Fidelity fund manager Shilpa ­Mehra doesn’t spend much time worrying about global trade wars or the Federal Reserve’s interest rate moves. Instead, she focuses on the fact that people who are using their smartphones while driving are causing a big increase in traffic accidents…and that your pet’s health care is becoming as sophisticated and expensive as your own. 

Mehra concentrates on long-term trends—changes in consumer and business behavior—that she thinks can persist for at least the next decade, regardless of how the economy or stock market is doing. She then invests in stocks that dominate niches likely to benefit the most from these trends. 

For instance, looking at phone-­related vehicle crashes led her to an ­online used-car auctioneer whose profits are soaring. And her insights about the pet health-care industry pointed her toward a fast-growing medical ­diagnostic-testing company. 

A trend can serve as a strong, steady tailwind, helping to boost a company’s profits and make them relatively immune to economic fluctuations. That can help the company’s stock price hold up better than the rest of the market in downturns. 

Bottom Line Personal spoke to Mehra to find out how she identifies companies most likely to benefit from long-term trends—and how you can, too…

Spotting the Trends

The problem is that massive, ­obvious trends, such as the consumer ­migration to the Internet, attract lots of large competitors vying for sales. And heavy attention from Wall Street makes it difficult to find undervalued stocks that benefit from those trends. But I look for niches within those trends that many investors may not realize exist. For example, airline travel and airplane manufacturing are booming around the world. I realized that with so many jetliners spending so much time in the air, there’s a huge, corresponding need for commercial airplane replacement parts. 

Once I identify a viable trend, I take the following steps…

Find “durable” companies tapping into the trend to spur growth. Durability is characterized by the ­following… 

  • Recurring, predictable revenue and high rates of customer retention for many years.
  • Enduring advantages over new and old competitors, such as patented technology, regulatory approvals and/or the ability to dominate a market niche.
  • Substantial free cash flow that a company can invest back into the ­business. 

Buy the stock when it becomes cheap relative to the company’s long-term growth potential. This can happen when a company’s share price falls because of short-term setbacks…or when a little-noticed catalyst is likely to boost a company’s profit growth. 

Five Long-Term Trends

Here are some of the top trends that I have identified and attractive stocks that my fund owns that meet the above criteria… 

Trend: Growing number of salvage vehicles, the technical term for cars and trucks that have been deemed a total loss by auto-insurance companies. According to the US Department of Transportation, annual traffic accidents in the US were 20% higher in 2017 than in 2010. People are driving more miles and are more distracted using their phones. Auto insurers are opting not to repair many of these cars because, ironically, the many new accident-avoidance technologies going into cars have raised the cost of repairs. Company well-positioned to benefit…

Copart Inc. (CPRT) is the world’s largest auctioneer of salvage vehicles, controlling 40% to 45% of the market and selling more than two million vehicles a year in the US and abroad. Copart auctions are conducted online, using an eBay-like model to sell to junkyards, auto shops and used-vehicle dealers. Copart collects a fee from each vehicle sale. 

Trend: Sharp increases in spending on pet health care. Americans are expected to spend nearly $19 billion on veterinary services in 2019, up nearly 5% from 2017, according to the American Pet Products Association. Strong growth is expected to continue, thanks to longer average pet life spans and a wide range of innovative diagnostic technologies. Company well-positioned to benefit…

IDEXX Laboratories (IDXX) sells animal-health diagnostic tools and veterinary hospital software and diagnostic imaging systems in the US and more than 175 countries. It has carved out a virtual monopoly position in single-use canine and feline hematology test kits that veterinarians now routinely employ in their offices. Profits are expanding by 10% to 13% a year, and IDEXX has a robust pipeline of new diagnostic tests in development.

Trend: Boom in global airline traffic. By 2035, commercial aircraft fleets around the world are expected to double to more than 45,000 planes, according to Boeing, spurred in part by increased global travel involving emerging markets. Greater use of commercial aircraft means that they need replacement parts more frequently. Company well-positioned to benefit…

Heico Corp (HEI) designs and manufactures thousands of FAA-approved aircraft-replacement parts, ranging from engine components to hydraulic systems. Its clients include almost every major airline in the world because the company’s products are much less expensive than those from original-equipment manufacturers such as Boeing.

Trend: Growing use of artificial ­intelligence in things ranging from autonomous vehicles to smart homes. The semiconductor-chip industry, which produces tiny silicon circuits that make artificial intelligence possible, is growing 6% to 7% annually and, according to market research firm ICI Insights, is expected to be a $75 billion market by 2022. Under pressure to build faster, more innovative and power-efficient chips, chip makers rely on electronic-design automation (EDA) software that lets them create and test new circuits. Company well-positioned to benefit…

Cadence Design Systems (CDNS) is one of only a handful of software firms in the world that controls the EDA software business. While it’s difficult to pick particular winners in the semiconductor industry, Cadence is a bet on the entire industry because it supplies all major chip manufacturers. About 90% of Cadence’s revenues are recurring, and client retention is nearly 100%. Last year, the company announced a major multiyear contract with the Pentagon to help it design next-generation processors and printed circuit boards. 

Trend: More and more businesses are storing and accessing data over the Internet through cloud computing. As part of this trend, some companies are accessing all the software that is needed to run their businesses—­including ­human resources, accounting and sales management—via cloud computing. This cuts company costs and boosts efficiency because businesses buy only as much access as they need. The market for “software as a service”—SaaS as it’s known—will grow by more than 21% a year, reaching $186 billion by 2024, according to KBV Research. Company well-­positioned to benefit…

ServiceNow (NOW) is one of the leading SaaS companies in the world. Three-quarters of the Fortune 500 companies use ServiceNow’s cloud software apps to operate their daily business. It expects to generate subscription sales growth of more than 30% annually for the next several years.