Amidst recent market turmoil marked by widespread panic selling, now may be a good time for long-term investors to take a hard look at their investment strategies going forward. When looking at where to invest, I try to look out a couple years to determine what areas are going to continue to grow despite tough economic conditions. I try to isolate special situations that have high probability of outperforming despite the macro-economic environment. With this in mind, I have identified both the mobile advertising / marketing space and precious metals/specialty minerals.
When looking at the mobile space, I am trying to determine what companies I believe will be the leaders over the next couple years. Here are the top five key areas that I believe can help identify the future mobile leaders:
- What company currently has the best client list and retention rates? Look at clients and identify if they are Fortune 500 clients or major brands? Are they the type of clients whose ad spend will continue despite an economic slowdown? Big brands will typically not compromise their ad budgets despite consumer purchasing habits being curtailed.
- What technology offers the most value to the customer? Even in times of low economic development advertisers will spend advertising budgets but they will be looking to what technologies offer them the best return on their investment. They will also be looking at what outside companies have end-to-end solutions that do not require their own staffing to execute since in down times staffing is cut to save money.
- What players are positioning themselves to handle and maintain the massive growth that is coming in this space? Experienced people with high margin products are essential.
- What company has intellectual property that can be used to provide barrier to entry or may require competitors to pay high royalties just to compete? Is that IP being managed effectively by those experienced to do so?
- What company has the right management team with experience in the mobile space? Look for companies that have seasoned veterans running the show and whose rolodexes offer potential large contacts opportunities within the space.
In this space obvious leaders will emerge and be recognized by the industry in addition to investors. Being forward thinking and finding these investments first, ahead of the masses, is one path to successful investing during unknown times.
The other area that I have identified for high potential returns in the next two years is the Precious Metals/Minerals space. With the price of gold hitting new highs every day, it should be obvious that supply and demand is driving that market. What I have found interesting is that a lot of the new finds announced by companies are telling us why this is really the case. Many of the announced finds are really historically low in terms of grades compared with just ten years ago or they are in such remote locations that production and startup costs are very high. When gold was $500-$800/oz, these discoveries would not have even been considered significant due to their not being economically feasible to mine. What that is telling us, as most precious metal experts have known for a long time, is that it’s getting harder to find gold and lower grades cost much more to mine. So even independent of demand, the supply side costs are driving prices higher.
Along these same lines are the Rare Earths and certain minerals such as Manganese. China for a long time has dominated 97% of the supply of these critical components and by not worrying about pollution and having cheap labor, it was able to keep costs of production low. This is a fundamental change that is happening in China. Environmental concerns are going to be front and center going forward, which means not only are the costs going to rise dramatically, but China's ability to export is going to drop considerably. As an example output of Electrolytic Manganese Metal, which is made from Manganese Carbonate, may drop by 50% in the next 2 years. Most people do not realize that Electrolytic Manganese Metal is a required component to make steel. Without it, you simply can’t make it and there is no substitute. Does anyone really think that if China can not supply its own steel plants it is going to export any of this critical material to anyone else in the world?
China produced 1.4 million tonnes of manganese last year, with a capacity to produce upwards of 2.2 million tonnes. According to a report from Metal Pages, due to shrinking ore bodies, the production of electrolytic Mn may fall off dramatically in the coming years. “China may lose 500,000-700,000 tonnes a year of metal capacity in the next 3-5 years if no new resources are found,” stated Zeng Xianbo the General Secretary of China’s Sodality of Manganese Plant Directors. This massive reduction in supply will result in higher prices, as well as moves by China to protect their resource.
This is just one example of many that are going to play out in the commodity markets over the next several years.
With what will likely be more volatile times ahead, identifying the right investment situations can be the key to securing positive returns. With this in mind, it may be wise to keep your eyes on the mobile advertising/marketing and precious metals/specialty minerals spaces.