Tuesday, January 15, 2013

Three Investment Themes For 2013

As investors we are often focused on the short term but it’s always good to take a step back and look at the big picture. Sometimes things change slowly and it’s not always easy to see them evolving. In this article I want to look at three exciting trends in 2013 and take a guess as to which sectors and themes will do well.

Hardware to Software

One recurring theme in 2012 was the willingness of companies to spend on software as opposed to hardware. Technology bellwethers like IBM and Oracle were reporting decent software sales but weaker numbers in hardware. Indeed, predominantly hardware companies like Dell and Hewlett Packard faced significant challenges within their product lines. In a sense this is part of a longer term trend whereby the intellectual quotient of a good’s value is increasing. Devices are getting smarter and the doomsters that predict terminal decline for the West in comparison with the rise of the BRICs need to take note. Manufacturing maybe shifting to the Far East, but if the value is shifting into the intellectual input then the West can benefit accordingly.

I think this theme will continue to play out in 2013 and things like cloud computing, desktop virtualization, Bring Your Own Device (BYOD) and big data analytics will be hot topics again. It is noticeable that a large part of these activities involve companies creating virtualized environments and using technology to outsource IT hardware requirements. All of which emphasizes the hardware to software shift.

In addition, smart phone penetration will certainly increase and this is only going to create more strain on carrier networks as bandwidth rich applications for things like social networking expand significantly. Of course, all of this will create huge amounts of data from which sales and marketing departments will be all too keen to try and make sense of. 

Putting these things together it is hard to see that the market place for companies like F5 Networks (NASDAQ: FFIV) or Citrix Systems (NASDAQ: CTXS) isn’t going to do well in 2013. F5’s solutions are critical for a company’s application delivery around the web and I suspect its telco derived revenues may well see a bounce this year. As for Citrix Systems its desktop virtualization allows customers to cut their IT costs by not carrying as much inventory as they previously needed and also in reducing downtime. Both companies are large cash generators.

Rise of the Uber Consumer

The uber consumer is typically a member of a subgroup of wealthy single people who are relative winners from the economic recovery. The US has seen a significant amount of bifurcation in the fortunes of the wealthy and mass markets in the last few years and I think it will continue. Therefore investors in retail should think carefully about how these people spend money. Stocks like yoga apparel manufacturer Lululemon (NASDAQ: LULU) and up-market grocer Whole Foods (NASDAQ: WFM) may appear expensive at first sight, but let’s recall that it takes a relatively small number of concerted uber consumers to be converted to their benefits for them to see decent increases in the top line. I would argue that it is a matter of time before other apparel manufacturers come out with ‘cooler’ gear than Lululemon, but for Whole Foods it could be a while longer for customer to seek out alternatives.

In fact the rise of e-commerce is only going to place more stress on retailers to offer differentiated products, service or retail experience. Selling commoditized products under bricks and mortar simply isn’t enough anymore.

Generics, Private Label and In-Store Brands

The last area that I think investors should look at closely is related to the necessity to cut public spending on healthcare. One way that this can be done is through encouraging the increased penetration of lower priced generics. In particular Europe needs to increase generic penetration rates to US levels and I think there is good upside for the likes of Watson Pharmaceuticals (NYSE: WPI) and Novartis (Sandoz).  Watson has over 750 products globally marketed and a mix of organic plus acquisition led growth is giving it increasingly strong prospects.

Similarly, many retailers like CVS, Wal-Mart and Walgreen are looking to expand their ranges of in-store and private label brands. Customers like them because they are cheaper and stores like them because they tend to be higher margin for the retailer thanks to cutting out the profit to the original brand owning pharma company. Look out for this trend to continue

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