On The Edge of Seventeen: Eight Investment Themes To Consider

The prediction business is in a deep, dark hole and 2016 is the reason. Ultimately, when we look back, we'll realize what a watershed year it was. In 2016 everything the predictors predicted would happen didn't, and everything they believed would never happen did. Brexit (did). Hillary (didn't). Trump (did). Inflation (didn't). Cubs (did). Chinese recession (didn't). Rising Yields (didn't. Well, not as much as was predicted. Treasuries were predicted to rise to 3.75%. They jumped right after the election from 1.83% to end the year at 2.45%). Cold War Part 2 (did). DOW 20K (didn't).

Predictors did a lousy job, but it's not entirely their fault. We don't really answer our phones anymore when polling companies call, and we've become highly suspicious of institutions inquiring about our personal information. The crystal ball is getting smaller and smaller.

It's also gotten really challenging to see the forest for the trees because larger political, economic and cultural shifts aren't clocking in quarterly reports. Global systemic changes play out over years, sometimes decades. Predicting takes a lot of patience.

And, patience is something we don't have time for; we are just too busy consuming information. We are more inclined to read just the headline or a paragraph or two before forming an opinion and going about our business. We basically prefer pre-digested news with eyeball-grabbing headlines and, as a rule, we forget it as quickly as we see it. It's no wonder a large number of investors enter and exit investments at exactly the wrong time.

Here at Divine, we like to look at trees, but we love wandering around in the forest. I mean that both literally and figuratively; I live in Woodstock on the side of a mountain, plenty of trees and still plenty of people continuing to wander the woods since the last big concert. I have spent most of my career seeking investment themes that unfold over long periods of time and putting together portfolio strategies that seek to take advantage of those themes. As a trader I was the fly on the wall of capital inflows and outflows, market structure and global growth. I learned (oh, so many times) that one does not buy with the crowd; one sells to the crowd and buys only after the crowd has left for the next sparkly, shiny thing. As an investor and an asset manager, I've become a value seeker, courageously pilfering through someone else's proverbial garbage. Yes, I am a dumpster-diver. But a classy one.


The 2016 Highlight Reel
S&P 500 (Pending: GSPC) +11.24% (w/out dividend)
Dow 30 (Private: DJI) +15.24% (w/out dividend)
ASDAQ (IXIC) +9.79% (w/out dividend)

   
  
 
  
    
  
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     2016 US equity market performance Chart: YahooFinance DAM

2016 US equity market performance Chart: YahooFinance DAM

The equity markets had a phenomenal year in 2016. There were a few sale days (the sell-off in early February, late June and right before the election in October), but the markets made an unprecedented and unanticipated leap beginning the historical morning of November 9th.

Markets were so unprepared for a victorious Trump outcome that US Futures tanked 800 points overnight. Markets in Europe and Asia were down significantly.

   
  
 
  
    
  
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     Chart: dowjones

Chart: dowjones

But-- as the US markets woke up early on the morning of November 9th -- things quickly reversed. Although there were no actual policy directives on the table from the Trump team, investors dusted off their standard-issue Republican-Rose-Colored glasses and began buying up financial, oil and gas stocks. Health care suddenly became out of favor because Obamacare would likely be on the chopping block.

Trump favors a less regressive fiscal policy. He favors lowering corporate tax. During his campaign, he talked about repatriation of corporate cash. We have hardly pulled out of the station on the Trump train, yet since the onset of the election he has been a prime factor in 128 point gains on the S&P500 and 1,494 on the DOW (as of the close 1.17.17).

If following the unexpected presidential victory, a chastened Republican-controlled Congress can organize itself enough to at least create the perception that it is working to slow or even reverse the current regulatory burden and incentivize investment, the current market trajectory we are experiencing may continue intact.

Coming Attractions
Our outlook is long, and we are on the forefront of a seismic shift that we expect will play out over many years. Here are 8 areas I'll highlight where those shifts are taking place:

1. Big Data. Take a moment to consider that 90% of the world's data was only created in the last two years. Let that sink in. In 2015, the global big data market was approximately $22 billion, with estimates anticipating 100 percent growth within 4 years.

We seek the players that host, manage, manipulate and organize that data. We own MSFT, ORCL, AAPL, CEVA and we really wish AMZN would go on sale (it's on our watchlist for now.)
 

2. Women Rule. As consumers, women control approximately 80% of this country's buying power. In the board room, companies with 30% or more women on their board financially outperform their peers without. According to research from Catalyst.org, companies with the most women board directors had 16% higher Return on Sales (ROS) than those with the least, and 26% higher Return on Invested Capital (NASDAQ:ROIC). Women are also starting up companies at 2 times the rate of men.

Since there's an ETF for everything, you could own SPDR® SSGA Gender Diversity Index ETF with the appropriate symbol, SHE; however, we prefer to own specific companies. Our holdings include AMGN, MA, PFE and MMM is on our watchlist.
 

3. Growth of Energy Consumption. By 2040 global energy consumption is expected to increase by 48%. In 2016, New York, Oregon, and the District of Columbia extended and expanded their mandates for renewable electric generation to reach 50% of each state's total electricity generation by 2030, 2032, and 2040, respectively.

We believe that the global energy story will playout over many decades. The world's thirst for power, power systems and energy to fuel growth is just beginning. Emerging Markets have only just begun to deploy key infrastructure to power their nation's systems. The developed market's energy demands are growing. The US Energy Information Administration (NYSEMKT:EIA) predicts that by 2040, global energy consumption will rise by 48%. Talk about lightning in a jar.

Our clients own BP, PSX, CORR. Interestingly, alternative energy has fallen out of favor with many, the thesis being that Trump may potentially roll back legislation on fossil fuel companies so wind and solar may potentially have a harder time. However, energy consumption is a global challenge, and many wind and solar companies are doing a better job at driving down costs and building efficiencies. Some issuers even pay us (a dividend) to wait, like Pattern Energy Group (PEGI:NASDAQ).

4. Conversation. It's a two way street, and it's a busy one: FaceBook has about 1.6 billion users globally and has 89% penetration of the US market. (How many times have you checked your FB this week?) Instagram has an estimated 400 million users, and it's owned by FaceBook. There are approximately 2.3 billion active social media users globally - and that's 31% penetration.

We are still holding onto our Twitter position (TWTR:NASDAQ) at a small loss because we see the potential for tremendous value with the giant fact that almost every single corporation has a Twitter account and most commonly utilize it as a means of customer service and communication. I've even heard a rumor that President Trump is using it. Someday soon, we believe that the company may figure out how to capitalize on its ubiquity.

5. Financial technology. Blockchain. Bitcoin. Roboadvisors. Crowdfunding. Peer-to-peer lending. Global payment processing. The Millennial generation is bigger than the Baby Boomers and they are not afraid to share all their information for better access and better pricing.

Most global financial firms are in the blockchain game, and many are acquiring roboadvisory and RIA platforms to boost visibility and connectivity to millennials. We own First Data Corp (FDC) despite it's absolutely meh historical performance. Most segments are up, they are reducing debt and executing "maniacally" on their SMB segment.

6. Water. Nearly 97% of the world's water is non-potable-only 3% can be consumed by humans. Water infrastructure is quite dated and privatization is on the rise. Cooper Lake in Woodstock was almost confiscated last year by a private company dangling promises of plastic bottles and revenue shares.

Here is where we have advocated for an exchange traded fund, CGW, Guggenheim S&P Global Water Index ETF.

7. My Home is My Castle. Why leave home when you don't have to? Buy it online. Binge watch everything you want. Binge eat everything you want. One-on-one training via the web. Turn on your coffee maker with your iPhone. Subscribe and receive the latest gadget/makeup/designer outfit/doggy treat each month. Telecommute and share stuff with co-workers in the cloud. The possibilities are nearly endless.

Our clients own AAPL, T for the very long term. On our watchlist are CTXS, NFLX and AMZN.

8. Healthcare. Healthcare and social assistance is projected to be the fastest growing industry sector between 2014-2024 at 21% projected growth (for comparison, construction comes in at #2 with 13% projected growth). Our population is living longer, demanding better treatments and technologies and requiring more services.

We've been long term holders of HealthCare Services Group HCGS, JNJ, and more recently entered GILD, AZN. The sector was a loser (Sad!) in 2016. It may even lag in 2017. The watch list is long and the dumpsters are deep.

The only solid prediction for 2017 that I'll share is that it's bound to be a sensational year. I'm not using "sensational" to mean fantastic or wonderful--but "sensational" as in shocking. That is, if we have any capacity to be shocked anymore.


 

Dani Hughes is the Founding Partner of Divine Asset Management LLC, an RIA based in NYC. While not dumpster-diving, she lives in Woodstock NY with her family.

 

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