Track the intersection of demographics, economics, and psychographics to follow global changes, advises Chris Versace, editor of Power Trend Profits. Today, he zeroes in on stocks that stand to gain as these trends take hold.
Kate Stalter: Today, I am speaking with Chris Versace, editor of Power Trend Profits. Chris, let’s start out today with just a definition: What do you mean by "power trend?"
Chris Versace: Hi Kate. Yeah, what is a power trend? It is a fantastic question.
There are so many ways to look at the market and come up with an investing strategy. Mine, power trends, really focuses on the intersection of demographics, economics, and psychographics. So we can picture long-term, sustainable trends that companies can either benefit from or be vulnerable to.
It is fantastic because it kicks out both winners and losers that we can either invest on the long side, or more risk-tolerant investors can short or get even more aggressive with.
Kate Stalter: Now, I know you have a number of different power trends you have identified. Can you tell us a little bit about some of them today?
Chris Versace: Sure. All in all, there are about eight great power trends, as I call them. Some have some sub-trends, because we want to have a little extra room and play in all the ways that we can, and capture as many of these intersections as we can.
One of the key ones that we are seeing today is what I call “Always On, Always Connected.” That really deals with not only the growth of smartphones, tablets, but the change in the way consumers are consuming content. Not so much from analog—newspaper, radio and standard television—but more toward a digital way or digital content consumption.
So we look at the companies that are making the devices, making the key components such as RF semiconductors, as well as the content companies, and even the companies that are monitoring what is happening here.
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For example, one is a company called comScore (SCOR), a digital analytics company that would tell advertisers who, what, and where people are looking at so they can properly spend their advertising dollars.
Kate Stalter: How about a couple of others that are prominent, at this point?
Chris Versace: Well, inside of this particular power trend, there are other companies like InterDigital (IDCC), which is a key patent holder in 4G and 3G technologies. And companies like Verizon (VZ) have stated that as they continue to deploy their 4G LTE network, they are only going to offer 4G-capable smartphones. So that is a phenomenal play on that, if you think about that.
Also, two other companies like Skyworks (SWKS) or RF Micro Devices (RFMD), really on the RF semiconductor front. As we have more devices being smartphones and tablets with greater connectivity, 2G, 3G, and 4G technologies, GPS, WiFi, Bluetooth, so on and so forth, it is those types of companies that are poised to growth their revenues far faster than shipment numbers for overall devices, simply because their dollar content per device is going through the roof.
Kate Stalter: Chris, let’s talk a little bit about some of the other power trends. I know you have one you call the “Rise and Fall of the Middle Class.” Say a little bit about that.
Chris Versace: “Rise and Fall of the Middle Class” really takes a look at what is going on with a global perspective. Traditionally, we tend to be US-focused—what is going on with the US consumer? What is going on with the US trends and disposable income, employment, so on and so forth?
If we look outside the United States into China, India, and other emerging markets, what we are seeing is a number of different things. First and foremost, we are seeing rises in wage. We are seeing a trade-up in the type of diet that these people are going from traditionally. There is China, which had been a rice-based diet, migrating toward a fish- or chicken-based diet.
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Well, what do those trends do, in terms of overall global demand for goods and services? We step back and we wonder why coffee prices are going through the roof, why meat prices and chicken prices or even corn prices are going through the roof? It is all because of this rise in a new middle class outside the United States.
Kate Stalter: Any companies that you see that might stand to benefit from that trend?
Chris Versace: Well there are a whole host of companies out there. There is Yum! Brands (YUM), which is doing a phenomenal job targeting growth in China proper. There is Starbucks (SBUX), that is really starting to expand into China.
But there are other US-based companies too, like a McCormick’s (MKC), or even International Flavors and Fragrances (IFF), all of which have increasing exposure either directly or indirectly through their customer base, which can include companies like PepsiCo (PEP), Coca-Cola (KO) ,or Yum! Brands, like I said. They are increasing exposure and profit generation from these emerging markets.
Kate Stalter: You have another trend that I wanted to touch on briefly here, that you call “New Demand and New Solutions.” What is that?
Chris Versace: Sure. “New Demand and New Solutions” takes a look at existing industries and tries to invest in transformative technologies or disruptive technologies that can really change the way the industry is being played today.
One example: over time, we have seen a metamorphosis in terms of televisions. In the past, we had these large cathode-ray tubes, then we had LCDs that dropped a lot of weight out of TVs.
Now, we have got LED-backlit LCD TVs, so we could take a look a look at companies like Cree (CREE), for example, and what they are doing there. We could also take a look at Universal Display (PANL), and its work in FOLEDs, or organic light-emitting diodes.
That is just one twist on that. LEDs are also being used in replacing street lights and a whole host of other applications.
So that is one example, but we can also take a look at some things that may not be so high-tech. For example, we can look in good old-fashioned rail cars. A cyclical industry, but we are seeing a replacement cycle where we are seeing lighter materials like aluminum, at the expense of heavier materials in cars built ten or 15 years ago, in terms of steel.
Kate Stalter: I know that you use fundamentals as part of your methodology in identifying companies that could benefit from these trends. Can you say a little bit about that, Chris?
Chris Versace: Sure. As you can imagine, Kate, that when we are looking at this intersection of economics, demographics, psychographics, and more, there is a tremendous amount of stuff to read. As a result, there is always a lot of data to sift through. You kind of have to piece it all together in your investment mosaic.
Once you have all that, what do you do? You really have to hone in on individual companies. By that, we’re understanding: Where is the revenue generation coming from? What is the profit potential? What do margins look like on a historical basis? What is the room for upside improvement to that? We are also looking at a number of the inputs that go into that.
At the end of the day, you have got to be laser-focused on your entry point, so I tend to use historical valuation, peer valuation and a few others. At the end of the day, if we are looking at particular metrics, it is going to be P/E. It is going to be dividend, dividend growth, and dividend yield.
We will be looking at enterprise value to revenue, enterprise value to EBITDA—so a whole host of metrics.
Generally speaking, for me to get comfortable on a company, particularly with regard to entering a new position, I need to see compelling upside and minimum downside. So I look for a very compelling what I call “reward to risk profile.”
Kate Stalter: Now, I have got to ask you this: How do you believe retail investors should or should not incorporate charting into their buy and sell decisions?
Chris Versace: Well, like I said, I look at number of different things, particularly when I am trying to hone in on an entry point in a new name. But also where I might want to double down on an existing name.
So I would be lying if I said I was only using fundamentals; of course, I am going to consult some charts and look at some of the trends there. What is going on in the MACD and what is going on with the Bollinger Bands®, from time to time.
But by and large, I find that a savvy investor is looking at a combination of things. Just like power trends look at a confluence of economics, demographics, and psychographics, a savvy investor wants to look at the fundamentals. They will consult the charts and so on to make a well-rounded and informed decision.
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