As the economy recovers from the effects of the coronavirus pandemic, many investors are taking a cautious approach to investing. Not Alex Ely. The fund manager is comfortable taking investment risks as he seeks stocks that are shaking things up. And his approach is paying off big. His stock portfolio of fast-growing small and medium-size companies gained 28% this year as of June 30 versus a 3% loss for the S&P 500. The companies he hunts for are tapping into consumer trends that have gotten a boost from this year’s shifts in consumer behavior and spending. Their businesses should thrive over the next few years—but these stocks tend to be much more volatile than those of large companies and the overall market. The companies include such gems as a maker of camping and outdoor gear…a service that simplifies shopping for health insurance…and an all-natural pet-food maker.
Bottom Line Personal asked Ely to describe today’s most promising trends and the stocks likely to benefit from them…
How To Find The New Stock Winners
I start by looking for disruptions. These are changes from the normal or traditional ways of doing things—usually aided by technology or some form of innovation—that allow consumers and businesses to live, work and spend in better, cheaper and/or faster ways. Recently, the forces driving these changes have not only been maintained but have been accelerated by the health crisis. The most obvious disruption in 2020 has been led by giant tech companies whose services make staying home more enjoyable and/or productive, such as Amazon.com, Netflix and Zoom Video. Not surprisingly, their stocks have become very expensive. Here are examples of three disruptive trends that Wall Street is less focused on and that have benefited various stocks that are still relative bargains…
Great outdoors. As the pandemic continues to suspend people’s long-distance travel plans, consumers are turning to local outdoor experiences and they are spending to improve their own backyards. Even before the pandemic, the outdoor-recreation industry was projected to continue growing by an annual average of 7% through 2023, according to the accounting firm Moss Adams.
Digitalization of financial services. Both consumers and small businesses want simpler, safer and more efficient ways to bank, send money, pay bills, purchase insurance and perform financial transactions remotely without having to handle cash or paper documents. In a survey this year by the financial-services research firm Novantas, only 40% of respondents said they expect to do their banking in person at brick-and-mortar branches in the future.
Premiumization of food. The dramatic decline in restaurant visits this year has put new emphasis on higher-quality food and drink for home consumption. That has dovetailed with a larger societal shift toward all-natural and locally sourced foods. Nearly 70% of millennials are willing to pay more for high-quality foods, according to a survey by Whole Foods.
7 Attractive Stocks
Once I have identified a disruptive trend, I look for the companies best positioned to tap into it. Each of the following companies reflects one of the trends described above. They range from $2 billion to $7 billion in stock market capitalization. And each should continue to benefit from annual revenue growth of at least 10%…annual earnings growth of at least 20%…strong, experienced management…and a leading position in its market niche.
Adding one or more of these stocks to your portfolio could help boost your long-term returns…
Trend: Great outdoors…
SiteOne Landscaping Supply (SITE) is the US landscaping supply industry’s largest wholesaler, offering more than 120,000 products ranging from fertilizers and trees to natural stone and outdoor lighting. SiteOne is four times as large as the nearest competitor and has been consolidating a highly fragmented industry of regional mom-and-pop companies. It made 10 acquisitions last year but has plenty of room for growth because its annual sales amount to just 12% of the $20 billion landscape-supply market. Recent share price: $108.11.
Trex Co. (TREX) makes plastic-composite boards for residential decks that are resistant to fading, scratches and stains, and they cost less over time than pressure-treated lumber. The company controls nearly half the nonwood decking market in the US. Its proprietary manufacturing process combines sawdust with more than 500 million pounds of recycled plastics each year. Recent share price: $124.25.
Yeti Holdings (YETI) manufactures high-quality gear and rugged products for the amateur outdoor recreational market. The items are sold at about 4,700 retailers around the country as well as seven of Yeti’s own stores. The brand has developed a cult following thanks to its emphasis on innovative design of products including signature Tundra coolers with two-inch thick insulation as well as steel drinkware and waterproof blankets, duffel bags and totes. Recent share price: $41.81.
Trend: Digitalization of financial services…
Bill.com Holdings (BILL). More than 90% of small and medium-size businesses still rely on paper checks to make and receive payments. Bill.com provides an alternative—a suite of cloud-based software and services that offer low-cost bill-paying and invoicing. That makes it easier for businesses to accept payments from major banks and card companies while preventing errors caused by manual processes. The company, which went public in December 2019, has more than 81,000 customers and processes more than $70 billion in transactions annually. The stock is up more than 100% this year and has room for further growth. Recent share price: $89.60.
eHealth (EHTH). This 20-year-old company operates eHealth.com, the nation’s largest private online health insurance exchange. In an industry filled with small independent brokers with minimal online presence, eHealth can offer individuals and various small businesses better pricing and more than 10,000 plans from major insurers. The big catalyst for the company is the 10,000 baby boomers who turn 65 each day and become eligible for Medicare and supplemental plans. Last year, the company’s revenue from its Medicare segment rose 112%. Recent share price: $110.98.
Trend: Premiumization of food…
Boston Beer Co. (SAM). The craft brewer is best known for its Samuel Adams beers. But Boston Beer’s non-beer products such as Angry Orchard Hard Cider and Truly Hard Seltzer make up about two-thirds of the total volume it produces—its beers make up only about one-third. These alternative alcoholic beverages have had explosive growth as consumers turn to lower-calorie and gluten-free alcoholic drinks. Recent share price: $603.67.
Freshpet (FRPT). This company has pioneered the concept of refrigerated food for cats and dogs made from farm-raised chicken, beef and fish and all-natural vegetables and fruit. It is sold in branded fridges at more than 20,000 supermarkets, pet stores and big-box chains around the country. Recent share price: $86.14.