.19%

8.Company: PPL Corporation (PPL)
Current Dividend Yield: 4.09%

9.Company: Public Service Enterprise Group Inc. (PEG)
Current Dividend Yield: 4.00%

10.Company: Edison International (EIX)
Current Dividend Yield: 2.78%

Note: Dividend yields noted above are as of June 30, 2017. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long NEE

On the Impact of the Declining Average Tenure of a Company in the S&P 500 Index

The average tenure of a company in the S&P 500 index has been on a decline for many years now. According to one research report, the average tenure is under 20 years now. So a S&P 500 company today may not exist in the index or even disappear completely within the next 20 years.

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Source: Navigating Macro Choppiness, The Fiduciary Group

Currently the sector composition of the S&P 500 looks like below:

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Source: S&P 500

At over 22% the tech sector accounts for about one-fourth of the index and is the largest sector in the index followed by financials and health care. Among the top 10 constituents by index are weight are tech companies like Apple Inc (AAPL), Microsoft Corp(MSFT), Inc (AMZN) , Facebook Inc A(FB) and Alphabet Inc C (GOOG). These and other tech companies in the index will endure higher competition and technological disruption in the next 20 years. As a results a few of them may disappear. While this may not be the case with larger companies like Apple or Amazon, they will still have to fight off competition and the nature of the industry is such that some other new technology can appear and uproot their dominance.

A recent article at CityWire quoted Anton Eser, chief investment officer at Legal & General Investment Management (LGIM) as saying that companies currently in the S&P 500 will change in the next 10 years and predicts 50% of the companies in the index will disappear by 2027.From the article:

Half of the companies in the S&P 500 could become obsolete by 2027, according to Legal & General Investment Management (LGIM) chief investment officer Anton Eser.

Eser expects the blue chip index, made up of the 500 largest stocks listed on the New York stock exchange and Nasdaq, will see a radical shake-upover the next decade.

‘Companies that we own over the next 10 years will change and the average lifespan of a company on the S&P 500 is declining,’ he said.

‘Fifty per cent of the companies will no longer be there by 2027.’

He expects many companies will face major disruption as a result of technological change, not least retailers as they adapt to the growth of online shopping.

The automotive sector also faces new competition from driverless and electric cars. James Carrick, LGIM global economist, points out that this poses a challenge for traditional car manufacturers.

While the UK and US are major players in the world of internal combustion engines, there is no guarantee that their car manufacturers will stay ahead of the game forever.

‘China is looking at electric cars. It may not compete when it comes to internal combustion engines, but we do not know who will make autonomous cars in the future. What happens to Ford, Toyota and the others?’ Carrick asked.

Elsewhere, technology has led to advances in energy production, with significant repercussions for economic growth.

‘The cost of solar is down to the equivalent of fossil fuel and that will have an impact on economic growth in 10 to 20 years,’ Eser said.

‘Energy costs are declining dramatically in the US…the money people have to spend on energy is declining and it is leaving [that money] available for consumption elsewhere,’ he added.

Source: LGIM: tech could wipe out half of the S&P 500, CityWire

The key takeaway for investors is that they should be prepared for big changes in the composition of the S&P 500 over the next decade or so. This is especially important for investors in the tech sector as the industry is the most vulnerable to major changes quickly.

Disclosure: No Positions