Trend Investing: The Pursuit of Value

In today's continuously changing economy, new opportunities keep arising. These major economic changes are often followed by growth trends. As previously mentioned in the article 'Market Outlook: Recovery of Value Stocks', investing in trends has increased in popularity in recent years. This increase in trends investing was mainly driven by three key economic changes: the development of transforming technologies, socio-demographic changes and the need for more sustainability in economies.

Trend investors believe that a real change is happening in the world, leading to an increase in demand for a certain sector, product or service. From this increase in demand, companies can benefit and grow in the long term by providing that which is being demanded by consumers. As you can imagine, investing in such companies can lead to immense long-run returns. A great example is a relatively recent trend in the online streaming service market. A $990 investment in Netflix in its Initial Public Offering (IPO) in 2002, would now be worth $340,956, unadjusted for inflation.

Of course, these trends come at great risk. Netflix was a winner in this growth trend, where other companies that entered this market did not survive. Examples of such companies are Blockbuster Inc., VidAngel and Shomi. All three left the market, with Blockbuster Inc. not only shutting down their online streaming service but filing for bankruptcy. These companies could not live up to the high, fast-changing and adaptive requirements of the trend. It is thus of vital importance for trend investors to pick the right companies that meet these requirements. A typically consistent pattern in the stock prices of companies that enter such trend markets is modeled by the "Gartner Hype Cycle" (Figure 1). As the economy changes and companies see opportunities in entering a certain market, investors are often overconfident in the growth of such a market and overinvest in these companies. This can be seen in the stock price chart by an extremely rapid increase in the stock price over a relatively short period of time. As these inflated expectations cannot be met by most companies, while more competitors have entered the same market, the value of these companies falls at an almost identical rate as the initial growth. Once the market value has dropped significantly as seen in the second stage of figure 1, the strong surviving companies can grow and gain market share through investments, while the weaker 'hyped' companies leave the market. Blockbuster Inc. was an example of such a company leaving the market in 2013, after the hype of the online streaming service market. In general, the companies that survive such hypes and achieve long term growth, like Netflix are the ones with the best strategies in meeting the requirements of the market trend.

Figure I. Gartner Hype Cycle

Figure I. Gartner Hype Cycle

Other interesting examples of such market trends that showed a clear Gartner hype cycle are Blockchain and the Canadian Cannabis Industry. Blockchain's quick value increase at the end of 2017 (figure 2) was caused by its technological development and increase of popularity.

As explained in the article "Market Basics: Bitcoin (BTC), Ripple (XRP), Litecoin (LTC), Ethereum (ETH)", its popularity was caused by the belief that cryptocurrencies will eventually replace the current payment systems. After being hyped (late 2017), it is market value decreased quickly again at the start of 2018. Since the beginning of 2019, its value has started increasing again, which could signal long-term growth for Blockchain, in the case that cryptocurrencies will eventually be used more frequently in payment methods.

Cannabis was officially legalized everywhere in Canada in late June 2018, as can be seen in figure 3, this led to a quick value increase of the Canadian Cannabis index. However, in November of the same year, its value already decreased significantly. However, the index' share price has already shown growth by increasing by 55% since December 2018. Due to the opportunities in this market, long-term growth for well-positioned companies in this market is highly probable.

Figure II. Blockchain's historical market price chart (June 2017 - June 2019)

Figure II. Blockchain's historical market price chart (June 2017 - June 2019)

Figure III. Cannabis' index historical price chart (June 2018 - June 2019).

Figure III. Cannabis' index historical price chart (June 2018 - June 2019).

As the Gartner Hype Cycle and the example of Netflix and Blockbuster show, it is important when investing in trends, to pick the right companies. When making these types of investments can be highly beneficial to follow these steps:

1. Keep up with the news on technological developments, socio-demographic changes and developments in sustainability.

2. Do research about what market might be affected or created by this change.

3. Investigate which are the companies that will invest in this trend.

4. Investigate what strategies these companies maintain to gain market share in this market.

5. Pick the company with the strategy that you have the most faith in.

In short, a good trend investor is not only able to distinguishing hypes from growth trends, but also has the ability to pick the right companies that will benefit from trends. Also, it is important to be long term oriented when investing in trends, as investing in a trend implicitly means to trust the long term growth of a company, assuming the strategic investment is not to exit at the peak of the hype or to 'short' at the peak of the hype.

Interesting trends to look at right now are is the cybersecurity market, which could experience an increase in demand due to the increasing number of recent cyber attacks. For large companies and governments, it is imperative to prevent such attacks in the future. An example is the steady growth that Cyberark Software Ltd. has shows in the past 12 months. Another interesting trend is caused by the increasing popularity in healthy lifestyle choices. This is evident by the increase in the number of healthy products being offered by dietary companies and number of fitness centers per city. Companies like planet fitness have already shown that they are able to profit from this trend. Lastly, due to the need for sustainability and renewable energy. Companies with the right strategy in offering these types of products are expected to grow significantly in the coming years. An interesting company that could profit from the increasing usage of solar energy is the American firm First Solar.

Sander van EckComment