The Broad View
As a growth investor, I look for innovative companies whose products or services can improve the world. Finding them is never easy, but we have one advantage today: The kind of transformational change we’ve all experienced in the past year can clear the way for businesses that have world-shaping potential.
The headline is that COVID-19 accelerated the secular shift toward digitization. If the digitization sailboat was cruising along with steady tailwinds before, it became a sleek and speedy catamaran amid the gale of the pandemic. But how do we know this sea change is creating opportunities for businesses and investors?
As evidence, look at the past decade. Some of the best investment opportunities since 2010 were in a variety of companies: big and small; expensive and cheap; and established franchises, turnarounds and game changers. However, they tended to have one commonality — they took advantage of the opportunities afforded by big changes. They filled gaps caused by the global financial crisis. They picked up new technologies that redefined how we communicate, especially in data transfer and storage. And they reevaluated and pivoted their operations amid massive shifts in regulation, such as Obamacare (formally known as the Patient Protection and Affordable Care Act).
Consider Amazon and the new technologies that allowed it to expand its capabilities, explore next-day delivery and host third-party vendors, all while creating and building out Amazon Web Services, its cloud-computing platform. Netflix took advantage of robust new networks to transition its subscription model from physical DVDs to on-demand streaming. The explosion in mobile phone usage kicked up Facebook and Google’s digital advertising duopoly. Tesla ran with advanced battery technology to secure the top spot among electric vehicle makers.
These companies weren’t just lucky or in the right place at the right time. Rather, they all had vision and were willing to take advantage of big changes. Furthermore, it’s apparent now that each of these companies was ridiculously cheap in 2010.
As a portfolio manager, I face the same challenge today as I did 10 years ago: to find undervalued companies that will be innovative leaders in the decade to come. That’s why I pay close attention to today’s unique challenges, as those disruptions could provide an opening for tomorrow’s Goliaths. And between the COVID-19 pandemic and ongoing technological shifts, there have been few periods of change in recent years more significant than what we’re experiencing now.
Take retailers. Historically, retail operations required a big investment budget and an IT department. Now we are seeing a wave of back-end infrastructure development with the potential to empower small and medium-size businesses by offering effective inventory management and lowering technical barriers between them and their customers. A new online retailer can launch its operations in as little as 15 minutes.
The fast-growing “software as a service,” or SaaS, industry is another example. COVID-19 accelerated the need for online services, and SaaS companies eagerly stepped in. That expansion uncovered additional opportunities for software vendors. For example, many local governments and their various appendages, such as courts and payment collections, still need to make the switch to digital records. Others rely on systems so old that they simply can’t interface with modern technology. SaaS vendors that specialize in payroll and business services have found a rich new vein of opportunity as millions of workers have shifted to home offices and digital work.
Additionally, I think we will see continued democratization of health care. Today, most of us don’t have immediate, on-demand access to data such as our cholesterol level or heart rate. I think we’ll see more remote monitoring that can connect to smart delivery systems of medication and other therapies.
We’re already seeing glimpses of an even more advanced future. Devices are being developed that can keep tabs on people with diabetes and deliver life-saving insulin. A decade from now, these technologies could be more broad-based, perhaps even sending alerts to your doctor. Surgical robots are becoming more precise and exact; one day, they might allow something as remarkable as a surgical specialist in Japan performing a real-time procedure on a patient in Nebraska. In that world, patients will have access to leading specialists despite geographic barriers. The pieces are in place for this to happen, and it has the potential to improve outcomes and reduce costs.
The bottom line is that we are living in an incredible time of change, and change drives opportunity for active investors like us.