As I explained in 'Benjamin Graham takes on the Internet of Things', I'm building my portfolio around the theme of exponential technologies, or expo tech for short. I define expo tech as any technology that could potentially contribute to the next industrial revolution, like the internet did of the turn of the millennium.
Many of these technologies are either still in their infancy or unproven (or in the case of virtual reality, a bit of both), so this strategy is probably further up the risk spectrum than some might be comfortable with. In a way, I suppose you could liken it to a venture capitalist approach to building a share portfolio. But I'm prepared to hold these shares over the long- term and I'm diversifying across different sectors, so I'm willing to accept the greater risk for the potential superior returns.
As it stands, I hold shares in the following sectors:
· Robotics- ABB (NYSE: ABB)
· Virtual reality- Facebook (NSQ: FB)
· DNA sequencing- Illumina (NSQ: ILMN)
· 3D printing- Dassault Systemes (FR:DSY)
· Internet of things- Skyworks (NSQ: SWKS)
Others I'm considering include artificial intelligence, cyber security and drones.
I finally got around to reading Benjamin Graham's investing classic 'The Intelligent Investor' over Christmas. Value investing is an approach- buy low and sell high- that resonates with me. The most recent addition to my portfolio, Skyworks, is a value play.
After careful consideration, I decided to revisit some of my existing holdings. Other than targeting expo tech, I wasn't following a particular strategy when I picked them last summer. So I'm going to apply Ben Graham's enterprising investor screen to the sectors listed above and replace any shares failing to meet the value criteria.
First up, the robotics industry. The sector has been in the news a lot lately as people are worried that automation will lead to job losses. My opinion, for what it's worth, is a new breed of jobs will emerge from this technology, much like the internet brought us social media managers. In the worst case scenario, we can always fall back on universal income or tax the robots. To put the opportunity in context, Fortune Magazine predicts spending on robotics will nearly double from $71 billion in 2015 to $135 billion in 2019.
For a list of companies operating in this sector, I turned to the holdings of the ROBO Global Robotics and Automation Index ETF. That gave me 81 shares from all over the world which I had to narrow down. I started by removing any with a price- earnings (NYSE:PE) ratio- the principle criteria employed by Graham- above 20, leaving me with a shortlist of 12. Half were Japanese companies and not available through my stockbroker, while I removed one more for ethical reasons, so I had six to choose from.
The next step was to apply a few of Graham's other criteria in the hope of finding at least one candidate for a value investment:
· Current ratio greater than 1.5
· Paying some level of dividends
Here's a summary of how they measured up*. I include my current holding in this sector, ABB, as a comparison.
*Data sourced from markets.ft.com on 13th February 2017
I was left with something of a dilemma, as none of the shares met all of the criteria. I had to decide whether Krones AG's rising EPS (with a current ratio close enough) or Denso's book ratio of 1.2 carried greater weight.
After climbing steeply between 2012 and 2014, Denso Corps' EPS fell in 2015 and 2016. But the PB ratio is worth considering when comparing industrials as it measures tangible assets. On the other hand, Krones AG has experienced a smooth uptrend in EPS over the last five years. And at 2.6, the PB ratio is just above the corresponding figure for the Robo ETF.
So I decided to add Krones AG to my value portfolio. Not only does it give me exposure to the robotics industry, but investing in a German share helps with geographical diversification, as my other holdings are concentrated in the US.
Whether it performs better than ABB remains to be seen, although if it follows the trajectory of Skyworks- up 15% since I bought it last month- I won't complain.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OVER THE NEXT 72 HOURS over the next 72 hours.