As I visit my friends in NY and LA, I notice that there are certain trends emerging throughout the country that should give investors some pointers on the stock market. It is like Warren Buffett's rule of investing: If you understand consumers, it is easy to follow the products. Let us shine a light on three major trends in the U.S., and how investors can profit.
The Innovation of Healthy Living
While the core principles of "healthy living" remain the same, "exercise and diet", the fads and information surrounding health change by the minute. In the U.S., healthcare, weight-loss, medicine, etc. is the largest single industry, and there is always new research and companies in the market looking to benefit in some way, shape, or form.
In 2010/2011 it was the season of ordered meals and large returns from NutriSystem (NTRI) and Weight Watchers (WTW). Prior to this period, it was WebMD (WBMD) and new technologies in the Internet age. Today, it has become VIVUS (VVUS) and Arena Pharmaceuticals (ARNA), as weight-loss prescriptions prepare to stick for the long-term. While each made a major impact in the market, sustainability is the issue in healthcare, such as new technologies to make healthcare costs cheaper and more effective, and to allow physicians to easily educate patients. In fact, there have been some reports of physicians actually prescribing "apps"-- now if that's not a sign of innovation, then I don't know what is.
When we look at "health" as an industry, it clearly affects all people, with the biggest problem being obesity and an overweight society. One of the good things about innovation in technology is that information is more readily available, and people know how important a healthy weight is to living a healthy life, although we often ignore these facts. According to the Euromonitor International almost 35.0% of Americans are "obese" with a BMI above 30.0. While recent FDA approved weight loss drugs will aid in attacking this market, the problem involves a greater shift, one that needs to be long lasting.
One of the great trends that we have seen over the last few years is for large food and beverage companies to make changes in ingredients, making them healthier. One of the biggest movements has been artificially flavored water additives such as Mio, which grew into a $200 million product in just two years, and has now spread into other popular drinks such as Kool-Aid. These additives make water taste like popular drinks and with zero calories. So how are companies achieving this once-considered-impossible feat of keeping products sweet without the sugar? One of the answers lies with using the fastest growing commodity in the alternative-sweetening sector, which is stevia.
Stevia is an all-natural, zero calorie sweetener that is safe for diabetics and doesn't cause tooth decay. It also delivers 200-400 times the sweetness of sugar, meaning very little product provides big taste. Already we have seen large beverage companies PepsiCo (PEP) and Coca-Cola (KO) make changes to implement stevia and replace sugar. One of the best-selling products, Truvia, saw its sales rise from $46 million in 2010 to $90 million in 2012.
The sales growth of Coca-Cola's Truvia, which is stevia, shows the rate of adoption and the potential for this commodity, and could be an indication of a long-lasting transition to monitor, one that could return big revenue and profits for those who take notice early. However, one disclaimer must be noted, and that is stevia does carry an aftertaste not found in sugar, which has been one complaint of using the sweetener. Stevia First Corp (OTCQB:STVF) is working to produce stevia's active product through fermentation to remove the aftertaste while also reducing costs. The company has over 1,000 acres in the heart of California s Central Valley, and should be monitored if, in fact, it can remove any potential downside to stevia while capitalizing on the upside.
Currently, Stevia First Corp has no revenue but does have the land present to harvest. In theory those that have the best geographical locations to harvest should be the most successful, hence California's Central Valley. Just look at a company such as S&W Seed Company (SANW), which harvests alfalfa seeds and also has a large presence in Central Valley, through acquisitions, and saw its sales grow 189% last quarter, further showing the potential for companies in the early process of harvesting also located in Central Valley. In my opinion, using growth and industry trends as proof, I'd watch closely the future performance of those aiding the health industry in a big, yet under-the-radar way, such as the all-natural stevia.
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The 3D Printing (& Manufacturing) Movement
According to trendwatching.com, 76% of U.S. shoppers notice "Made in the USA" claims and labels, and are more likely to purchase that product. The most significant problem is that most products from large technology companies and even consumer products are manufactured outside the U.S. In the past, the U.S. was unable to compete with China's low wages, price of energy, and even technology, but that is now changing.
Today, this trend is seeing some improvements, as North America is becoming more attractive. Most investors are aware of the growing manufacturing presence in Mexico, but the U.S. is also closing the gap with China. Of course there are obvious reasons such as rising wages in China combined with a weaker dollar, but these just briefly explain why the U.S. could see more manufacturing in the coming years.
Combined with the economic factors explained above, the U.S. is also seeing a decline in energy prices, has 5.3 times more arable land, and 4.6 times the water resources compared to China. The large discoveries in shale oil and natural gas will also work to offset the cost of cheap labor with lower transportation costs. If in fact the U.S. sees growth in manufacturing, taking business from China, it will also be due to technology. While you can find several investment opportunities from local production of goods, one that could be at the center of this transition is 3D printing. In this space the leaders are 3D Systems Corporation (DDD), Stratasys (SSYS), and even ExOne (XONE). These are companies that operate both in the consumer and also in large scale manufacturing spaces.
Since January 2012, the 3D printing industry has been one of the best performing industries in the market. The reason for the momentum is because the companies in the space have advanced both into consumer markets and also into printing everything from fairly simple materials to aircraft parts and prosthetics. There is virtually no limit on what can be printed from these printers. Over time, this aids in lowering costs and increasing productivity; hence many believe that 3D printers will be instrumental in bringing manufacturing back to the U.S. Currently, the business is small, less than $1 billion in revenue in 2012, but it is expected to grow and become a $6 billion business by 2019, thus presenting investment opportunities.
*Yearly revenue data obtained from Google Finance
A Comeback for Solar?
When we look at consumer trends, we can see a number of current changes: The PC market continues to decline in favor of tablets and smartphones; housing prices continue to rise; and BMW has become the preferred luxury vehicle over Mercedes-Benz. However, each of these "trends" has been priced in the market; you can often find trends such as these, but the key is to find those that are underpriced in the market.
One of the biggest booming markets in the U.S. is solar and, more specifically, installed solar capacity and solar panels. For the last five years, growth has been explosive, particularly in the mid-West, but slumping solar panel costs had created pessimism within the space over the last five years, including more than a dozen bankruptcies, and most recently China's Suntech Power. The good news is that this is one industry that is not solely controlled by the free market, but is highly funded by the government and has the full support of the Obama Administration.
In 2012, the U.S. solar market grew 76%, which far exceeded online retail, auto, transportation, healthcare, or any other large branch of the economy. In terms of revenue, the U.S. market grew 34% to $11.5 billion, which was due in part to the 11% created from new solar capacity created. This remarkable growth is also met with a number of very cheap leaders in the industry.
In the solar industry, there is oversupply of solar panels and fierce competition. Yet one company that is seeing a nice rebound is First Solar (FSLR), which has seen a 110% gain over the last 12 months. Despite these gains, First Solar is trading with an 85% loss over a five-year period of time, due to the issues with pricing in the space. Yet as we dig deeper and look for guidance from one of the market's major solar companies (First Solar) we find reasons to be optimistic.
During the company's recent analyst day, it guided for module shipments to significantly increase over the next three years, as followed:
Module Shipment (guidance)
As I explained above, segments in solar have continued to grow year-over-year, but it's the pricing that has weighed on the industry. Therefore, the earnings are encouraging for First Solar, combined with module shipments, as the company expects an EPS of $2.50-$4.00 in 2014, and then $4-$6 in 2015. This not only shows growth in shipments but stabilization in prices, which is most important. Hence I would watch solar for more macro trends, and for prices to find stable ground in the coming years, therefore leading to large gains in the undervalued industry.
How well might it had been to get ahead of past trends? Something as simple as a change in preference towards coupons could have returned investors great profits with Groupon (GRPN), or to be in front of the economic shift from cash to innovating payment technologies. In the last decade alone, there have been countless such trends: Just consider the movement from BlackBerry to Apple and now to Samsung in mobile technologies. If you get ahead of these trends, then you can return very large gains. However, if it were easy then everyone would position himself or herself ahead of the curve.
In biotechnology the largest gains come from companies that you don't see coming, or the ones you choose to ignore. In the market, it is no different. There are 100s of "trends", and in my experience I have found that those that produce the largest gains are the ones that are unnoticed and that operate in large industries or segments of the market. I would watch all of the trends I note, including those in health, manufacturing, and solar, as continued strength and further confirmation of trends could lead to larger returns.