This is the first of what will become a quarterly letter sent to investors in our innovative growth portfolio similar to what we have done for about a year with our Dividend Stock Strategies. Our aim remains education, providing you with insights into what we are seeing on the cutting edge of technology, the secular themes of growth we are investing in, and specific news that has caught our eye over the past quarter.
Being our first note, we will dedicate most of this letter to discussing the themes of growth in our portfolio before briefly touching on returns for growth stocks.
While performing our initial research that became the foundation of our portfolio, we identified 6 areas where we feel confident that multi year, and perhaps even multi-decade high rates of growth are likely. They are as follows:
- Ecommerce
- Payments
- Technology Hardware
- Social Networking & General Entertainment
- Technology Software (Both Personal & Business)
- Biotechnology & Healthcare
These 6 growth markets cover the vast majority of holdings in our portfolio and are a key starting point to our research process. Below are a few details describing why we believe each of these areas has significant growth in the years ahead.
E-commerce
COVID and the associated lock-downs that carried much of the year in some parts of the country certainly sped up adoption of E-Commerce solutions. In 2020 Total E-Commerce sales were up 32.4% from 2019 while overall retail sales were only up 3.4%. A Clear increase in market share. That being said E-Commerce market share is only 14%. (Census) In less developed areas of the world, the impact was even greater including Peru which saw a 900% increase in E-Commerce Sales in 2020. While some may relish a trip back to the store, we believe that E-Commerce market share will continue to grow and legacy brick-and-mortar retailers will have to get more creative to continue to keep pace in an increasingly “Omni-channel” (in person and digital) retail world.
Payments
While the science on transferring COVID-19 via surfaces is a little sparse, the “war on cash” continued through 2020 as a hesitance to use cash & change led to increased use of digital wallets from Apple Pay to Cash App and Paypal. Additionally, the rise of “digital currencies” additionally raised interest in platforms that could enable the easy exchange between “Fiat” and “Crypto” (US Dollars and digital currencies like Bitcoin). Cash App, owned by Square was a key beneficiary of this trend (Yahoo Finance)
Technology Hardware
5G, Internet of Things (IoT), Cloud Computing, Artificial Intelligence, Autonomous Driving and many other of the fastest growing technologies are powered by cutting edge hardware. Specifically, the quality and quantity of graphics chips (GPU’s) and computer processors (CPU’s) has become incredibly important. Interestingly, this evolution has allowed new companies to thrive; beginning to unseat entrenched competitors like Intel.
Social Networking and General Entertainment
Ever since Facebook (in 2004) and Google (in 2000) pioneered the ad-based revenue model in the early 2000’s, the sector has experienced very strong growth. We anticipate this growth to continue as offerings become increasingly specialized to one’s desires. One need look only at the stunning array at TV streaming options to confirm this thesis. Another long-duration secular trend we believe will be the rise of decentralized gambling (outside of a casino). While only 5 states allow it today (daily gazette), governments are searching for revenue sources and gambling we believe will be a popular one for states around the country in the coming years.
Technology Software
Pioneering the Software – as – a – service (Saas) business model, Amazon with Amazon Web services (cloud computing) and Microsoft with Office 365 & Azure, set the stage for a very popular business model. With the benefit of smooth ongoing revenue the SaaS model has been adopted in products from E-Signature to Cyber Security. Within Software, we have identified several businesses that we believe can attractively grow revenues over the coming 3-5 years.
Biotech & Healthcare
A favorite point of Brian Wesbury at our annual Economic Forecast Breakfast, the cost of sequencing the Human Genome has dropped 75% in the last 6 years. Even more shocking since 2006 the cost has dropped 99.993% (genome.gov). The power of technological advancement in this area has unlocked a variety of possibilities for new drug & treatment platforms in the next 10-20 years. For an appetizer of the type of technology we are likely to see, look no further than the innovative mRNA platform used in the COVID-19 Vaccines from Pfizer and Moderna.
While items from interest rates to economic growth may very well influence the performance of our portfolio in the short term (interest rates were a particular headwind in the first quarter), we believe that over the long-term the growth of these trends will be the primary driver of returns…for which we think the future is bright.
April 2021
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
