Get In Early On The Next Big Global Industry

Imagine a sailboat on a calm, windless day. Not much movement, right? Now picture a seven-mile-per-hour steady breeze filling the sails. See the boat moving steadily across the water?

#-ad_banner-#From an investment standpoint, that’s the difference between a good company in a slow-growth industry and a good company in a fast-growing industry. Stocks with the wind at their backs move higher faster. They’re less dependent on good luck, and they’re less vulnerable to bad news. 

So regardless of short-term market dynamics or medium-term economic cycles, it’s almost always a good time to invest in reasonably priced stocks benefiting from long-term trends. The “graying of America” is one of the most-cited trends. Investors are starting to catch on to the long-term potential of alternative energy, too.

Another strong long-term trend worth attention is the continued rise of robotics, or automation, in everyday life. Industrial processes have used robotics for many years, replacing factory workers with machines that can perform assembly tasks quickly and precisely without getting tired. There are well over 200,000 robots in industrial use around the world today, primarily in the manufacturing of automobiles, electronics, metals and chemicals. Robots are also used routinely now in medical, energy exploration and military activities.

Source: World Robotics 2015

Consumer applications that use robots are less obvious, but they’re gaining in popularity: the Roomba vacuum cleaner, for example, has evolved from a novelty item into a commonplace appliance. In the coming years, we’ll see another wave of robot-like machines in a dizzying number of places.

The biggest problem with using robots in the workplace: they aren’t yet smart enough to interact effectively with human workers. Most factories that use automation keep their fast-moving robot arms safely away from anyone else, often literally in a cage. But the pace of change in robotics technology — including much-improved sensors, artificial intelligence, programmability and even “learning” by machines — is expected to greatly increase human-robot interaction. Robots now perform about 10% of all industrial tasks, but that is expected to rise well north of 20% over the next decade. One study predicted that 70% of all current jobs could be replaced by automation by the end of this century — a frightening prospect for lower-skilled workers.

The rise of mobile computing has helped drive demand for automated activities that can be run remotely — for example, home-cleaning or security devices that can be operated from one’s phone. And lower prices for high-strength materials and long-lasting batteries have helped make robots lower-priced and more practical.

It’s a powerful trend. Boston Consulting Group estimates total spending on robots to grow at a 10% annualized rate, from $15 billion in 2010 to $67 billion in 2025. Growth in industrial use remains strong, while new consumer applications are growing even faster. The spending increase is partly driven by a race among technology giants Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), Uber and Alphabet (Nasdaq: GOOGL) — aka Google — in such technologies as driverless cars and delivery drones. Google alone owns at least eight robotics companies, including innovation leader Boston Dynamics. 

Some of the highest-profile robotics stocks boast compelling growth prospects, but their shares are too expensive now. I’d include Roomba maker iRobot (Nasdaq: IRBT) in that category. Fortunately, we can invest in a couple of attractively valued stocks in the space:

Rockwell Automation (NYSE: ROK) is one of the leading global producers of industrial automation systems. Split from better-known sibling Rockwell Aviation in 2002, Milwaukee-based Rockwell Automation makes a wide range of hardware and software needed for factories and other facilities — such as amusement parks — to use robotic components. It’s especially strong in the control systems needed to program, monitor and control automated functions.

As a leader in industrial robotics, Rockwell is enjoying revenue and cash flows as global demand increases. The stock has suffered along with earnings when Rockwell’s short-term sales took a hit due to weakness in the U.S. energy sector and emerging markets. But I’m more bullish on the auto sector than some, and Rockwell also has strong business lines in less-cyclical areas such as food production. The stock currently trades at less than 17 times analysts’ consensus estimate for per-share earnings for fiscal 2016 (ends September). It also yields 3.1% currently. This is a buying opportunity for a company that’s perfectly positioned to benefit from a long-term trend.

ABB (NYSE: ABB), the Swiss-based engineering conglomerate, is one of the world leaders in robotics. The company is one of the largest suppliers to the power generation and electric utility industry, making every variety of switch, circuit breaker, transformer, wiring and cable hardware, and the like. In automation, it is a major producer of industrial robots and the control systems needed to operate them. ABB also consults with customers in almost every industry to help them automate their processes more effectively.

ABB is a leader in the key area of human-robot interaction. Last year, it launched YuMi, a dual-arm, small-parts assembly robot that can work side by side with human “colleagues.” This expertise positions ABB for strong growth as the barriers between human and robot workers fall over the next decade, and its leadership in the power-generation space will help the company benefit from the strong global investment in alternative energy that many experts foresee resulting from climate change policy changes. The stock has suffered due to economic growth concerns, but that only makes it more attractive as a long-term investment today.

ABB trades at 16.4 times analysts’ consensus estimate for 2016 earnings per ADR.

Risks To Consider: Both of these stocks are considered vulnerable to economic cycles, so further signs of economic slowdown could hurt them in the short run.
Action To Take: Buy Rockwell Automation below $100 and ABB below $18. 

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