5 Top Investment trends (2021): Finding Themes with Structural Growth Story

5 Top Investment trends (2021) with Structural Growth

The world is beginning to recover from the aftermath of COVID-19, a pandemic that plunged major economies into recessions back in 2020. Uncertainties, however, remain abound pertaining to the resolution of this pandemic.

Developing countries such as India and various Asian nations have seen a resurgent of COVID-19 cases of late due to variant COVID-19 strains that are more infectious. This puts the global recovery in doubt despite vaccination efforts being undertaken on a massive scale all over the world.

Nonetheless, we believe there are certain investment trends that are set to benefit both in a pandemic-driven world as well as a post-pandemic one. In this article, we seek to highlight the 5 top investment trends that will witness structural growth in the coming decade.

I will also highlight what I believe are some of the top stocks best leveraged to these structural trends.

Without further ado, let’s reveal my top investment trends of 2021   

Top Investment Trends (2021) #1: eCommerce

Ecommerce is one of the hottest trends resulting from the pandemic. Before COVID-19, eCommerce is already growing with a projected CAGR in the double-digits, the pandemic accelerated the shift of secular shopping habits to the online marketplace.

eCommerce is one of the Top 8 technology trends accelerating due to COVID-19. 2021 is setting up to be an e-commerce inflection year as the combination of shelter-in-place, lower spending on experiences and government stimulus have driven dollars online.

At the end of 2020 (according to data from Statista) the global eCommerce market has sales reaching $4.28trn and represented 18% of the total share of global retail sales. This data predicts that by the end of 2021, global eCommerce sales will reach $4.9trn and make up 20% of total retail sales. And these numbers are only predicted to go up as we continue into the ‘20s.

Regarding eCommerce and where best to put your money, Amazon, Chewy and Wayfair are by far the best choices because they are mostly pure-play eCommerce, except for Amazon. Amazon while not exactly deemed a pure-play eCommerce company, has other revenue streams that are equally if not even more attractive, one being AWS or Amazon Web Services which is its fastest-growing segment of business focused on cloud computing services.

Chewing away its competition

As a digital-only brand, Chewy was well-positioned to absorb the surge in volume brought on by COVID-19 which forced much of the world’s daily commerce activities online. According to its management, they expect the increased demand levels they are experiencing currently to be here to stay and reflect an acceleration of e-commerce adoption that is not likely to return to pre-pandemic levels.

What makes Chewy interesting is its recurring revenue. The company is cashing in big on auto-shipped business and growth in that segment is accelerating. In its last report, the company’s revenue from auto-shipped items such as food and medicine accounted for more than 68.2% of the business and hit $1.39bn in 4Q, a YoY growth of 46%. That means steady, stable, and safe income even if the world around us is thrown into turmoil due to COVID-19.

“Chewy has one of those businesses where you sign up for auto renewal. Auto renewal is the single most profitable form of business in the world today. I am a buyer of Chewy.”

Jim Cramer

After hitting a high of $120/share, Chewy has corrected significantly as there were concerns over its lofty valuation. At its current price of $79.47/share, it is down 10.6% for the year. This might be an opportunity for investors (particularly pet lovers) to get in at a much cheaper price.

Look out for traditional retail heavyweights

Other companies that might benefit from this eCommerce acceleration trend are surprisingly some of the mega hypermarkets/discount stores that have accelerated their shift towards eCommerce. Three of my favorites are Target, HD, and Costco. All three are reporting solid increases in their digitally sourced revenue.

In addition to their attractiveness as plays on eCommerce, Target, HD, and Costco are all decent dividend payers as well. Target, in particular, is a Dividend King candidate, having grown its dividends by 51 years. That track record is unlikely to be broken anytime soon, in my view as Target continues to dominate both the offline and online retail scenes.

Top Investment Trends (2021) #2: Semiconductors

The semiconductor foundry business model, pioneered by TSMC in the late 1980s, has outgrown the overall semiconductor market over the last few decades, as the emergence of fabless semiconductor companies (e.g. Qualcomm, Broadcom, MediaTek) rely on foundries for chip manufacturing.

The rising fab costs have incentivized previously vertically-integrated (IDM) suppliers to go fab-lite (e.g. NXP,
Analog Devices, Maxim) and outsource their production to foundries.

As such, the foundry market has grown at a CAGR of 10% over the past 20 years from US$13.4bn in 2000 to US$74.0bn in 2020, during which the total semiconductor market has grown at a 4% CAGR from US$204.4bn in 2000 to US$239.0bn in 2020.

As the market leader in this segment, TSMC will likely be a key beneficiary of heightened foundry demand, with GS expecting a 15% VAGR for this market in 2020-2023 and returning to the normalized level of 10% CAGR in 2024-2025.

Piling on the chips

With CAPEX spending expected to be elevated by key foundries players such as TSMC, UMC, SMIC, and Samsung, this will bode well for the Semiconductor Capital Equipment Industry, with key players such as Applied Materials, Lam Research, and KLA Corporation. KLA Corporation or KLAC for short looks particularly interesting to us.

KLAC is a chip-industry service provider that supplies process control and yield management systems for the semiconductor and other related nanoelectronics industries. KLAC highlighted that the global response to COVID-19 is accelerating secular drivers of the industry growth that will allow both the company and the industry to emerge from this crisis stronger than before.

Whether it’s the move to Industry 4.0 or factory automation, the rising semiconductor content in automobiles, remote medical diagnostics, and care, 5G, ubiquitous connectivity, supported by continued data center build-outs or new more capable handset offerings, the new work from home reality or the overall acceleration of digitalization and move to the data era, everything will depend on advancing semiconductor technology that KLAC helps to make possible.

This theme definitely favors semiconductor equipment manufacturers such as KLAC, Lam Research, AMAT, etc, all of which will be massive beneficiaries of heightening Capex spending by foundries such as TSMC in the coming 3-5 years.

Top Investment Trends (2021) #3: Online Entertainment

Live Sports + Sports Betting

When the coronavirus caused nationwide lockdowns in March, state governments absorbed a tough financial blow, watching countless tax streams evaporate. Lawmakers’ hunger for new income sources has opened the door for up-and-coming vice industries, like online sports gambling, to fill the void the virus has created in states’ budgets.

More and more states are launching online betting businesses as the legal infrastructure and public opinion have turned in favor of such services. According to Global market insights, the growth in the online gambling market is expected to witness a 16.5% CAGR from 2020-26, translating into a $160bn market in 2026.

Popular online sport betting companies such as DraftKings (DKNG) and Penn National Gaming (PENN) will stand to benefit from this thematic trend which should continue to gain momentum in 2021.

Another more speculative play is FuboTV (FUBO), which is set to be a huge beneficiary of live sports OTT as well as being well-positioned for free to play fantasy games and sports betting. Through its association with Sky Media (the top sports betting company in the world which was acquired by Comcast in 2018) and now Comcast, FuboTV might be looking to replicate the success and monetization path of Sky Media that has made the latter one of the most successful sports betting company in the world.

Online gaming “jackpot”

Besides video streaming, the online gaming arena has also been a key beneficiary of COVID-19 and this investment trend is unlikely to see a decline in consumer demand for the rest of 2020, particularly with a resurgent in new COVID-19 cases. With more spread of the virus, people are expected to stay at home and more often keep busy on online games and opening the spending spigot.

Based on data from an NPD Group’s report, Americans spent a record $56.9bn on video games in 2020, showing a 27% jump from the previous year.

Tencent, while not a pure-play online gaming company, is the world’s largest game publisher and generates 35% of its revenue last quarter from its gaming division. It is still locking in gamers with hit games such as Honor of Kings, PUBG Mobile, and League of Legends. Its revenue grew 31% annually during the quarter as people played more games throughout the lockdown period.

It has stakes in overseas companies like Fortnite publisher Epic Games and Activision Blizzard which help reduce its dependence on the Chinese market which is hobbled by fickle censorship standards, tight playtime restrictions, and rigid licensing requirements.

Looking ahead investors should expect Tencent’s gaming unit to rely more heavily on overseas titles like Call of Duty Mobile as well as increased investments in overseas developers and publishers.

The recent weakness seen in Tencent’s share price as a result of the Chinese government clamp-down on big-tech players in China could be a good buying opportunity for long-term believers of Tencent’s dominant status in the gaming world.

Streaming into your pod

Last but not least, we have the digital music streaming arena where Spotify is the market leader. Spotify now operates in 79 markets around the world and is rumored to be launching its 80^th market, South Korea, sometime this year. Last quarter, monthly active users grew 31% to 286m, 130m of which are premium subscribers.

That figure could hit 1bn in 10 years.

While the market remains cautious of Spotify because the company has to pay high royalty fees to major music labels and other music right holders, the company’s transition into the podcasting market could change its profitability profile significantly over the coming years.

The big idea is that the more users the company can attract, the more users will listen to Spotify-owned podcasts and their accompanying ads. This could result in a high level of fixed cost leverage that it hasn’t been able to enjoy thus far in the music streaming business.

Top Investment Trends (2021) #4: Augmented Reality/ Virtual Reality

COVID-19 should help expand AR/VR usage because the need to interact at a distance has never been so mandatory.

According to many predictions, the AR/VR market will be in full force by 2025 with the growth beginning now. Most predictions place the market between $80 billion to $100 billion by 2025 up from about $1 billion now. From there, the market is predicted to grow 10X to $1 trillion.

AR/VR has so far been a disappointment, with promoters constantly claiming that they are the next big technology but no breakthrough development has happened thus far. However, that could be finally changing through Apple’s iPhone. With Apple’s continuous iPhone update, an additional VR device is no longer required.

We think mobile augmented reality mainly facilitated through Apple will solve the puzzle of AR/VR distribution. Digi-Capital places mobile AR’s active-installed base at 1.5 billion by 2024 with a combined mobile AR active installed base of 2.7 billion. 

Digital experiences through AR/VR

With Apple setting the stage or platform for the usage of AR/VR to boom through mobile AR, a major beneficiary of that trend will be SNAP.

The company is becoming a very useful tool for companies that want to digitalize experiences for their customers, specifically younger generations. CEO Evan Spiegel mentioned that he believes COVID has accelerated the adoption of AR in many brands because companies are now more open to try new things to reach their audience.  Businesses are more open-minded and many are finding significant ROI utilizing Snap’s AR technology. 

Snap’s goal is to develop AR technology and build a large network of users around the tech.  In its current form, AR is both a monetization tool and an engagement tool. Here is how Snap’s CTO Bobby Murphy sees the company utilizing AR in the future:

“With AR specifically, what’s really fascinating is that it quite literally transforms the way you see the world through your camera. It has tremendous potential to change the way we see the world. To educate, inform, help people connect with one another.”  

Snap’s CTO Bobby Murphy

Smart Glasses

Smart glasses have been an intriguing product with the potential for mass-market appeal. For the adventurous investors, an interesting company that is the market leader in this arena is Vuzix, an AR/VR pureplay.

The company is small in terms of revenue and market cap ($1.2bn). Last quarter’s revenue was $3.9 million compared to $1.5 million in the year-ago quarter, or an increase of 156%. Smart glasses sales rose by 177% year-over-year to $2.4 million. 

Here is how the company’s growth has looked over the past few quarters:

The recent earnings call discussed there being “increased inbound interest in order flows related to the reopening of the economy” as industries such as logistics, warehousing, retail picking, e-commerce and third-party logistics are looking for “many 1000s of units.”

For those who are intrigued by the thought of smart glasses becoming a mass-market product in the not-so-distant future, you might wish to take a small position in this AR/VR player.

Top Investment Trends (2021) #5: Tech-related Infrastructure REITs

Back in June, stocks soared when Mr. Donald Trump talks of spending an extra US$1trn on infrastructure which acts as a nice distraction from the rising COVID-19 cases. The scheme would see funds being poured into roads, rail, and 5G.

Of particular interest to me would be Data-Center REITs, Communication REITs, and lastly warehousing REITs. I like these sectors best for several reasons. The three most important are

1) that the industry served is growing by double-digits and accelerating under the pandemic conditions,

2) their customers are highly unlikely to default on payments and

3) all 3 subsectors lie at the heart of the digital ecosystem, providing critical infrastructure for the e-commerce value chain.

What that leaves us is a group of REITs whose businesses are growing and safe.

Every time you purchase your smartphone or computer, it sets a sequence in motion that travels through a network of communications, data, and logistics facilities— many of which are owned by real estate investment trusts (REITs).

These companies play an integral role in getting your package from the warehouse to your doorstep, giving investors a way to participate in the potential growth of e-commerce.

Cell Tower: Transferring your orders

The first group is communication infrastructure REITs where their assets are the cell towers. These REITs hold communication towers that are necessary for the acceleration of eCommerce.  

Stocks such as American Tower and Crown Castle International, two extremely popular REITs that provide communications infrastructure in the US (CCI only in the US) and globally have been heavily sought after due to the rise of 5G development as well.

Because towers are relatively simple structures, they can be built quickly to meet rising demand. As a group, companies have recently been constructing several thousands of towers a year. However, incumbent tower owners generally enjoy significant barriers to new competition due to strict zoning laws, limited suitable locations, and the network effect and scale their towers provide to end-users.

Data Center: Processing your orders

The second group, data-centers are where the “cloud” lives. Today’s trends are driven by hyper-scale growth, the ability for data centers to reproduce small-cell services over and over again in a way that allows businesses, big and small, to use them to grow without limit.

You have companies like Amazon, Microsoft, Google, and Oracle fuelling the growth of cloud and consequently data-center. These tech behemoths are not likely to default on their payments. Of the data-center REIT, the largest is undoubtedly Equinix whose data centers are located all over the world. Another popular data center REIT is Digital Realty which is one of the largest US data center REITs.

Warehouse: Fulfilling your orders

The last group is the warehousing REITs. The growth in e-commerce is structurally changing traditional logistics for parcel delivery. Industrial landlords are now building facilities closer to population centers where consumers and workers live, allowing businesses to deliver goods to consumers faster and cheaper. Many warehouses are becoming increasingly automated with robots that work alongside human operators to store and retrieve items.

Prologis is the largest REIT in the industrial sector based in the US but with sizable footprints in Europe and Asia.

Technology-related REITs, such as those highlighted above, offer some of the more attractive opportunities we see today, benefiting from the rise of e-commerce and the demand for faster mobile networks, faster delivery times, more bandwidth, and more data storage. These powerful secular drivers tend to be less dependent on the broader economy, which may help to counter the ebbs and flows of market cycles.

Which stocks to BUY NOW?

Out of the > 10 stocks highlighted above, all of which have strong long-term growth potential, I am particularly interested in taking a position/adding to my position in 3 companies which in my opinion are ideal companies to BUY now, taking into consideration their technical aspects in addition to their fundamental resilience as having been highlighted above.    

Stocks to buy now #1: Fubo

Using the proprietary trading system got TGPS which is run by Collin Seow and his team, it shows a potential entry at the US$310 level. While the stock has been within a narrow band for the past year, there are indicative signs that a successful break-out above the US$330 level might finally occur after its latest set of strong June sales.

After having retraced from a high of $63 back in late-2020, FuboTV has retraced to the current share price level of $29, a more than 50% declined. According to the TGPS system, the company might be at the early stage of a strong rebound, with a positive entry signal at the price of $$24.60.

The counter can be a rather volatile stock to purchase, hence an investor might wish to potentially position size his/her initial entry conservatively.

Stocks to buy now #2: Snap

The counter remains in a sideway channel for now but there was a positive entry signal at $61.61 a couple of days ago. The stock could start trending higher if it manages to break out of its last significant resistant level of $65.86 by which the stock could then look to test its all time high level of $74/share.

Stocks to buy now #3: American Tower

AMT has recently breached its all-time high level, although it is not yet a convincing break-out. There was a positive signal to enter into the counter at a price of $263 which is not very far from its current share price level of $267/share. Once a breakout is confirmed, the counter could head for the psychological key resistance level of $300/share.

Conclusion

Whatever the outcome of the pandemic, the lockdown, and the recovery you can rest assured it will take some time for the dust to clear, much less settle. There is no way to predict what the future will bring in the best of times, investors have to make the best-educated guesses they can, so these times are going to be especially difficult to navigate.

What this means is that time and time again, the best investment choices will prove to be solid, blue-chip companies with at least some insulation from the pandemic. Now is the time to take a hard look at your portfolio and decide which are the stocks to trim and which are the stocks to capitalize on price weakness in the event there is a second wave of market meltdown.

It is time to pick some targets and develop a buying strategy.

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Disclosure: The accuracy of the material found in this article cannot be guaranteed. Past performance is not an assurance of future results. This article is not to be construed as a recommendation to Buy or Sell any shares or derivative products and is solely for reference only.