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Best long term secular trends


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Guest Schwab711

E.g. I think a lot of us like TDG so I could say sole-source distributors in highly regulated markets (Airlines). I'm thinking ideas with relatively stable growth and why. I don't think we are going to change the minds of much $ in the market by going through the exercise. All my examples are with the US in mind.

 

* Sole-source distributors in highly regulated airline market - TDG

    - FCC legally restricts competition to improve engineering quality

* Distributors of personal credit scores - EFX/FICO

    - Extremely expensive to create/maintain a replacement system and takes a long time to "prove" improved efficiency

* Electronic Payment Networks - MA/V/PayPal

    - Difficult/expensive to get all participants on one system or switch systems once on

* Soda/Water - KO/PEP/DPS/ELDO  (Maybe controversial)

    - Great taste memory? Should we include water?

* Makeup - LRLCY

    - No one in their league and it destroys inflation in pricing power

* Credit Ratings - MCO/MHFI

    - General population doesn't understand business; Customers of business don't want the liability of switching (costs are tiny fraction of deals or a mistake)

* Search - GOOG

    - No one is ever competing! Will apps decrease demand?

* Electric cars - TSLA

    - No doubt we need a gasoline replacement but is this the answer? I know nothing about the auto industry other than it's expensive to be wrong!

* Nuclear Fusion Power Providers

    - Future low-cost producer. Look for Berkshire to enter the market in 2050.

 

 

Any other ideas?

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Great topic.

 

Health & Wellness => towards higher protein and lower sugar & fat foods

- Fish related companies (tuna, salmon)? Specialty Ingredient companies such as Ingredion, Tate & Lyle, International Flavors, ...

 

Ever rising healthcare costs

- private organization stepping in to manage hospitals/elderly homes/drug budgets/... Orpea, HCC Healthcare, Tenet, Express Scripts, CVS, ??

 

#1 of #2 distributors in any sector

- competitive position reinforced by economies of scale and switching costs. Fastenal, Patterson, Henry Schein, MRC, DNOW, ... ?

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E.g. I think a lot of us like TDG so I could say sole-source distributors in highly regulated markets (Airlines). I'm thinking ideas with relatively stable growth and why. I don't think we are going to change the minds of much $ in the market by going through the exercise. All my examples are with the US in mind.

 

I like to invest in companies that are the sole-source or the best source of a product as well. 

 

 

Spices - MKC

 

Salvage Parts - LKQ

 

High fulfillment auto parts - ORLY

 

Fasteners - FAST

 

This thread will probably end up one of those "companies with a moat" threads...

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I don't have good stocks ideas on these but three that strike me as unstoppable are:

- Rising data usage especially over mobile

- Driverless cars

- 3D printing

 

The issue with the latter two being that they are as likely to disrupt existing industries in an unpredictable way as they are to generate big returns for investors.  I'd say the same of rising healthcare costs.

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E.g. I think a lot of us like TDG so I could say sole-source distributors in highly regulated markets (Airlines). I'm thinking ideas with relatively stable growth and why. I don't think we are going to change the minds of much $ in the market by going through the exercise. All my examples are with the US in mind.

 

I like to invest in companies that are the sole-source or the best source of a product as well. 

 

 

Spices - MKC

 

Salvage Parts - LKQ

 

High fulfillment auto parts - ORLY

 

Fasteners - FAST

 

This thread will probably end up one of those "companies with a moat" threads...

 

 

Not to highjack the thread....

 

 

Ross812

 

Im going to take advantage of your suggestion to ask about your holdings.  ;)

 

I have been looking at FAST and going to initiate a position this week. Near a 52 week low it seems to offer value relative to other multiples it has traded. The business seems intact and historically has had great ROE/ROIC which I think it can continue as the business grows, are we just seeing a repricing of the business multiple wise in your opinion? If anything the dividend looks pretty attractive as that should increase nicely in the future.

 

Thanks.

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I think the health industry is ripe for disruption in a big way.  Less focused on human averages and more focused on individualized care tailored to each persons individual genetic needs with a focus on influencing their epigenetic gene expression through lifestyle changes, diet, supplementation, and individualized drugs.  Genetic research, antiaging research, and big data are all going to play a big role.  I'm not sure how to turn this into investing advice though, it is too early in the game.  But I know it doesn't bode well for existing drug companies and the rules they currently play by.  Some will adopt, others won't, and some will try to use politics to ban new ways of doing things (new treatments, types of practitioners, distribution of certain types of medical information, etc), which will fail due to the increasing difficulty with controlling information and travel.

 

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Another secular trend will be the legalization of Marijuana in all 50 states and eventually at the federal level.  The profit will be made catering to the Whole Foods crowd with boutique brands and strains, as well as vaporizers and food products/oils/additives.  People will want to know that their weed was grown organically and they will want a customized experience for different situations with known levels of THC and CBD.  There's a difference between after dinner weed, medicinal weed, and "I want get totally stoned and watch Pink Floyd The Wall" weed.

 

Here's a good article:  http://www.fastcoexist.com/3043513/world-changing-ideas/here-comes-the-whole-foods-ification-of-marijuana

 

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The exportation of Natural gas from the U.S. to Asia and overall of U.S. energy independence. Natural gas is around $3/mmbtu in the U.S. and $10/mmbtu in asia. It costs around 2 dollars all in to ship the natural gas from the u.s. to asia. In the next 5-10 years, I wouldn't be surprised if more and more natural gas is exported out of the U.S. ,balancing the prices. Companies like LNG stand to benefit from the first mover advantage but natural gas companies masquerading as crude oil companies also stand to benefit.

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Great topic.

 

Health & Wellness => towards higher protein and lower sugar & fat foods

- Fish related companies (tuna, salmon)? Specialty Ingredient companies such as Ingredion, Tate & Lyle, International Flavors, ...

 

This made me think of this very interesting article in a recent Economist:

 

http://www.economist.com/news/technology-quarterly/21645497-tech-startups-are-moving-food-business-make-sustainable-versions-meat

 

No doubt this kind of stuff is the future long term, as our current animal farming is not sustainable and doesn't scale (as well as not being humane, and not always healthy).

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Guest Schwab711

Solar energy seems to be experiencing a "Moore's law" style progression with respect to increasing efficiency vs falling costs.

 

It's funny because I've follow First Solar for nearly 9 years now and nearly every year they keep saying technological progress will start to level off in 2 years. A few years ago (2008/2009?) it was stated that solar power efficiency could not pass 18% no matter what innovations were made. That was for all commercial applications of solar panel technology! FS was at 14% or so? Just recently First Solar announced 21.5% conversion rate (http://www.greentechmedia.com/articles/read/first-solar-hits-record-21.5-conversion-efficiency)

 

What you're saying might be true but it's funny the industry never expected it to happen.

 

As a side note, this thread worked perfect for what I was looking for. I just wanted more ideas of angles to study (although the stock ideas are never a bad thing, I learned about LKQ).

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Guest Schwab711

E.g. I think a lot of us like TDG so I could say sole-source distributors in highly regulated markets (Airlines). I'm thinking ideas with relatively stable growth and why. I don't think we are going to change the minds of much $ in the market by going through the exercise. All my examples are with the US in mind.

 

I like to invest in companies that are the sole-source or the best source of a product as well. 

 

 

Spices - MKC

 

Salvage Parts - LKQ

 

High fulfillment auto parts - ORLY

 

Fasteners - FAST

 

This thread will probably end up one of those "companies with a moat" threads...

 

 

Not to highjack the thread....

 

 

Ross812

 

Im going to take advantage of your suggestion to ask about your holdings.  ;)

 

I have been looking at FAST and going to initiate a position this week. Near a 52 week low it seems to offer value relative to other multiples it has traded. The business seems intact and historically has had great ROE/ROIC which I think it can continue as the business grows, are we just seeing a repricing of the business multiple wise in your opinion? If anything the dividend looks pretty attractive as that should increase nicely in the future.

 

Thanks.

 

According to the S&P 500 guide in 2013, FAST has averaged P/E ratios of ~21-22. Depending on how confident you are with FY15 projections, there is probably a >50% chance your long-run returns will at least match EBIT/shr growth rate. Assuming the company remains a strong performer, the downside is basically being forced to sell at 15x earnings in the future so your returns become 0.75*(compound growth rate of EBIT/shr). I like FAST a lot but AXP, CLB, and PX all seem like better choices off the top of my head just in the large-cap space. AXP has all the benefits of generationally-great tailwinds (extreme rising interest rates) while selling at slightly below long-term price multiples. I think there's a reasonable bull-case for EBIT/shr increasing by ~20% annually (probably back-loaded from today) over the period of interest rate increases (5-10 years?). Given how capital-lite they are, reasonable inflation levels will provide significant earnings growth.

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E.g. I think a lot of us like TDG so I could say sole-source distributors in highly regulated markets (Airlines). I'm thinking ideas with relatively stable growth and why. I don't think we are going to change the minds of much $ in the market by going through the exercise. All my examples are with the US in mind.

 

I like to invest in companies that are the sole-source or the best source of a product as well. 

 

 

Spices - MKC

 

Salvage Parts - LKQ

 

High fulfillment auto parts - ORLY

 

Fasteners - FAST

 

This thread will probably end up one of those "companies with a moat" threads...

 

 

Not to highjack the thread....

 

 

Ross812

 

Im going to take advantage of your suggestion to ask about your holdings.  ;)

 

I have been looking at FAST and going to initiate a position this week. Near a 52 week low it seems to offer value relative to other multiples it has traded. The business seems intact and historically has had great ROE/ROIC which I think it can continue as the business grows, are we just seeing a repricing of the business multiple wise in your opinion? If anything the dividend looks pretty attractive as that should increase nicely in the future.

 

Thanks.

 

Orthopa,

 

I think Fastenal is nearing store saturation in the US market. They have stated 3500 is about the limit and they have 2700 right now. They are increasing sales staff and I expect same store sales to tick up from 5% growth to 7% growth. Add to this a 2%-3% bump in store count for the next 7-10 years and I think you easily get 10% growth. Any efficiency gains and expansion of Fastenal branded fasteners is just icing.

 

At 25x is expensive for 10% growth, but this company has a huge moat and slow high quality growth adds up if you are counting your investment horizon by decades and not months or years.

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Schwab, can you walk me through how higher rates benefits AXP? I've never looked at the business in great detail.

 

As I understand it, AXP makes money with charge cards and credit cards.

 

For charge cards they make money by

1) charging an annual fee (not related to rates)

2) charging a swipe fee (not related to rates)

3) maybe a little float from membership rewards points

 

Maybe some schmucks pay the 18% APR on the platinum card's pay over time option that they keep sending me in the mail, but I doubt it.

 

For credit cards

they make the annual fees + the interest rate spread after chargeoffs.

 

Why would this go up with rising rates? As I see it credit card companies' funding cost could not be any lower right now and their high interest rates haven't come down like other forms of credit (corporate loans, mortgages, etc.)

 

Just glancing at the balance sheet, I see they earn on average about 8% on their assets and pay about 1.7% on  their liabilities, a very healthy and juicy spread of 6%+. Has this been higher in the past? ROE seems  pretty stable over the past 10 yrs which includes different rate environments.

 

Like I said, I don't know a lot about the business other than as a customer. I'm just trying to understand the logic of higher rates = better AXP results.

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AXP has all the benefits of generationally-great tailwinds (extreme rising interest rates) while selling at slightly below long-term price multiples. I think there's a reasonable bull-case for EBIT/shr increasing by ~20% annually (probably back-loaded from today) over the period of interest rate increases (5-10 years?). Given how capital-lite they are, reasonable inflation levels will provide significant earnings growth.

 

Not sure I understand why you believe extreme rising interest rates is beneficial to AXP.  The economics of heavy spenders who pay off in full every month should be on the margin negative in that environment, because AXP has to front all the spending to merchants without getting paid any interest from the consumers?

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According to the S&P 500 guide in 2013, FAST has averaged P/E ratios of ~21-22. Depending on how confident you are with FY15 projections, there is probably a >50% chance your long-run returns will at least match EBIT/shr growth rate. Assuming the company remains a strong performer, the downside is basically being forced to sell at 15x earnings in the future so your returns become 0.75*(compound growth rate of EBIT/shr). I like FAST a lot but AXP, CLB, and PX all seem like better choices off the top of my head just in the large-cap space. AXP has all the benefits of generationally-great tailwinds (extreme rising interest rates) while selling at slightly below long-term price multiples. I think there's a reasonable bull-case for EBIT/shr increasing by ~20% annually (probably back-loaded from today) over the period of interest rate increases (5-10 years?). Given how capital-lite they are, reasonable inflation levels will provide significant earnings growth.

 

Schwab,

 

I agree with you on American Express. I started adding it yesterday. I had sold a lot of options on Fiat, KMI, Chef, and AL and I'm looking for somewhere to put the money. I'll have a chance to buy back KMI soon I'm sure but the other three are pretty rich right now.

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Guest Schwab711

 

According to the S&P 500 guide in 2013, FAST has averaged P/E ratios of ~21-22. Depending on how confident you are with FY15 projections, there is probably a >50% chance your long-run returns will at least match EBIT/shr growth rate. Assuming the company remains a strong performer, the downside is basically being forced to sell at 15x earnings in the future so your returns become 0.75*(compound growth rate of EBIT/shr). I like FAST a lot but AXP, CLB, and PX all seem like better choices off the top of my head just in the large-cap space. AXP has all the benefits of generationally-great tailwinds (extreme rising interest rates) while selling at slightly below long-term price multiples. I think there's a reasonable bull-case for EBIT/shr increasing by ~20% annually (probably back-loaded from today) over the period of interest rate increases (5-10 years?). Given how capital-lite they are, reasonable inflation levels will provide significant earnings growth.

 

Schwab,

 

I agree with you on American Express. I started adding it yesterday. I had sold a lot of options on Fiat, KMI, Chef, and AL and I'm looking for somewhere to put the money. I'll have a chance to buy back KMI soon I'm sure but the other three are pretty rich right now.

 

ELDO is my favorite idea right now. I have a long write-up I'm going to publish (probably my first blog post but maybe SA) in the next few days. I think it's conservatively worth $2.00 - $2.50 with huge potential upside and great M&A candidate as a bonus.

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Guest Schwab711

Schwab, can you walk me through how higher rates benefits AXP? I've never looked at the business in great detail.

 

As I understand it, AXP makes money with charge cards and credit cards.

 

For charge cards they make money by

1) charging an annual fee (not related to rates)

2) charging a swipe fee (not related to rates)

3) maybe a little float from membership rewards points

 

Maybe some schmucks pay the 18% APR on the platinum card's pay over time option that they keep sending me in the mail, but I doubt it.

 

For credit cards

they make the annual fees + the interest rate spread after chargeoffs.

 

Why would this go up with rising rates? As I see it credit card companies' funding cost could not be any lower right now and their high interest rates haven't come down like other forms of credit (corporate loans, mortgages, etc.)

 

Just glancing at the balance sheet, I see they earn on average about 8% on their assets and pay about 1.7% on  their liabilities, a very healthy and juicy spread of 6%+. Has this been higher in the past? ROE seems  pretty stable over the past 10 yrs which includes different rate environments.

 

Like I said, I don't know a lot about the business other than as a customer. I'm just trying to understand the logic of higher rates = better AXP results.

 

AXP includes this discussion on Market Risk in every AR. The below link basically shows where the current spread is (historically high at 50bps vs 20-25 average long-term). However, the current global economic condition is not normal and LIBOR is decreasing quickly and is currently negative up to 2 months. Banks/Lenders will get their last hurrah because Europe is pulling down LIBOR artificially from QE and weak Asian demand (over a significant period of time while the Fed is increasing rates with the same strategy). AXP certainly has risks if you are a serious "regression to mean" fan. Both charge-offs are at all-time lows and NIM is near historic highs.

 

I just see years of Asian/Canadian weakness (resource reliant economies), drop in Chinese demand, and continued QE from Europe. I think the largest beneficiaries will be US lenders, financial services, and later, companies that benefit from macro increases in debt load (the US consumer has decades-low leverage ratios at the moment - If income could ever pick up there will be massive growth in the US). I try not to invest on macro beliefs but at some point if I can identify trends that are somewhat assured, slow moving, and significant relative to the whole economy then I at least want to invest in that direction. Inflation is enemy #1 right now so I like financial services (or any business) that takes a % of transactions (PCLN, GOOG, ect have similar aspects but there seems to be downward pressure in the cost of airline flights and CPM). Basically, I'm extremely confident that the average loan balance outstanding for AXP (and all other principal metrics) will continuously rise at a steady/predictable rate. Although specific asset managers would seem to qualify that seems like too specific of a bet for my taste. I want to be assured I'm right, even if it costs higher upside.

 

Current LIBOR rates:

http://www.global-rates.com/interest-rates/libor/libor.aspx

 

Some background on the importance of the spread:

http://www.investopedia.com/articles/investing/060214/what-relationship-between-federal-funds-prime-and-libor-rates.asp

 

OIS-Spread (Fed Funds & Prime Rate vs LIBOR):

http://www.fedprimerate.com/usprimerate-vs-libor-vs-fedfundstargetrate-chart.htm

 

AXP 2014 AR - p.47 (Search: "Net Interest Margin")

We are also subject to market risk from changes in the relationship between the benchmark Prime rate that determines the yield on our

variable-rate lending receivables and the benchmark LIBOR rate that determines the effective interest cost on a significant portion of our

outstanding debt. Differences in the rate of change of these two indices, commonly referred to as basis risk, would impact our variable-rate

U.S. lending net interest margins because we borrow at rates based on LIBOR but lend to our customers based on the Prime rate. The

detrimental effect on our net interest income of a hypothetical 10 basis point decrease in the spread between Prime and one-month LIBOR

over the next 12 months is estimated to be $38 million. We currently have approximately $38 billion of Prime-based, variable-rate U.S.

lending receivables and $38 billion of LIBOR-indexed debt, including asset securitizations.

 

I doubt it will work as neatly as it does on a napkin but the Fed is promising a 25bps rate increase (at minimum) while LIBOR will likely decrease during the same period given the global pressure to de-leverage. This amount to at least [net bps increase in spread] * [$38m gain/bps spread increase) => 25 * 38m = $950m in additional net interest profit per Fed hike that does not affect LIBOR. The great thing is they have many profitable revenue streams yet this stream has potential to move the needle without the usual risk of a severe collapse in earnings.

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We analyze a variety of scenarios to inform management of potential impacts to earnings and economic value of equity, which may occur given changes in interest rate curves using a range of severities. As of December 31, 2014, the detrimental effect on our annual net interest income of a hypothetical 100 basis point increase in interest rates would be approximately $212 million. To calculate this effect, we first measure the potential change in net interest income over the following 12 months taking into consideration anticipated future business growth and market-based forward interest rates. We then stress the implied forward interest rate curve with a 100 basis point increase to measure the impact on the projected net interest income. This effect is primarily driven by the volume of charge card receivables that are non-interest earning and credit card loans deemed to be fixed-rate, which are funded by variable-rate liabilities. As of December 31, 2014, the percentage of worldwide charge card accounts receivable and credit card loans that were deemed to be fixed rate was 66.7 percent, or $78 billion, with the remaining 33.3 percent, or $39 billion, deemed to be variable-rate credit card loans.

 

According to the section of the annual report to which you directed me, all else equal, rising rates would decrease NIM and 2/3 of their receivables are considered fixed rate.

 

I understand there are other reasons to be bullish of AXP. I really don't understand why the specter of rising rates is one of them. All else equal, by the company's own calculation and my uninformed intuition, rising rates would hurt a lender that has funding costs that can't go any lower and charges relatively high interest rates (2/3 of which are fixed).

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I think your calc is off. The $38MM is for every 10 basis points, not 1 basis point, so you need to divide your napkin calculation of $950MM by 10, to get $95MM.

 

So if I understand it correctly, you think that because AXP can borrow in LIBOR and invest in assets (CC borrowings indexed to prime), decreasing LIBOR will help lower AXP's funding cost and increasing Prime from the Fed will help increase what they earn on their assets. Do I have that right?

 

I don't think it's that clear. In my opinion you have the company telling you NIM will go lower if rates were to rise by 100bps and you have 2/3 of receivables at a fixed rate.

 

Looking at the forest through the trees, to me it seems that in the grand scheme of things, NIM should decrease with rates a bit higher.

 

 

 

 

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I agree with thepupil.  The standard asset/liability sensitivity analysis doesn't lead to the conclusion that Prime/LIBOR spread, and therefore NIM, currently at historical wides, should be even wider in a rising rate environment. 

 

The statement that current LIBOR is negative out to 2 month is also not correct.  USD LIBOR is positive across the curve. 

 

Otherwise, I happen to like the credit cad business a lot, in all its shapes and forms.  According to Paul Volcker, "the single most useful financial innovation".

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I think the online education trend will continue to be strong - even replacing college for a lot of people.

 

 

The freelance economy as well. More and more people will work various freelance jobs, rather than being tied to jobs at specific companies.

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I think the online education trend will continue to be strong - even replacing college for a lot of people.

 

 

The freelance economy as well. More and more people will work various freelance jobs, rather than being tied to jobs at specific companies.

 

I spend most of my free time figuring out how to make this happen for myself.  Started a blog about it to help myself focus on making it happen yesterday. 

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I think the online education trend will continue to be strong - even replacing college for a lot of people.

 

 

The freelance economy as well. More and more people will work various freelance jobs, rather than being tied to jobs at specific companies.

 

I spend most of my free time figuring out how to make this happen for myself.  Started a blog about it to help myself focus on making it happen yesterday. 

 

This ties back into healthcare as health insurance being tied to employment is what is keeping a lot of people in jobs they don't like. Imagine if you couldn't really buy car insurance or home insurance on your own, or from out of state companies, or with the exact level of coverage that you wanted because of stupid government regulations.

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