Looking to position your portfolio to reap the benefits of a sector explosion? Investing in the right sector before the explosion in growth will net you huge gains at minimal risk. This is one way to achieve what investment managers call “risk adjusted returns” and I’m here to show you how to do it.
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Without further ado, let’s jump right in.
Why sector research is important
Getting into the right sector before growth strikes is pivotal to growing your investment with little risk. This is because if you invest in a company and the entire sector is growing, it’s rather hard for the company to mess it up (in theory).
We see companies dissipate during lulls or even declines in a sector. When the sector is exploding it is rather hard for even a bad company to go “belly up.” Because of this we are free to invest a higher percentage of a portfolio into less corporations.
Typically during a period of standard growth in a sector you want to spread out risk across several investments. This helps to lower the chance of loss of capital but it also lessens your return, as it’s harder to keep up and predict the movements of several assets at once.
Further, in growing sectors the more established companies will try to keep their market cap by buying up competitors. We saw this extensively during the .com explosion in the late 90’s and early 2000’s. If you’re invested in up and coming companies during an economic explosion you could see yourself acquiring shares in a large-cap sector company for a fraction of their normal price.
1.) Cargo/Tanker Ships Retrofits and Scrapping
Over the next decade we are going to see a majority of cargo and tanker ships go carbon neutral. This is going to be a huge destabilization of the current sector. We will see long established companies disappear and new players emerge.
The reason for this is simple. Due to the 2020 pandemic cargo shipping has become backlogged with shipments being on backorder. A backorder that is not expected to fully clear until late 2022. During this entire time ships are operating at full capacity and frankly there are just not enough cargo ships to meet demand.
Further, the entire maritime shipping market is expected to go carbon neutral by 2030. While regulations will push this change we will see the largest push come from first mover advantage.
The first companies that upgrade/retrofit their ships will see drastically reduced fuel costs, their largest expenditure. The first couple shipping companies that perform this change will be able to offer severally reduced shipping costs to their customers. Forever changing the competitive landscape.
According to a report put out by the Danish Ship-Finance firm we can expect the shipping sector to undergo an entire retrofit sometime in the next 5 years. They expect that for short range vessels there will be a switch to hybrid-electric and hydrogen powered vessels. For longer ocean faring vessels we can expect a zero-carbon fuel. (https://www.shipfinance.dk/media/2098/shipping-market-review-may-2021.pdf)
Currently the retrofits are awaiting new regulatory laws that will kick off this transition. We can start to expect these new laws in late 2022 as the world finally comes out of the pandemic and transit returns to a normal pace.
Right now in early 2022 the cargo tanker sector has started to explode due to a supply chain breakdown. This has forced people to ship via tankers at an increasing rate as the economy opens back up. This is only going to further the retrofitting bubble that is forming.
2.) Wind Energy Generation in North America
Unless you have been living under a rock you more than likely have heard of the ever increasing amount of wind farms across North America. This trend started in the mid 2010’s under the Obama administration with an increase in tax credits for wind farms. This trend has continued under the Trump administration and so far under the Biden administration.
According to Energy.gov we can expect the total amount of wind generated Gigawatts (GW) to nearly double over the next decade. This is huge and if you position your investment properly you can expect to reap in massive growth.
There are three types of sectors to invest in to capitalize upon this growing wind sector; Construction, maintenance, and generation/distribution.
First, Construction. For this I would look into any firms specializing in erecting the giant wind towers. These firms work around the clock to prop up and complete the massive demand for wind farms across North America. If dedicated you could construct an entire portfolio on the logistics chain for constructing these portfolios.
Second, Maintenance. These wind farms require near constant maintenance and upkeep. This is highly skilled labor with technicians often being suspended over 200 ft. off the ground. As such the cost to maintain these facilities is high and any firms specializing in providing labor will generate handsome returns.
Third, Generation/Distribution. There are several companies that had the foresight to build wind farms over the last couple years. This has given the first mover advantage and has increased their trading price considerably. The best example of this is NextEra Energy, which I wrote a research post on a week ago. Check it out if you’re interested in how to position trade in Generation/Distribution.
Over the next decade e-commerce is expected to continue to grow by an astounding 20%-35%. As the world becomes more and more connected consumers increasingly demand to have access to more goods at a cost effective rate.
This rate is further exacerbated by the increasing discretionary income of families across the developed world. We are seeing more and more people transition to online shopping in order to save time and money. It is easier for consumers to place an online order then instead of going to a local store.
Obviously the largest company that capitalizes on this trend is Amazon Inc. The secret to Amazon’s success was its dedication to convince shoppers to stay on site and continue to impulse buy products. This decade-long dedication has over the past 4 years paid off with Amazon becoming one of the largest providers of e-commerce goods.
Imagine positioning a portfolio in e-commerce 10 years ago. Filthy Rich….
Now several companies are attempting to shift to e-commerce to capitalize upon this growing trend. While I don’t think another company will dethrone Amazon any time soon, the sector has enough room for everyone. So long as a potential company has a dedicated consumer basis the shift to e-commerce is beneficial.
Recently GameStop announced its plans to shift from brick and mortar to e-commerce as a way to grow its consumer basis and lower its overhead. This is just an example of another company going the e-commerce route.
If you plan on capitalizing on the e-commerce sector you need to do your homework. Make sure the potential investment has the capability to sell its products online without a decline in revenue. Also make sure that the investment has room within their micro-sector (gaming, books, movies, etc.) to grow online.
According to a report issued on the cyber security market by Identity Theft Resource Center (ITRC) the cyber security market will grow from $119 billion to $433 billion in 2030. Citation: https://www.businesswire.com/news/home/20201119005835/en/Global-Cyber-Security-Market-2020-to-2030—by-Component-Security-Type-Deployment-Enterprise-Use-Case-and-Industry—ResearchAndMarkets.com
Few sectors are expected to grow by this amount over the next decade while still maintaining a low overhead for companies involved. This is because of the business model present within these companies, a business model that requires little capital investment to see sizable returns.
The largest expense for companies engaging in cybersecurity protection is going to be research and development. As we progress further and further into this decade we will see several competing companies engaging in overt or covert ‘brain-drain’ from larger established companies.
This brain-drain will take the form of patent buying or paying to acquire the right talent. Already we are seeing college degrees such as computer science and data science take off. The next step is companies jockeying to grab the right talent for this emerging cybersecurity sector.
There are three micro-sectors within the larger cybersecurity sector; personal, business, and government.
First, Personal. Personal cybersecurity is fast becoming a major player within the sector. Over the past 8 years we have seen people in democratic countries vote in policy to take control of their data back from corporations.
Second, business. Moving up, cybersecurity for mid-cap and large-cap companies is going to explode over the next decade. This is because information and proprietary material is becoming more and more ‘digital’ as we progress into the 21st century.
Third, the government. Since the mid 90’s governments have started to invest heavily into protecting their classified information. At first this investment took shape through direct government spending in the form of counter-intelligence operations. Nowadays, just like everything else, governments are cutting corners by instead investing in contracting companies.
Going forward from 2022 up through 2030 we can begin to expect that more governments will invest in contractor provided cybersecurity. On January 19th 2022 President Biden signed a law that doubles down on cybersecurity for government locations.
If you follow this law and possible contracts closely you can make a nice buck.
I previously wrote a research article on a company shifting its business model to account for this change. Blackberry (BB) is poised to capitalize upon this sector. You can find the research below.
5.) Electric Vehicles and Batteries
The Electric Vehicle sector, or EV, has sparked a transportation revolution. With companies such as Tesla leading the way we are now seeing an entire market develop to support this emerging sector.
According to an article written by Business Wire the global market for Electric Vehicles is expected to grow from 4,093 units to an astounding 34,756 units. This represents a growth of almost 850% over the next 9 years.
Within this EV sector growth two micro-sectors are growing at a faster pace; charging ports and batteries.
First, charging ports. All across Europe, Asia, and North America countries are doubling their efforts to provide charging stations for electric vehicles. This trend will continue for the next nine years as the demand for electric vehicles increases. Blink Charging (BLNK), a Florida based company in November of 2020 made the news when its stock shot up by close to 300% in a week.
Second, batteries. One of the largest restrictions to EV range and development is the current limitations of battery technologies. Of the largest limitations is thermal load. When the batteries are operational they produce an insane amount of heat. In the early iterations of EV’s oftentimes cars would simply catch on fire.
Further, thermal load also lowers the lifespan of your battery. This increase in costly maintenance of the vehicle dissuades potential customers from buying the vehicles. As a result a couple companies are attempting to reduce this thermal load. One such company I wrote a research report on is Aspen Aerogels. If interested check it out!
If you position your portfolio for growth over the next decade now then you will lessen your risk while maximizing potential gains.
This is because by getting in on a company with good financials (look for EBITDA) and a solid management team/business model. You can rest easy at night knowing that not only is the company in a good position to capitalize upon their growing sector they have the talent and capacity to do so.
This will generate you returns that beat market expectations.
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Until next time, I wish you the best of luck in your investments!