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As an investor, I try to analyze individual companies in order to find the best opportunities. However, I take a top-down approach first. I look to find powerful trends that cannot be stopped by the boom-bust cycle or by most anti-business government actions. After isolating these trends, I can then find opportunities in individual stocks, bonds, or commodities.
In taking this approach, I can eliminate the vast majority of investments and focus only on those areas that I feel will generate the best risk-adjusted returns without relying solely on basic metrics such as P/E ratios or dividend yields.
In this article, I point out 7 of these trends.
- Additive Manufacturing (aka "3-D Printing")
- The Re-Monetization of Gold
- The Global Shift from Cash to Cashless Payments
- The Shortage of and Rising Demand for Strategic Metals
- The Shift from Truck to Rail
- The Rising Need for Agricultural Efficiency (Resulting from a Rising Global Population)
- The Shift towards E-Commerce
Keep in mind that there are certainly more out there, and I encourage readers to point them out in comments below. However, I think that these 7 in particular have strong investment theses.
1: The Additive Manufacturing (aka "3-D Printing") Revolution
The cat is out of the bag on this one--3-D printing has become a very popular topic among investors, and its leaders such as 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS) have become some of the most widely followed stocks the market has to offer.
While this has generated near-term frothiness (see the charts below), there is little denying the long-term opportunity in the additive manufacturing industry.
Additive manufacturing is going to make current production methods obsolete. Products will be designed digitally and "printed," or stored in a database such as MakerBot's Thingiverse. Buying simple everyday objects from coffee cups to hair brushes will be as easy as going to the Thingiverse, downloading a blue-print, and hitting "print." Furthermore, additive manufacturing is coming to a point where more complex items can be "printed," and the aforementioned companies are designing products used by defense contractors (e.g. General Electric (NYSE:GE)), and medical device manufacturers (e.g. Stryker (NYSE:SYK)). One company--Organovo (NYSEMKT:ONVO)--is working towards generating 3-D printed body parts that can potentially change the face of medicine.
Additive manufacturing is where science fiction is meeting reality. As this continues, it is feasible that the top companies in the industry will be the most valuable companies in the world.
Since the industry is relatively young, it is difficult to know which companies will be winners. Thus far, Stratasys stands out as a profitable company with rapidly growing revenues. Its recent MakerBot acquisition and its ownership of the Thingiverse give it exposure to the retail market in addition to the corporate market. Organovo also seems like an excellent speculation opportunity, but investors need to bear in mind that the idea of reinventing the medical world through 3-D printed body parts is still in the fantasy stage, and investing in Organovo is a binary "all or nothing" risk/reward proposition--the company can easily go bankrupt, but it also has multi-bagger potential.
I should also emphasize that, as the above two charts exemplify, the shares of these companies have soared as of late, and prudent investors should wait for a sizeable pullback. I don't mean 5-10% like the one we have seen in, say, Stratasys. I mean 30% or more. Consider that shares of Intel (NASDAQ:INTC) traded down from $0.49 to $0.23 from 1980-1982, and it proved to be one of the great innovators of the 1980s and 1990s, with the share price rising more than 200 times from this 1982 level. There will come a time in the not-too-distant future when the 3-D printing investment thesis is questioned, and investors who are buying into euphoria now will sell into weakness. This is when I plan on buying the bulk of my position, but I am also not selling any time soon.
2: Gold Re-monetization
Recently, I wrote an article in which I describe the actions taken by political and monetary authorities in the U.S., and to a lesser extent in Western Europe, and by the IMF to "de-monetize" gold in the 1970s. Officials were acutely aware that the "golden rule" (i.e. he who has the gold makes the rules) was in effect, and since the U.S. lost most of its gold attempting to maintain the price at $35/ounce in the 1950s and 1960s through the London Gold Pool, these officials acted upon a corollary of the golden rule: if you don't have the gold but want to make the rules, then undermine the golden rule. Documentation links this perspective to top officials at the CIA and the State Department. As a result the Federal Reserve, led by Arthur Burns, put forward a de-monetization agenda, whereby it convinced the most important global central banks (predominantly in continental Europe) and the IMF not to buy gold, and to in fact sell gold in an attempt to undermine its importance in the global monetary system.
Up until very recently, de-monetization was still in effect, and central banks were net sellers of gold. But during the financial crisis, central bank gold holdings hit an inflection point and started moving higher.
Most of this buying is coming from emerging markets and Asia, and so western central banks have not necessarily re-evaluated their position on gold. However, the fact that central banks are buying gold reaffirms its monetary significance. While this may not necessarily imply that we are heading into a gold standard or a gold-exchange standard era, gold is going to play a larger monetary role than it has in the past couple of decades. We may see some smaller countries partially back their currencies with gold, and we may see international trade deals with gold clauses inserted.
Consequently, I think the price of gold is going to rise meaningfully over the long term, and investors should own investments that are correlated to the price of gold.
I prefer to simply own gold coins and bullion (e.g. Gold Eagles, Pamp Suisse bars...etc.). However, investors should also consider ETFs such as the SPDR Gold Trust (NYSEARCA:GLD), or better yet, there is a closed-end gold fund called the Central Gold Trust (NYSEMKT:GTU) that trades at a 5.3% discount to the spot gold price, and so it is as if you are buying gold for less than $1,200/ounce! Before buying one of these funds, however, investors should realize that there are differences between them, which I outline here. Investors may also buy shares in gold miners, although gold miners have very different risk/reward parameters than gold bullion, and proper due diligence is required.
3: From Cash to Cashless
There is an increase in the portion of global transactions that are taking place using debit and credit cards. This trend is evidenced in a comparison of the cashless payment industry's sales growth relative to the global economy. Visa (NYSE:V) and MasterCard (NYSE:MA), which represent a majority of credit/debit card transactions, are growing their combined sales at a much faster rate than the rate at which the global economy is growing. Over the past decade, while global GDP has increased from roughly $37.6 trillion to $70 trillion, or at a 6.4% annual growth rate, Visa's and MasterCard's combined revenue has grown from $4.2 billion to over $20 billion, or a 16% annual growth rate.
The reasons for this are rather intuitive.
First, credit/debit cards are convenient compared to cash. Cash can be burdensome to carry and to transact in, especially when dealing with small exact amounts or very large amounts. Furthermore, if cash is stolen it is almost impossible to trace. If a credit card is stolen, then the credit card company knows exactly when the card was used and where. Often the card owner can be reimbursed for such illegitimate transactions if (s)he reports the card stolen.
This last point leads to the next one, which is that governments love the fact that credit/debit transactions enable them to trace the flow of money. We see this in restrictions on using cash for transactions which are becoming more egregious, particularly in Europe. In France, transactions larger than 3,000 euros are illegal. Similar laws exist in Spain and Italy.
Finally, there is the rise in e-commerce, which I discuss below. Nearly all e-commerce transactions take place using credit or debit cards.
The obvious beneficiaries here are Visa and MasterCard. Investors may want to choose one over the other, but the difference is primarily geographical. Visa has more American exposure and MasterCard has more European and international exposure. Both are global companies, and I think it is virtually impossible to make a case for one without implying that there is a case for the other except in the most extreme circumstance (e.g. one of them uses fraudulent bookkeeping).
Like with 3-D printing companies, Visa and MasterCard have performed extremely well as of late.
Therefore, I would wait before initiating a position. There is really no reason to be impatient with these companies. They often come under regulatory scrutiny and this has knocked their prices down from time to time. These are great buying opportunities.
4: The Shortage of and Demand for Strategic Metals
New technologies utilize a wide variety of rare and esoteric metals. Here is just a short list.
- Uranium for the production of nuclear power
- Platinum and palladium for catalytic converters in automobiles
- Silver for photovoltaic cells in solar power generators
- Niobium for steel reinforcement
- Dysprosium for permanent magnets
Industrial demand for all of these metals, among others, is rising.
While there is an ongoing backlash from environmental groups, nuclear power is in a secular growth trend and demand is outpacing supply.
Platinum and palladium demand is also rising as emissions standards increase in parts of the world where people are driving more cars. This means there is greater demand for catalytic converters. For both platinum and palladium, global demand is greater than global mine supply. This deficit must be made up for through either recycled metals or by drawing down inventories. According to Resource Investor, demand for platinum in 2012 was 8,070,000 ounces, or 229,000 kilograms. For palladium, 2012 demand was 9,725,000 ounces, or 276,000 kilograms. Demand outpaced mine supply for platinum and palladium by 28% and 38% respectively.
Industrial demand for silver has been rising as new usages are found in technologies from solar panels (photovoltaic cells), to medical devices, to everyday electronic devices. This has been offset in the past by declining demand for silverware and photography, but these downtrends have less of an effect each year, and ultimately industrial demand is rising--up from about 370 million ounces a decade ago to 470 million ounces today.
Niobium is a little-known metal that is used to reinforce steel. As developing markets build up their infrastructure they will use a lot of steel, and therefore niobium to strengthen it. Global steel demand has increased from 850 million tonnes in 2000 to 1.5 billion tonnes in 2011. Thus, steel demand has been increasing at an annualized rate of 5.3%. Niobium demand has been increasing more rapidly because steel producers have been using more niobium per unit of steel to further strengthen steel structures. These trends are illustrated on the following chart, which can be found on IAMGOLD's "Niobium 101" webpage. Note that FeNb intensity refers to how many grams of niobium are used per tonne of steel.
Dysprosium is cited as a strategic metal that is essential to national security. It is also used in many clean energy technology products. Dysprosium has several industrial applications, including permanent magnets, neodymium-iron-boron magnets used in hybrid cars, neutron-absorbing control rods in nuclear reactors, and data storage (which requires magnetic compounds).
But while the demand for these metals (among others) is rising due to secular trends, the supply of these metals is severely restricted. Uranium and silver are, for the most part, not economical to mine at current prices. Neither are platinum and palladium, the supply of which is further restricted by the fact that these metals are most plentiful in South Africa and Russia, which are considered to be high-risk mining jurisdictions. More than 80% of the world's niobium comes from just one mine--Araxa--in Brazil. Virtually all of the world's dysprosium is mined in China.
The end result is that the prices for these metals must go substantially higher in order to reflect rising demand and to incentivize mining companies to operate lower-grade mines.
Obviously this trend covers a lot of ground and there are a plethora of investment opportunities that stem from this basic thesis. Here are just a few investment ideas to consider. Note that they are generally depressed in price and so investors can consider taking positions now.
- Platinum and Palladium ETFs, Coins, and Bars: While there is one mining company--Stillwater Mining (NYSE:SWC) that seems intriguing, I think the best way to play this sector is to simply buy coins and ETFs. I have recommended the Sprott Physical Platinum and Palladium ETF (NYSEARCA:SPPP) as the best ETF in the sector given its low expense ratio and its favorable tax structure. It holds about 55% palladium and 45% platinum.
- IAMGOLD Corp. (NYSE:IAG): IAMGOLD is primarily a gold miner with operations in Burkina Faso, Surniame, and Canada. But it also owns Niobec, which is a niobium mine. This is more or less the only way to get exposure to a producing niobium mine. As a gold miner it is a solid company, although it needs higher gold prices for its full value to be realized. Therefore, this is a good way to play this trend along with the re-monetization of gold. Currently, the company is exploring potential expansion plans for Niobec, and it is likely going to be bringing in a JV partner to help fund the expansion. It should be one of the cornerstone properties in IAMGOLD's portfolio for decades to come, and it should benefit from higher niobium prices.
- Dacha Strategic Metals (OTCPK:DCHAF): There are lots of rare earth mining companies, but I like this approach. Dacha Strategic Metals, in a nutshell, currently holds dysprosium and cash. The market value of these assets exceeds this company's $9 million valuation by nearly 40%. While investors will probably do better if they have the knowledge to pick winners among dysprosium mining companies, I like the direct metal exposure that Dacha Strategic Metals provides.
- Silver Coins and Bars: There are more opportunities in silver mining companies than there are for these other metals, but I like owning coins and bars the best as a direct play on the price of silver. Investors should consider purchasing bullion coins, or coins issued by governments that can be purchased for a small premium over the spot price of silver. The most common is the Silver American Eagle, although the least expensive is generally the Canadian Maple Leaf. These are instantly recognizable by coin dealers, who will gladly buy them back from you should you decide to sell. Furthermore, they will develop a small numismatic premium over time, so that the premium paid for a 2009 Silver Eagles exceeds the premium paid for a 2013 Silver Eagle.
- First Majestic Silver (AG) and Silver Wheaton (SLW): These two companies have a significant amount of exposure to the price of silver as well as low costs. If you want relatively low-risk leverage to the silver price and in the latter case a dividend, then these are companies worth owning.
- Uranium Participation Corp. (URPTF): Uranium Participation Corp. is a holding company managed by Denison Mines (NYSEMKT:DNN)--a publicly traded uranium producer--that holds uranium oxide and uranium hexafluoride, which are forms of uranium "bullion." The management fees are minimal at 1.5% of the value of any uranium bought or sold, and $400,000 per year plus 0.3% of the company's net asset value in excess of $100 million (current NAV is just over $500 million). Uranium Participation Corp. is a great way for investors to gain exposure to the price of uranium without incurring the risks of mining uranium.
5: From Truck to Rail
The railroad industry has been incredibly strong since the beginning of the 21st century, having meaningfully outpaced the growth of the American economy. This has been in part due to some economic growth, but a lot of it is that there is a shift from truck to rail transportation.
This is due to the relative efficiency of rail transport versus truck transport. There are two reasons for this. First, railroads use far less fuel than trucks. CSX Corporation (NYSE:CSX) boasted that a gallon of diesel fuel can transport a ton of goods nearly 450 miles by train. With fuel costs elevated, the railroad industry should continue to benefit while the trucking industry suffers.
Second, railroad transportation requires far less labor than truck transportation. A train is basically hundreds of trucks linked together with one truck driver. The relative savings are incredible even if the train engineer has a higher salary than the truck driver. These savings have been compounding over the 21st century, as the cost of employing somebody has increased due to higher taxes and an increased regulatory burden.
Investors who find this story convincing will be doubly impressed when they realize that railroad companies are consistently and highly profitable, and extraordinarily shareholder-friendly. Pretty much all of the major railroad players pay rising dividends and buy back their own stock fairly regularly.
That being said, many railroad companies are trading near all-time highs, such as Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC). Therefore, investors may want to wait for weakness in these shares. However, one opportunity that appears to stand out now is CSX, which fell after releasing sub-par results for Q4 and trades at just 14.5 times earnings. These are opportunities that investors need to take advantage of.
Investors may also want to consider Canada's largest railroad-- Canadian National (NYSE:CNI), which is set to take advantage of the growing demand for Canadian natural resources in China, although it is somewhat pricey relative to its peers.
6: Population Growth and the Need for Agricultural Efficiency
There is little doubt that the global population is growing, and that it will continue to grow into the future.
One can draw many conclusions from this. But the one that I think is the strongest from an investment standpoint is that all of these people need to eat. There are two conclusions we can draw from this. First, food prices are going to rise. Investors who do not speculate in the futures markets can consider taking positions in broader agricultural commodity index funds such as the PowerShares DB Agriculture Fund (NYSEARCA:DBA), or the ELEMENTS Rogers International Commodity Agriculture ETN (NYSEARCA:RJA) (this one is broader, but less liquid). Investors can also consider taking positions in companies that produce agricultural commodities. Publicly traded farming companies are few and far between, and several of them have diversified into other sectors. However, investors may consider Black Earth Farming (OTC:BLERF), or if they want something local and (slightly) more liquid, they can buy Alico (NASDAQ:ALCO), which produces citrus and sugar products in Florida.
All of these assets are well off their recent highs. Alico is trading at $36.50/share, down from $47/share, and it appears to have strong support around $25-$30/share.
Black Earth Farming is trading at rock-bottom prices, down 75% over the past couple of years.
This company owns 250,000 hectares in the extremely fertile "Black Earth" region in western Russia, and it trades at just $450/hectare. Investors who are able to should buy the shares on the Swedish exchange (STO: BEF-STB), as the pink sheets are virtually illiquid.
Second, given that farmland is limited, farmers are going to have to find ways to increase efficiency. Those companies that provide services and products that increase the farmers' production capacity per land unit are going to do extremely well.
Investors who want to invest in such companies will be pleased to learn that there is a lot of pessimism and discounted share prices in the fertilizer space thanks to over-supply concerns. Shares of The Mosaic Company (NYSE:MOS) are especially attractive. They trade at <1.5X book value and they give investors exposure to all three major fertilizer products--phosphates, nitrogen, and potash. The company has remained profitable throughout the turmoil, and it has retained a lot of cash which it has begun to deploy in order to expand its business in the face of weak prices.
The shares have been especially weak, which is likely due in part to the fact that Cargill, which used to be a majority shareholder, has been selling off its massive position over the past several years. This is expected to end in 2015, at which time the supply overhang will dissipate. Thus, assuming that fertilizer prices begin to turn around, as the aforementioned trend predicts, Mosaic shares will have a lot of things going for them in the coming years.
Investors can also consider purchasing shares in Lindsay Corp. (NYSE:LNN), which produces irrigation systems. Irrigation is a great way to play the increase in agricultural efficiency without exposure to volatile fertilizer prices. High-tech computerized irrigation is still in its infancy and Lindsay has incredible room to expand, especially overseas. Hopefully the company will realize that it needs to divest its floundering road barriers business, which will streamline the company's focus and increase its long-term growth potential.
Global e-commerce has been soaring despite economic woes in Europe and several emerging markets.
(Source: US Department of Commerce, JP Morgan, Channel Advisor Estimates, Forrester Research, IDC, eMarketer, UK eStats, et. al.)
This trend is set to continue, as e-commerce represents just a small amount of total global commerce. As technology improves, the infrastructure used to facilitate e-commerce is making the experience easier for consumers.
The "obvious" winner here is Amazon (NASDAQ:AMZN), which has been ruthlessly sacrificing profits in order to expand its distribution infrastructure and maintain its dominance over this market. Of course, investors are wary of investing in a company valued at $165 billion with no profits. These skeptics now have decelerating revenue growth to hang their hats on--2013 revenue grew at "just" 22%. On a price-to-sales basis, Amazon doesn't appear to be that expensive at 2.2X given its high growth rate. The investment thesis is based on the presumption that the company will become extremely profitable once it is done sacrificing its profits for infrastructure growth. This can be years away, and investors looking for dividends should probably pass on this one. More aggressive investors may want to take a look at the shares after Friday's 11% pullback, although given general weakness in the stock market and the high volatility in Amazon shares I would wait for a lager pullback before buying the shares.
Investors who are looking for an opportunity in e-commerce with actual profitability may want to consider purchasing shares of eBay (NASDAQ:EBAY) or Yahoo (YHOO), which own Paypal and (part of) Alibaba.com, respectively. eBay is more of a "pure play," although its auction business has been relatively weak. Still, the company is comfortably profitable with growing sales and profits, and I think the shares can be purchased on weakness. Yahoo has many businesses that aren't directly associated with the rise in e-commerce, and if it weren't for the Alibaba stake, the company would be an overvalued internet dinosaur with shrinking sales that is losing out to companies such as Google (NASDAQ:GOOG). I think without an additional justification for owning the shares that Yahoo should be avoided.
One thing to note about this trend is that it is fairly well-known, and even if you can make an argument for owning the aforementioned three companies or their peers on a fundamental basis, I would want to wait for general market pessimism to gain a better entry point. Since these companies, especially Amazon, are so widely held, then a broader market sell-off will inevitably drag shares of these companies lower as well.
In this article, I have pointed out seven trends that I believe correspond to solid investment opportunities that are relatively immune from the cyclical nature of the market.
- 3-D printing may change the ways that manufacturing and product design take place, and the companies that own patents on this technology should perform very well.
- Central banks and investors are expressing a mistrust in paper currencies and a renewed interest in holding gold, and so the price of gold bullion should rise.
- More and more people and businesses are using credit and debit cards as opposed to cash and checks for transactions, and companies such as Visa and MasterCard are positioned to benefit.
- The rise in new technologies is leading to a rise in demand of rare and esoteric metals that are under-produced, and their prices will likely rise.
- The economic benefits of shipping goods via rail as opposed to shipping them via truck are becoming more acute, and so railroad companies should benefit.
- The rise in global population has many consequences, but the most certain is arguably an increase in food demand. Food prices should rise, and companies involved in making farmers more efficient should benefit.
- More commerce is taking place on the internet, and companies such as Amazon and eBay, and to a lesser extent Yahoo, are positioned to benefit.
I think an excellent portfolio can be generated by sticking to these trends. Not only will investors be able to diversify their exposure across many sectors and geographies, but they will be confident in knowing that even if there is short-term weakness (such as that seen in gold prices, fertilizer prices, or in shares of CSX) there are powerful secular tailwinds that can drive the aforementioned assets higher in the long run.
Given these ideas, investors can construct several different kinds of portfolios geared towards a variety of long-term goals. An aggressive investor can overweight the speculative, yet rapidly-growing 3-D printing stocks and some smaller metals mining companies. Conservative investors looking for dividends and dividend growth can focus more on the railroads, the cashless payment companies, the higher dividend fertilizer companies such as Potash Corp. of Saskatchewan (NYSE:POT) (not mentioned above), and gold and silver royalty companies such as Silver Wheaton or Royal Gold (NASDAQ:RGLD) (not mentioned above).
While there will inevitably be some losers in this bunch, I think the odds are stacked in favor of those investors who pick up these companies, as well as the dozens of unmentioned yet related companies on weakness.
Disclosure: I am long AG, BLERF, V, TAS, POT, MOS, SLW, RGLD, RJA, CSX, SSYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own shares in companies not mentioned here but which are related to the content of this article. I own gold, silver, and palladium coins and bars.