By Gordon Pape, Editor and Publisher
Imagine for a moment it’s the year 2025. You’re at your desk, reviewing your portfolio. Will you be nodding approvingly as you see how well your securities have performed? Or will you be kicking yourself for having chosen a bunch of losers?
No one can predict the future, of course. But there are ways to improve the odds that on that day in 2025 you’ll be feeling quite pleased with yourself.
One of them is to identify today’s secular trends and invest in companies that will ride that wave.
The term “secular trend” describes market movements that occur over a lengthy period of time. Stocks that are in a secular trend are not seasonal or cyclical; rather they are driven by long-term factors.
If you pay close attention to secular trends, you can create a stock portfolio that is almost certain to outperform the broad market over time.
Some of these trends are easy to identify. For example, look at energy. Green energy companies are clearly in an uptrend and there is every reason to expect that to continue. If Joe Biden wins the upcoming U.S. election, he has pledged to spend US$1.7 trillion over the next decade on “clean energy and environmental justice”, and expects private, state, and municipal spending to leverage that to $5 trillion. Even if President Trump, who is skeptical about climate change, is re-elected, the secular trend is already in place.
For a negative secular trend, look no farther than the fossil fuel industry. Our need for oil and natural gas is not going to vanish overnight, but it will steady diminish over time as more green energy options become available. At the time of writing, the S&P/TSX Capped Energy Index, which consists almost entirely of fossil fuel companies, was off almost 53 per cent year to date. Some major companies like Suncor (SU-T) and Canadian Natural Resources (CNQ-T) may recover some ground but it is unlikely they will ever retest their all-time highs.
Another obvious example of a positive secular trend is on-line shopping. It was already apparent before the pandemic but now it has become an irresistible force. In 2017, on-line orders accounted for 9.1 per cent of U.S. retail commerce. That increased to 9.9 per cent in 2018. By the fourth quarter of 2019, it was up to 11.3 per cent, according to Statistica. Then came the coronavirus and the chart shot straight up. In the second quarter of this year, on-line purchases were 16.1 per cent of the total in the U.S. Canadian numbers are likely similar.
This secular trend will almost certainly continue although the growth rate will likely slow once the pandemic finally passes. Companies that have profited and will continue to do so include Amazon (AMZN-Q), United Parcel Service (UPS-N), FedEx (FDX-N), and Shopify (SHOP-T).
Some trends are easy to spot but others are more obscure. One example is pet care, which was brought to my attention by my broker. He pointed to the surprising statistics that more U.S. households have pets (84.6 million) than have children (52.8 million). Pet owners overwhelmingly regard their animals as “family” and spend $72 billion a year on pet care.
Companies in this business are thriving, however many of them are not publicly traded or are part of larger corporations like Nestle and Proctor & Gamble. One company that is publicly listed is Zoetis (ZTS-N), which was spun out of pharmaceutical giant Pfizer (PHE-N) several years ago. It is a global animal health firm that produces medicines, vaccines, and diagnostic tests for pets. It generated revenue of US$6.3 billion in 2019. As of the time of writing, the stock was up 26 per cent so far this year. The price/earnings ratio is high at 50 but that’s not unusual in stocks in a positive secular trend.
Another secular trend to look at is cybersecurity. With more companies coming under attack, the demand for state-of-the-art firewalls and detection equipment has increased exponentially.
One leading company we have recommended to readers of my Internet Wealth Builder newsletter is Palo Alto Networks (PANW-N), which describes itself as the world’s largest cybersecurity company. The California-based firm operates in 75 countries and has 75,000+ customers. Second-quarter revenue was up 18 per cent year-over-year and the company reported non-GAAP earnings per share of US$1.48 for the period. The stock dropped to a low of US$125.47 in March but has since rebounded strongly and now trades at about double that figure.
Other secular trends to watch include robotics, artificial intelligence, electric cars, batteries, and health care infrastructure. Let me stress this does not mean all companies in a positive secular trend are going to go straight up in value. There will be bumps along the way. But when you look back at your portfolio in 2025, these will probably be the ones that give you the most satisfaction.
This article originally appeared in The Toronto Star.