About six months ago, I wrote an article recommending five stocks as long term buys, based partially on Warren Buffet's proclamation that "at Berkshire, our time horizon is forever." Six months is not forever, but so far the portfolio has done very well, on average doubling the market return over the past six months, with three names in particular (ROK, GM, and F) garnering 20%+ returns in only 6 months, for a 44% annualized return, with the portfolio (equally weighted) earning a 30% annualized return.
At the core of this sort of investment thesis is not short run returns, though, but rather the idea that many investors (especially institutional investors) are focused on maximizing returns in the next 1-3 years, which requires the identification and exploitation of near-term catalysts. Investors with a longer time horizon, then, have an opportunity to purchase based on long-run catalysts the market tends to ignore, outperforming over time. With that in mind, I've focused on a few other mega-trends that I think are here to stay, and picked the best names to play them.
1. Online data provision: This isn't a shocker to anyone, but that doesn't mean its magnitude is factored into share prices fully. Dramatic increases in bandwidth, both over the air and via direct fiber links, combined with a dramatic increase in consumer comfort with electronic purchases of all kinds, will spur a sea-change in how people purchase most non-perishable goods. The days of buying discs and books in physical form are rapidly giving way. Most affected will be products that are intrinsically data based: movies, video games, books and other such content.
Bastions of the physical retail of this sort of content have been struggling for awhile (Blockbuster, for example), and the harsh reality for the nostalgically inclined is that the core business models of companies such as Barnes & Noble (BKS) and GameStop (GME) will suffer massive, secular declines. Both companies are aware of these challenges, but cannot beat them in the long run and it is unclear how they will survive the massive loss of revenue that the gradual death of brick and mortar retailing of data will represent. I will never buy another product from either of them (though I often frequent Barnes & Noble with Amazon (AMZN) open on my phone should I find anything I like), and I'm not special in any way, but rather representative of my age group (20somethings). The stocks might perform okay in the short run as they strive to reinvent themselves with varying degrees of success, but I will be stunned if they're around in anything resembling their current states for too much longer, and even more stunned if investors in either beat the market.
So how to capitalize on this revolution? The frightening aspect of it is that there is no clear winner per se. Amazon should gain market share from virtually every other area of retail for a long time, but the company features razor-thin margins (though this is contested, and rightly so) and moreover it is unclear how retailers will position themselves between content providers and consumers as time progresses onwards. New game consoles will likely include proprietary stores, and with Microsoft (MSFT), Google (GOOG), Apple (AAPL), Verizon (VZ), and Netflix (NFLX) all crowding the data provision space, it is increasingly hard to imagine how retailers can add significant value beyond what the content creators add in the long run, and is increasingly evident that price wars will leave the margins of all involved low for a very, very long time if not forever. This seems to leave consumers and creators as the big winners, but there are some companies that stand to profit.
One of my top picks is Akamai (AKAM), which is far and away the industry leader in content provision and acceleration solutions. In a nutshell, it helps companies provide data (video, websites, applications large files such as video games, etc.) to consumers and internal networks as quickly as possible. As the back and forth between bandwidth supply and content demand continues, Akamai will serve as a sort of "tax" on virtually any company that wants to provide content and isn't interested in building up a massive network of datacenters as Netflix will set out to do. It has an established customer base that is hooked on its products like a drug and is loath the substitute competing products (even at lower price points), giving is substantial revenue predictability and stability. All in all, the company is reasonably priced (forward P/E of 20) and should provide market beating returns for the foreseeable future as the dramatic growth in content provision strains networks and increases demand for its services, with an exceptionally durable business model for a technology company and little competition.
2. Automated Manufacturing. This is similar to my last article but there are more ways to play this behemoth that I believe will significantly alter our world in the coming decades. In short, manufacturing processes are being rapidly automated, spurring an increase in productivity that will continue to make physical goods cheaper and less labor intensive to produce. I'm not alone in discussing this phenomenon, with Paul Krugman and Tyler Cowen, two influential economists (from opposite ends of the political spectrum), both discussing the implications of this shift recently. With labor costs as a percentage of final good costs steadily decreasing, the limiting factor will rapidly become commodities, which should drive a secular bull market in commodities that could last for the rest of human existence (with dips, of course). Energy production is undergoing a renaissance that may mitigate the effect on prices for a while, but it remains difficult to envision a future in which our available supplies of fossil fuels aren't strained by economic growth, regardless of the climate consensus. With that in mind, I'll calmly double down on my pick of Ultra Petroleum (UPL) as a company with superb long-term prospects, as a low-cost producer of natural gas and oil in the United States. On a global level, I remain bullish on the big miners such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE).
If you have an appetite for a more leveraged investment, I encourage you to take a hard look at Mongolia Growth Group (OTC:MNGGF). This small company was founded by Harris Kupperman, a very impressive man with a Hedge Fund background in the United States who, after visiting Mongolia, moved to UlaanBaatar (its frigid capital city) with tens of millions of investor money and began buying up assets leveraged to Mongolian economic growth. His portfolio now includes a massive amount of land and buildings in the city's downtown core, as well as Mongolia's best-capitalized insurance company. If this all seems tangential to my thesis, it is not. Mongolia sits atop some of the richest supplies of untouched natural resources in the world, and it is also next door to the world's largest consumer thereof. Some of the mining projects well into the planning stages could more than double Mongolia's GDP on their own, an explosion which would reverberate to Mongolia Growth Group's real estate assets in a big way. There are lots of risks involved, especially political risks as Mongolia matures, but the long-term commodity boom I envision would be an incredible boon for this country and its capital and, if everything plays out, make investors in Mongolia Growth Group very happy. To help mitigate the risks, the company has exceptional transparency, with detailed monthly shareholder letters and financial reporting, truly a rarity in a country as raw as Mongolia. Check out their corporate presentation for more information, I'm in the process of writing another article laying things out in detail (along with my model) though some here have covered the topic pretty well already.
In conclusion, there are very few sure things as we look beyond the next few years except great change. I've presented a few trends I think are durable and inexorable parts of that future, and two of my favorite ways to play them. If you disagree, please let me know in the comments and provide alternatives.