As you review your 2019 investment performance and look toward 2020, I want to share three very simple ideas that could lead to strong returns next year and beyond. I promise I won’t bore you with “factor analysis,” “smart beta,” “volatility-adjusted momentum” and other silly ideas intended to dazzle rather than help you. The recent investment returns of the ivy endowments have proved that method has rarely worked. Instead I appeal to simple common sense—which is becoming a rarity these days.
As we look toward 2020, many worrisome issues are still unresolved. The trade war, Brexit, impeachment and the presidential election are the main ones. To stay actively invested in this environment, certain investors have evolved creative approaches in the hope of making money. For example, some portfolio managers trigger trades off the president’s tweets, coding computers to detect words that they think will be good or bad signals for the markets. Ridiculous! Others have decided to retreat to dividend-paying stocks, reckoning that safer, large-cap dividend payers are strong enough to withstand current market swings—not so bad. How about something simple, easy to grasp, and loaded with common sense? Read on.
One method that continues to work for me is looking across the range of investment sectors and identifying obvious themes that are impervious to the current market threats. I don’t look at correlations, past performance in similar markets, or any other quantitative approaches. I use common sense, backed up by simple demographics that are both factual and intuitive. The results? Three industry categories emerge: Healthcare specific to aging populations, data storage and data security. These three industries all have tremendous demand momentum that cannot be stopped by trade, interest rates, overvalued markets and other popular worries.
Healthcare for aging populations is a no-brainer. The road to aging tells us that half the people over 70 will have eye surgery. Cataract is the most common surgery in the U.S. at about 5 million per year. Hearing is another easy-to-predict demand. Like vision loss, half the people over age 75 will develop disabling hearing loss. These demographics make it simple to model future demand for hearing and vision products, and hence earnings outlooks. And the need for both is mostly inelastic. I can’t imagine someone would delay a vision-related surgical procedure or not buy a hearing aid because of a Tariff Derangement Syndrome. Two examples of stocks that I like in this area are Sonova (SONVY)—a hearing aid manufacturer of state-of-the-art audio devices and Eyepoint (EYPT)— a more risky micro-cap vision company that has several FDA-approved meds for cataract-related surgery.
Similar to healthcare for the aging, data security is an industry that shows no sign of decreased momentum. There will never be a time when any company’s “risk officer” will certify 100% protection from data hacks, because the threats continuously keep evolving. And no one can state for certain that all current threats are covered. It’s like Y2K, but without an expiration date. This means that data security companies like CyberArk (CYBR) and Palo Alto Networks (PANW) have very bright futures ahead of them—no matter what happens in tariff land.
Lastly, the data storage sector also enjoys never-ending demand. I think this business is something like the “rule of your attic” that I once proposed to an architect: No matter how big your attic is, you will always fill it to maximum capacity. Think of all the industries that keep producing data that requires permanent storage. Consider YouTube stats: 1.3 trillion users upload 300 hours of video every minute, with 5 billion videos watched per day! That’s a lot of storage space requiring bigger and bigger “attics.” That’s where companies like Equinix (EQIX) come in, housing the giant servers that help companies like YouTube store growing data in the cloud.
Compare my process to forecasting Peleton’s spinning bike sales for 2020 and beyond. That business is surely a fad, with bikes that are destined to become expensive clothes hangers. Basic consumer psychology tells us that very few people will consistently exercise in isolation. The same mystery of trying to predict sales goes for many other overvalued “unicorns” like SmileDirect, Snap, Twitter, Slack, DoorDash, Uber and Compass. Stay away from them all.
The three sectors I’ve covered are not the only sectors that possess the gift of growing demand. Take cell phone towers for example. I urge you to think about cell phone towers and work through the logic on your own. In the meantime, I will continue to hold SONVY, EYPT, CYBR, PANW & EQIX with a facts-on-the-ground certainty. Sometimes it’s better to use a commonsense navigation tool like a map, rather than a black box GPS like Waze.
Opinions expressed are subject to change; past performance does not equal future returns.
Disclosure: I own SONVY, EYPT, CYBR, PANW & EQIX.