Secular Themes Extend Beyond the Business Cycle
SECULAR GROWERS
When we consider blue chip stocks for our allocations, one of the core characteristics that we look for are companies which are secular growers.
"Secular themes in the market are the ones we feel confident about putting money to work in because their growth extends well beyond the industrial cycle and is independent of any actions taken by the Fed," explained Gerald Asplund.
"A secular trend is the one that isn't tied to the business cycle. We can find these types of trends in expanding industries or disruptive companies as they are fundamentally changing the way we view our world, as is the case with cloud computing, home improvement, or digital payments."
A secular trend is a trend that will continue irrespective of what is happening in the economy broadly.
Secular Trends Include:
1. Home improvement and remodeling.
2. E-Commerce
3. Long term care.
4. Investing and saving for retirement.
5. Internet based advertising.
6. Internet retail sales.
7. Electrification of the economy.
Investing in secular trends and innovation can position an investor for the future. An important driver of secular returns the demand for the products and services of these companies and the wave of new customers that they attract.
Three broad examples of secular growth are product replacement, new products, and foundation technology.
Foundational Technology
Some technological innovations are so impactful that they not only generate their own wave of demand, but they also create a foundation upon which other businesses can grow. Importantly, companies at the epicenter of a foundational secular trend do not necessarily perform better or become larger than the firms that they eventually spawn.
The advent of the internet is a great example. Plenty of companies profited from the development of the internet infrastructure, but over time the biggest winners have been firms that successfully leveraged the technology, such as companies who provide movies to consumers via the internet.
Replacement Product, Existing Market – E-commerce
Secular growth can occur when innovative builds a better mousetrap, taking market share from established incumbents. New online shopping companies are an example.
One of the great secular growth stories of the 21st century has been the rise in e-commerce. Online sales have been taking progressively more market share from traditional retailers for the past 20 years, a secular trend that has literally transformed how people shop.
Source: Retail Indicators Branch, U.S. Census Bureau
New Product or Market
The third major type of secular growth occurs when an innovative startup develops a new product/service for a new market. Internet search providers fit into this category. Prior to the advent of the internet, there was no need for search engines. But once the web was born, search became indispensable, as people needed a tool to navigate the ever-expanding landscape. The chart below shows the steady increase in internet users globally from 1992 to 2017.
Source: Internet Live Stats
It is important to note that secular growth is not immune to hazards of a recession, although some trends are robust enough to withstand even the worst downturns.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
LPL 1-05227064
DEFINITIONS
E-commerce Retail Sales – Compiled by the US Census Bureau. E-commerce sales are sales of goods and services where the buyer places an order, or the price and terms of the sale are negotiated over an Internet, mobile device (M-commerce), extranet, Electronic Data Interchange (EDI) network, electronic mail, or other comparable online system. Payment may or may not be made online.
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