Some months ago, humankind rejoiced when the FAA started allowing travelers to keep phones on in-flight. While most of us were busy thumbing through our Facebook newsfeeds while the attendants nagged us to turn them to airplane mode, some logical investors were looking at the debt outstanding and private equity options for a little known company called Xhibit, betting it would collapse.
Looking into the details, we see that Xhibit is the owner of Skymall – the ubiquitous magazine that we all used to glance through in-flight because there was nothing else to do in that Jurassic (pre-airplane-mode) era.
Last week, the company declared bankruptcy – the phones being kept on wiped out their magazine’s customer base and corresponding revenue. A pretty nice reward for those logical people; it’s amazing how some simple observations could provide smart trade ideas. Quoting Sherlock Holmes, ask yourself this – you see, but do you observe? Facebook, Chipotle, Apple and Amazon, among others, have the most loyal customers, according to a late 2014 survey by Brandkeys. Check out these companies’ profiles. If we had invested in Nike or Microsoft in the 1980s (say, since the Oct’ 87 crash) after seeing similar trends then, you’d be up over 1000% in your investments. Do the ones above resemble them? I suggest allocating a bit of money to such stocks and chilling out for the long term, Interstellar-style. We’ll revisit the subject below with Shake Shack. With the majority of your money, of course, invest passively (for example, with the SPY and VXUS ETFs) and benefit with the markets in the long term. Meanwhile, for some fun, here are a few tactical plays for 2015:
1 – Tech and Biotech: We suggest an allocation to both – they aren’t as affected by interest rate hikes, and several stock picks lead the way in consumer trends, such as the ones above and Google. A McKinsey Global Institute paper from January focuses on productivity to save the day in a worldwide slowing growth environment. That’s technology’s next step. And an interesting quote from a Forbes article some months ago – ‘of all the deals with an initial financing between 2000-2010 that have [been] exited, roughly 8% of life science deals vs 4% of tech deals delivered above 5x realized returns’. Venture capital will continue to feed the booming biotech industry, and fuel the next steps in curing conditions, diseases and delivering higher life expectancy – which is slowly going upwards worldwide.
2 – Oil has bottomed out: We feel that the low 40s for WTI was basically it for oil – it isn’t sustainable. Companies are falling head over heels to cut their capex forecasts, including Conoco Phillips and Continental. Supply will reduce in some months. Wait for another week or two for the earnings season to taper off, and start buying XLE slowly.
3 – The bullish dollar trend: This has some more ways to go this year, with international regions fueling currency wars (Singapore joined the herd last week). It’ll hurt US exports, but that only forms 14% of GDP, according to Quandl. Smaller companies that derive revenues domestically may benefit more, and are worth looking into.
4 – Spending (wage growth and consumer discretionary stocks): Will it increase in the US? That’s a compelling question for 2015, along with capex spending. An interesting statistic from a Washington University research paper highlighted by the WSJ: ‘In 2012, 30% of consumer spending came from the wealthiest 5% of US households, compared to 23% 20 years ago’. Meanwhile, studies show wealth has gotten even further concentrated since the recession for the top 1%. As a result, we see the high-end retailers such as Nordstrom and Tiffany’s outperforming JC Penney, Sears, Target, etc over the recent 5 years. If we see wages growing, the middle class will benefit, and so will the retailers they go to.
5 – Macro trends: Our wild, surprise projection since the beginning of January is the European Stoxx 600 could outperform the US S&P 500, due to quantitative easing, and simply being oversold (last week, the WSJ noted that European stocks are at a 40% discount to US stocks, compared to 10% historically). Make sure to bet, though, via a currency-hedged ETF, such as HEDJ. Our projecting in mid-January that Germany is a smart investment has paid off well so far. But we’re in it for some more months. For other international picks, check our Outlook for 2015 post.
6 – Cybersecurity: Stocks in this subsector are richly valued, so while we don’t recommend buying in wholesale right now, it’s worth looking into. With hackers dominating headlines and business news networks turning into TMZ-equivalents far more often than in the past (Sony’s executive email leaks, for example), companies will spend on this to save on the embarrassment.
These are some trends to keep an eye on – we’ll keep adding as the year goes on.
To end on an appetizing note, let’s look into the details at Shake Shack. The Flatiron/Madison Square Park area in NYC is among the most frequented tourist destinations in the city. It’s also Shake Shack’s primary location, and significant consumer research (meaning, standing in line) reveals a great blend of tourists and locals. Now remember – high-browed New Yorkers traditionally frown upon chains. However, Shake Shack already has over 20 thriving locations all over the place. This burger must have made the cut for them. Meanwhile, it’s strategically positioned in JFK’s Terminal 4 at B23 and B37; at least half of the international travelers there have to walk past them to get to their gates to board for every corner of the planet, every day. What better way to say goodbye to a most-likely memorable New York, USA visit than with an American staple burger from Shake Shack? Imagine how happy they’ll be when the taste reaches their hometown. It’s not nearly there yet. The stock just IPO’d last week, and has extremely high expectations. Still, seeing – and observing – the consumer loyalty and growth trend may provide yet another delicious return by investing in this company for the long term.
