Future-Proof Companies For Long-Term Investing

Joseph Hogue's picture

Friday, July 6, 2018 - 5:15pm

by Joseph Hogue

In 1988, my father brought home a new LaserDisc player. It cost a good chunk of our savings, but he was convinced that this would be the next evolution in home theater to replace VHS. He had already bet wrong on Betamax earlier in the decade but was sure that this new format was the real deal.


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Of course, the format never did find its market, and manufacturers stopped printing movies for it just a few years later.

While my family’s struggle with technological obsolescence is nothing new, it seems the problem has gotten more acute for investors over the past several decades. Once leading companies are being pushed aside and bankrupted as their industries die out or they fail to adapt.

How can a long-term investor hope to make money if there’s no safety in their best-of-breed, long-term investments?

The answer is in finding future-proof industries -- segments of the economy that won’t get replaced by technology or industries that will benefit from it.

Time Makes Fools of Us All -- Even Investors

That constant threat of technological obsolescence isn’t just a problem for consumers but for investors as well. The pace of technological change seems to be quickening. (Think of how quickly Blockbuster Video and Borders fell out of favor.) Sometimes it’s the entire industry that dies out and sometimes it’s just companies that fail to adapt.

As streaming takes a larger share of the industry, recorded music sales have plunged more than 40% since 2000, according to the International Federation of the Phonographic Industry. Music stores have tried to delay the inevitable by expanding their product offering to include novelty items and apparel, but it won’t be long before these stores are a thing of the past.

The slow death of traditional retail over the past few years has resulted in vacant malls and struggling department stores. Even rising consumer spending and a strong economy hasn’t been able to save once valuable brands like Sears and Toys R Us.

Of course, sometimes it’s the jobs within an industry that are lost or changed. For example, more than 67% of millennials are purchasing their insurance directly from companies rather than going to an agent.

The problem for investors is that a long-term strategy of investing in best-of-breed companies won’t save them from the march of change. IBM once dominated all things tech but failed to adapt to the cloud revolution. Even Warren Buffett -- the man whose favorite holding period is "forever" -- has given up on Big Blue.

Future-Proof Industries... Plus, 3 Best-Of-Breed Stocks

Investing in the era of change means looking to industries that are either safe from technological change or will benefit from it.

People have been drinking beer for more than 4,000 years and it’s difficult to imagine a technology that could replace it. Other liquors may be a substitute, but there will always be a market for fermented suds.

Ambev S.A. (NYSE: ABEV) owns and distributes some of the most popular global brands and holds a commanding share in many of its markets. It's the world’s third-largest brewer, controlling more than 68% of the market in Brazil, Argentina, and Bolivia. Shares pay an attractive 4.3% dividend yield and trade at 20 times forward earnings.

The company has been under pressure lately on weakness in Brazil, but volumes in the second and third quarters should be up significantly thanks to the World Cup matches. Recent volume weakness has been partially offset by stronger profitability with the EBITDA margin expanding by 1.6% in the latest quarter.

The trucking industry may actually be a beneficiary of the evolution in technology with driverless trucks curing the worker shortage that is forcing wages higher. Higher fuel prices and regulations are weighing on the industry now, but transportation is here to stay.

While several high-profile accidents involving automated cars has set the progress back, automation is already a reality in trucking. An Anheuser-Busch truck made a 120-mile delivery in 2016 with the driver sitting in the cabin instead of behind the wheel. Another truck made a 2,400 mile cross-country trip this year with only rare disengagements that required the driver take over.

Knight-Swift Transportation Holdings (NYSE: KNX) is 24% lower from its March high as enthusiasm over self-driving vehicles has come down, but that won’t stop the technological change from happening. Driver costs as a percentage of total costs are among the highest in the industry after the merger of Knight Transportation and Swift Transportation in 2017.

The merger created one of the largest operators in the full-truckload segment. Costs should come down gradually as the consolidation process wraps up but the real benefit will come as the company adopts an ever-automated fleet. Earnings are expected to be 67% higher over the next four quarters (estimated at $2.31 per share for 2018), for a forward PE of just 16.5.

Aerospace & Defense may evolve to need fewer workers, but it's another sector that should hold up against technological change. President Trump proposed a defense budget of $886 billion for fiscal 2019 and a creation of the proposed "space force" could balloon that well past $1 trillion. The budget has grown at a 6% annual pace since 2000 and shows no signs of slowing.

General Dynamics (NYSE: GD) is diversified across the Aerospace & Defense sector with 25% of sales in information technology, followed by aerospace orders (24%), marine systems (23%), combat systems (16%), and mission systems (12%). The acquisition of CSRA makes it one of the largest IT contractors to the U.S. government.

The increasing defense budget could make General Dynamics a cash flow machine with $2.5 billion -- 4.4% of the company's market cap -- returned to investors through buybacks and dividends over the past four quarters. Shares trade for 17 times forward earnings, and the company has a solid balance sheet with $4.3 billion in cash.

Risks To Consider: The nature of technological change makes it difficult to predict, and these industries could still be at risk. Investors need a diversified portfolio around sectors and industries that can stand the test of time.

Action To Take: Future-proof your portfolio by investing in best of breeds within industries immune from technological change or that can evolve with it.

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Joseph Hogue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.