Looking Through 2019 To The 2020s; 4 Major Themes

|
Includes: ABB, ACN, ADM, AMKBY, BAYRY, BG, BMO, BNPQY, BP, CMANY, CRRFY, CRZBY, DNNGY, DWDP, EBKDY, ENGIY, FSLR, GLNCY, GS, HPGLY, HSBC, IBM, MS, NVDA, RDS.A, RDS.B, SIEGY, TM, TOT, TSLA, UBS, USB, VWAGY, WMT
by: Henry Miles
Summary

In past articles, I have discussed what I consider to be major investment themes for the years ahead.

They include renewable energy, blockchain, and crop-based agribusiness; now one more, robotics/AI.

Surging underlying demand and consolidating competitive positions will drive value in these four areas.

For those who haven’t moved into them, the choppiness going into 2019 may present an opportunity to do so.

Added to very important fundamental, technical and other factors, shareholder value is most importantly driven by the underlying demand for products and services and the competitive position of the companies that supply to that demand. It’s very easy to get distracted in these markets. However, just as it was when we were all learning how to drive, wise investors will “aim high in steering” keeping their eyes just below the horizon. Here are four major investment themes that are coming at us, looking forward into the 2020’s.

#1, Crop-based Agribusiness

Let’s begin with agrochemical and seed companies vested in improving crop yields including through genetic engineering. Here, an oligopoly has recently formed with the mergers of ChemChina and Syngenta (national), Dow and DuPont (DWDP), and Bayer and Monsanto (OTCPK:BAYRY). These three companies, extending to DowDuPont’s eventual spin-off of Corteva, essentially control their global markets (which is the primary reason that regulatory approval was so long in coming). Once they work their way through challenges common to most M&A’s, my sense is that DWDP and BAYER should begin to outperform the market.

The Merchants of Grain”, also now known as “ABCD’s” – Archer Daniels Midland (ADM), Bunge (BG), Cargill (private), and Louis Dreyfus (private) – have long held global oligopoly powers. Unfortunately, grain, legume, and other soft commodity prices have been in cyclical decline [see 5-year chart] holding back the stock prices of ADM and BG. Moreover, the industry has suffered from trade and tariff restrictions and retaliation.

But food is food, the population is growing, and the beginnings of a trend away from animal protein may be gathering momentum. Against those macro trends, only a few things must go right for crop-based agribusiness to arc positive heading into the 2020’s: a) a cyclical upturn in prices, b) a better trade environment, and c) benefits resulting from blockchain (read on). Oh, and one other thing: Given their recently announced changes at the top, I sense that Bunge may finally be ready to be acquired and merged either with ADM, or Glencorp (OTCPK:GLNCY) who made a run at them in 2017. And, given the precedent set by ChemChina in its acquisition of Syngenta, it’s not outside the realm of possibility that COFCO – China National Cereals, Oils and Foodstuffs Corporation (national) – might approach Bunge.

#2, Blockchain

The words “supply chain” originally defined serial and systemic linkages of product and service components that met in-coming at a production facility, and out-going at a distribution center. The paradigm and related concepts like just-in-time inventory, manufacturing and delivery were instrumental in driving productivity over the last few decades. Still, handoffs along supply chains involved non-standard manual and often paper-intensive processes. These are cumbersome, expensive, and prone to human error that results in do-overs. Not good enough.

Executives are coming to understand that their companies require another round of modernization and the tag of choice is, “blockchain”. In earlier articles on the subject I’ve referenced and linked background materials including this definition offered through Wikipedia:

“A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically has [a] pointer as a link to a previous block, a timestamp, and transaction data. By design blockchains are inherently resistant to modification of the data. Functionally, a blockchain can serve as, an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.For [such] use, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks..."

I have italicized above the key words – “linked and secured”, “pointer”, “timestamp”, “distributed ledger”, “verifiable and permanent”, “peer-to-peer”, and “adhering to a protocol”. This is the stuff of next-level improvements in transaction processing and oversight. By way of analogy, think of the progress that has already been achieved with such methods in credit card and securities processing. For another take on the subject, I refer you to this article written by Rick LeBlanc for the Balance Small Business.

The grain middlemen mentioned above – again, Archer Daniels Midland, Bunge, Cargill, and Louis Dreyfus – are working to organize a “GrainBridge” blockchain. So are downstream grocers like Walmart (WMT) and Carrefour (OTCPK:CRRFY) in “FoodTrust” that will be used initially by farmers, consolidators, and truckers of fruits and vegetables. This blockchain platform will speed time-to-market and reduce spoilage and administrative costs.

As one who facilitated and financed international trade – grain, cargo, and oil – I can assure you that the parties and overhead involved in such activities are onerous involving invoices, packing lists, evidence of insurance, bills-of-lading, letters of credit, bank drafts, collection documents, port permissions, customs declarations, the list goes on and on. Therefore, it’s not surprising that global container shipping giant Maersk (OTCPK:AMKBY) is also heavily involved in blockchain, “TradeLens”. To be expected from complex multilateral initiatives, here we see some intramural squabbling, notably from Hapag-Lloyd (OTCPK:HPGLY) in Germany and CMA (OTCPK:CMANY) in France. Given the potential involved, things will eventually get sorted out; there is no place in blockchain for parochialism.

And, then there’s oil that is slightly behind the curve but where, “Abu Dhabi National Oil Company (ADNOC) is piloting blockchain-based transaction management for its commodities right from the oil wells through to its end customers. The automated, blockchain-based, system will encompass oil and gas production management for ADNOC’s entire value chain including tracking, validating, and executing, transactions. As with many blockchain pilots, this one is also expected to increase efficiencies and provide greater stakeholder transparency. A key differential, however, is this pilot’s application to the entire oil and gas lifecycle where other industry pilots have focused on key parts of commodity supply chains, like trade and post-trade processes.”

Tying into the initiatives above are four consortium of global trade finance blockchains involving Bank of Montreal (BMO), BNP Paribas (OTCQX:BNPQY) Commerzbank (OTCPK:CRZBY), the Erste Group (OTCPK:EBKDY), HSBC (HSBC), UBS (UBS), US Bancorp (USB) and many other major banks. Speculation persists that we may see merger activity among these blockchains, a good idea. Another good idea is the CLS forex blockchain, covering 120 fiat currencies and shepherded into production by Goldman Sachs (GS) and Morgan Stanley (MS).

Many companies, across many industries, stand to benefit from blockchain. Simply because of scale economies, larger companies will benefit more than smaller ones. However, my money is on two information technologists that will “bind it all together” and “make it happen” for all parties involved. If you’re so inclined, take the time to drill into the blockchains mentioned above and you will see that IBM (IBM) is involved with most of them. The sleeper is Accenture (ACN) which, while not as visible yet in the area, surpasses Big Blue in their ability to deliver extremely complex, industrial-strength application solutions. Also, importantly, these two companies stand to benefit handsomely from demand for critical adjunct services including cybersecure cloud computing.

#3, Renewable Energy

I have written about renewable energy extensively and, other than to link to my most popular article on the subject, no purpose is served by rehashing all that here. Successful investors will be ahead of the opportunities along this continuum, the top representing the supply-side with the bottom representing demand:

  1. Converters – Those tapping and turning the power of solar, wind, geothermal, tidal, and hydrogen into clean energy; photovoltaics, turbines, generators and fuel cells.
  2. Storage – Manufacturers of batteries that enable the economic retention and "buffering" of electricity pending its final use whether by consumers, industry, or municipalities.
  3. Distribution – Grid solutions essential to the delivery of electricity – analogous to big oil's midstream system of pipes and downstream networks of gas stations – including micro-grids.
  4. Engineering – The specialized services of outside experts that support governmental and commercial renewable energy projects; conversions, upgrades, and maintenance.
  5. Utilities – Publicly-regulated companies that bring together and operate the elements above to meet the end needs of consumers for electricity.
  6. “Appliances” – Broadly defined to include all devices that plug-in and draw power for whatever their intended purpose; lighting, heating, tool and vehicle charging, etc.

Although I am invested in a few “out there” companies on the top / supply-side of the continuum, the major action will be in solar/photovoltaics and wind/turbines. I like First Solar (FSLR) and point readers to Vincent Ventures' recent series of SA's articles on the company. I also like Orsted (OTCPK:DNNGY), a Danish company and formidable force in offshore wind. And, I like Siemens (OTCPK:SIEGY) that is increasingly active in both solar and wind and, I suspect, positioning to become the renewable energy integrator with strong partnerships in battery storage and grid solutions.

On the bottom, the demand-side of the continuum, I have one investment in the utility space with the progressive French company ENGIE (OTCPK:ENGIY). However, I have become somewhat fixated on appliance companies and specifically electric vehicles. This we know: BEV’s are capturing from ICE vehicles an increasing share of the automobile market. We also are learning that dominant manufacturers are moving aggressively into the area. By way of illustration, Volkswagen (OTCPK:VWAGY) recently announced that it will stop manufacturing ICE vehicles, petrol and diesel, in 2025. But, as with Tesla (TSLA), we must remember that technological prowess is but only one condition for success in the coming world of electric cars. Huge amounts of capital are also essential, and for this reason, my money is on Toyota (TM) even though they’re somewhat late to the BEV party.

Although counterintuitive, it is worth taking a few seconds to talk about dirty energy in the context of clean. This is because the major integrated oil companies have also accumulated vast amounts of capital needed to bring about the change to renewable energy; not to forget that their very existence may come under threat if they don’t. Royal Dutch Shell (RDS.A) (RDS.B) is soon to set short-term greenhouse gas reduction targets and to tie executive compensation to those goals, and BP (BP) has come under pressure to do so as well. Meanwhile, a few of the oil majors including Total (TOT) are moving into solar and/or wind and leveraging their extensive refueling networks with electric charging stations.

As suggested, this seemingly could set up a zero-sum game for the majors with the substitution of oil / petrol with natural gas and, eventually, electricity. However, stepping back, investors need to consider whether the majors might gain market share because lesser players in heavy carbon don’t have the capital or time to adapt. For a fuller discussion of big oil’s transition to natural gas, and transformation to renewable energy, I refer you to this article.

Climate change deniers blather on that a left-wing conspiracy of self-serving scientists has duped us into believing that human-contributed global warming is real. It’s a hoax, so say deniers. Unfortunately, they dismiss the thousands of longitudinal studies by researchers, subject to peer review, as supported by evidence obvious to most of us – melting glaciers / rising seas, dying reefs, extreme weather – typhoons, flooding, fires. Fortunately, most policy makers believe the science and embrace the challenge of climate change as do leaders in the private sector.

#4, A Cross-tab, Robotics/AI

Have you ever noticed that the terms “robotics” and “artificial intelligence” are often associated with one another? This is because they go hand in hand with the former being physical and the latter, informational. We are rapidly evolving beyond fixed-in-place machines that continually replicate a limited number of human movements – picking things up, holding them, fastening and welding, doing whatever comes next. The future is in solutions that sense the environment and move, perform, and adapt, and do so continually and fluidly.

Gaming was/is a “lab” for research, development, and test in some of these areas – life-like action figures moving against one another through shadowy three-dimensional spaces under attack from above and below; mayhem everywhere. As a baby-boomer, I had difficulty equating teenagers with R&D. However, I was the one who grew to appreciate the connection between the faux world of gaming and real world needs to process extremely dense and changing data sets in never-ending real-time.

It’s difficult to conceive where all this might lead just as it was, not too long ago, to envision the future of drones or da Vinci surgery. Because robotics/AI will become so pervasive, I for one had a hard time deciding how allocate investment dollars to the field. Then it occurred to me: Think about the subject as a cross-tab to all others. If one really believes in the future of crop-based agribusiness, blockchain, or renewable energy, then look for companies that integrate robotics/AI into their business and solutions. Companies like IBM with Watson, or:

Always, a Few Numbers

I know a fair amount about strategy and financials, but I’m not god’s gift to stock price prognostication, certainly not in these markets. Thus, I turn the job over to experts meaning the CFA analysts following the stocks mentioned above in which we are invested. Lest anyone think that I’m not putting my money where my mouth is, our holdings covering the four themes above comprise about 50% of our total financial assets; roughly two-thirds of our equities (excluding investments purchased money funds.) Here are the forecasts:

Sell Under-Perform Hold

Over- Perform

Buy Median Forecast Friday Close Appre- ciation
DWDP 0 0 8 1 20 $75.00 $52.78 +42%
BAYRY 0 0 6 1 20 $25.07 $17.81 +41%
ADM 0 0 7 2 6 $54.00 $44.61 +21%
BG 0 0 5 1 5 $77.50 $58.83 +32%
GLNCY n/a n/a n/a n/a n/a n/a $7.15 n/a
IBM 3 0 11 2 5 $155.00 $119.90 +29%
ACN 2 1 8 2 16 $180.00 $155.53 +16%
FSLR 0 0 8 3 6 $62.00 $43.64 +42%
DNNGY n/a n/a n/a n/a n/a n/a $23.40 n/a
SIEGY 0 0 10 2 14 $72.28 $56.34 +28%
TM 0 0 7 3 13 $151.81 $120.10 +26%
RDS.B 1 0 9 3 18 $74.96 $59.51 +26%
BP 0 1 6 6 18 $50.49 $38.66 +31%
TOT 0 0 5 2 22 $69.91 $54.36 +29%
ABB 1 0 15 2 13 $24.95 $19.40 +29%
NVDA 1 1 11 2 22 $235.00 $146.45 +60%

Why Now; Why Not Later

All sorts of articles will be written now about 2019, fewer about the decade ahead. I argue that next year is about the next ten years for the simple reason that we may continue to see values under pressure. QE has ended, QT has begun, and we have exhausted our options for fiscal stimulus. Geopolitical tensions are high owing to my-way-or-the-highway thinking and reaction thereto. Against it all, reconsider this:

  • Agribusiness may recover on the back of rising commodity prices, merger and acquisition synergies, and oligopoly powers.
  • Blockchain is emerging commercially for the potential it holds to speed time-to-market, improve quality, and lower costs.
  • Renewable energy is on the verge of exploding driven by unstoppable demand and competitors positioning to thrive and survive.
  • Robotics/AI, cross-tabbed to the other three themes, is enabling people and organizations to perform better, faster, cheaper.

The 2020’s promise to be an extraordinary decade including for investors. Take advantage of 2019 to prepare for it. Look past the potholes and dips; aim high in steering.

Disclosure: I am/we are long DWDP, BAYRY, ADM, BG, GLNCY, IBM, ACN, FSLR, DNNGY, SIEGY, TM, RDS.B, BP, TOT, ABB, NVDA. 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: Always do your own due diligence in consultation with a licensed and competent financial adviser who understands your unique needs and puts your interests ahead of their own. Remember, there are added considerations in owning foreign securities including those associated with ADR sponsorship, buying and selling the pinks, foreign withholding taxes on dividends, and fees. (All my proceeds from contributing to SA go to charity.)