PROMISING INVESTMENT OPPORTUNITIES GOING FORWARD- August 2020
Over the past few years, we have identified and invested in several secular trends. This has always been an important part of our research process. Investing in trends enhances the opportunity for positive longer-term investing
We believe that the Covid 19 virus is accelerating several of these shifts, confirming our past thesis. We anticipate that opportunities will only get stronger over the next several years.
Cloud Computing Services
Cloud computing is the delivery of on-demand computing services – from applications to storage and processing power – typically over the internet and on a pay-as-you-go basis. Rather than owning your own computing infrastructure or data centers, companies and individuals can rent access to anything from applications to storage from a cloud service provider.
The first use of “cloud computing” in its modern context occurred in 2006, when then Google CEO Eric Schmidt introduced the term to an industry conference. Since then business has monetized computing with Service as a System (SAAS) through recurring payments to access software, store and process information. Examples of cloud computing services that you have been using already are your Google emails, your smartphone photos and any pay as you go services like Netflix. The idea of your laptop or desktop holding your licensed copy of software is quickly disappearing.
Over the past few years more companies have shifted from in-house processing to remote enterprise cloud computing services for a variety of needs. The strategic benefits of cloud computing are many– enhanced data security and optimization, scalability, reduced capital expenditure and operating costs, and improved mobility, which has quickly become a critical factor in the pandemic.
Working remotely has gained widespread adoption and is no longer considered transitory. Corporations, in greater numbers, are embracing cloud computing technology that has enabled a smooth and seamless transition to a remote work environment. This shift in how America works has many additional benefits – less need for office space, reduced emissions from transportation requirements and more family time for workers no longer sitting in traffic.
As this trend continues to accelerate, dominant players in the enterprise cloud computing industry are poised to benefit as they are able to provide the security, reach, cost savings, and required infrastructures needed by employers.
As a side note, Chesapeake has been using cloud computing services for several years.
Rise of eCommerce
The demise of traditional retail has long been predicted and as the Covid-19 crisis unfolds more consumers are shopping online. This is primarily due to the shutdown of nonessential brick-and-mortar stores amid government shelter-in-place policies and fears surrounding the spread of the virus. The easing of shutdown orders is unlikely to curtail this shift. Some smaller retailers will not survive, leaving fewer traditional shopping options. We believe the increased adoption of eCommerce will continue as the convenience and comfort of online shopping result in a permanent change in consumer behavior.
We will look for leading traditional retailers with loyal customer bases and large existing eCommerce operations to successfully navigate the shift.
While credit cards and digital payments have gained in popularity over the years, we expect to see a surge in their use along with the rise of eCommerce.
The proportion of digital payments in an economy is usually closely related to the overall level of economic development. In low and lower middle-income countries, digital payments by volume are low. Many upper-income countries have recently passed the 50% threshold and these consumers conduct about 2 payment transactions a day.
Supply Chain and Manufacturing Sources
Supply chains encompass the entire enterprise connection – originating with raw material suppliers and resulting in the distribution of the product or service. Entities in the supply chain may include producers, vendors, warehouses, transportation companies, distribution centers, and retailers.
The COVID-19 crisis is creating fundamental changes in consumer behavior, supply chains, and market routes that are throwing companies off balance. Responding to the pandemic has underscored the need for leaders to accelerate the adoption of flexible ways of working to help cope with the uncertainty.
Now, more than ever, the supply chain is critical. Some companies were already starting to rethink their supply chains and manufacturing sources prior to the Covid-19 crisis. As the U.S.-China trade war intensified, companies began restructuring their supply chains to rely on multiple sources, including shifting a portion of manufacturing to other regions, rather than relying on a single source, such as China. We think this trend will quicken, as the pandemic has highlighted the risks associated with the absence of a diversified supply chain.
In healthcare, this risk has been especially evident. There has been an enormous shortage of critical personal protective equipment for front-line health care professionals, a significant amount of which is manufactured in China, along with many basic pharmaceutical drugs. It is estimated that China produces 70% of the headache remedy and fever reducer acetaminophen used in the U.S.
Public support for clean energy has soared over the past year, as has political backing in many countries. Crucially, the cost of renewable energy can now be competitive with fossil fuels. Government, corporate and consumer interests finally seem to be aligning.
The Covid crisis will delay some renewable projects, but the fact remains that alternative-energy spending has more support than spending on oil and gas. Globally, clean-energy investment is now expected to account for half of total investment in the entire energy sector this year.
Solar and wind are now mature technologies that provide predictable long-term returns. Big lithium-ion batteries, such as those that power Tesla’s, are industrializing rapidly.
The big question for investors is no longer whether alternative energy is going mainstream, but how best to invest in it.
Digital Media, Video On Demand (VOD), Live Streaming
Traditional cable and broadcasting television viewing has been on the decline and consumers are turning to innovative internet-based delivery options as an alternative, experiencing cost saving benefits in the process.
Video on Demand (VOD) basically gives its users the opportunity to watch videos at any time and from any Internet-connected device. The convenience of watching tutorials, educational and entertainment content from virtually anywhere and on any device is the intended design of VOD. Netflix is the biggest platform on the planet for this type of viewing.
Live streaming services allow you to watch live programming that is being broadcast right now. It is essentially the same as cable except that is being streamed through the internet. Hulu and CBS All Access offer this type of service.
Based on the trends discussed above, Chesapeake continues to explore for healthy industries experiencing secular growth drivers whose profits are expected to strengthen at least as fast as the overall economy over a three-to-five-year horizon. Our process identifies what we characterize as structurally advantaged companies – growing companies in growing industries. Our aim is to invest in mid and large-cap companies within those industries that we believe are taking share of the industry profit pool.