Below we’ve cobbled together a subset of the articles that caught our thematic eye over the last several days. As you can see this list not only touch on several aspects of our investment themes but the sources of these articles are rather diverse as well. In our view, this confirms not only the pervasive nature of our investment themes but the degree to which they are recognizable in the world around us, provided that one is seeing, listening and thinking thematically.
July was a bit of a roller coaster ride for the domestic stock market, as it grappled with the ongoing U.S.-China trade war, economic data that points to a slowing global economy and the expected interest-rate cut by the Federal Reserve at the end of the month. For the month in full, each of the major stock market indexes finished higher month-over-month, adding to their gains for the year, but exited the month below their July highs. The same was true for the Tematica Research Cleaner Living Index, which rose 1.2% in July, continuing its sharp June rebound.
Driving the July performance for the Cleaner Living Index were shares of Beyond Meat (BYND) and Primo Water Corp. (PRMW), both of which climbed more than 20% during the month. Those moves reflect the continued expansion of Beyond Meat’s meatless protein products, a growing number of partnerships and expanding consumer awareness of water quality. That last topic was a key conversation point in our recent Thematic Signals podcast conversation with Dr. Roy Speiser. The index’s July performance also benefitted from double-digit gains at Simply Good Foods (SMPL), the company that leverages the Atkins brand in the healthy snack market, Trex (TREX) and Fresh del Monte Produce (FDP).
Offsetting those gains were continued declines at Tenneco Inc. (TEN). The company’s clean air solutions have been impacted by the combination of a slowing global economy, a weakening of the auto market and on-going US-China trade concerns. Other notable decliners with the index for the month of July included Sprouts Farmers Markets (SAFM) and Renewable Energy Group (REGI). Sprouts continues to confront the traditional grocery chains expanding their natural, organic and healthier for you product offerings. Cleaner fuel company Renewable Energy Group on the other hand is facing falling oil prices, making competing solutions increasingly affordable.
As we are starting to wind down the 2019 June-quarter earnings season, coming into this week more than three-quarters of the S&P 500 group of companies had reported those quarterly figures. Tallying those results, we’ve seen earnings-per-share expectations for the current quarter fall. The result is that full year 2019 earnings per share expectations for that cohort of 500 companies has risen just 2.7%, compared to 2018. Before too long, investors will begin to focus on 2020 growth prospects, and current expectations have the S&P 500 group of companies growing their collective earnings by 10.8% year over year in 2020.
By comparison, the Cleaner Living index constituent base is slated to grow its collective earnings by nearly 30% in 2020. That’s significantly faster than the expected year over year EPS growth of 6%-12% in 2020 for the consumer discretionary, consumer staple and utility segments tallied by FactSet. Arguably the difference in those EPS growth rates reflects the accelerating shift by consumers toward natural, organic and healthier for you solutions that speaks to the structural shift captured by Tematica’s Cleaner Living investment theme and index.
While we very much like the overall vector and velocity of the Cleaner Living constituent base and the collective earnings-per-share growth to be had in the coming quarters, we recognize at least in the near-term the overall market and subsequently the Cleaner Living index will likely be impacted by U.S.-China trade developments, the speed of the global economy and changes in monetary policy from the world’s major central banks.
Signals for Tematica’s Cleaner Living investment theme & the Cleaner Living Index
Performance for the Tematica Research Cleaner Living Index (CLNR) is available through Bloomberg, Reuters, FactSet, and other data aggregators, as well as the Tematica Research website. The index is currenty available for licensing for the use in a variety of exchange traded products or as a data overlay in portfolio screening and management. The Tematica Research Cleaner Living Index is being calculated by Indxx.
The cover story on the August 5, 2019 issue of Bloomberg Businessweek features some colorful helmets from Netflix (NFLX), Disney (DIS), Amazon (AMZN), HBO (T) and Hulu (which is essentially a part of Disney now) with the headline “It’s showtime.” The issue and the ensuing article are of course talking about the ensuing video streaming war to be had, which could likely change the playing field for that aspect of our Digital Lifestyle investing theme.
If like me you managed to find an actual print copy of the issue, on page 11 the title of the corresponding article is “All over but the streaming” and the authors correctly call out the coming streaming video war as resembling The Hunger Games.
Here’s how the article starts:
Anyone who wants to watch a dramatic, treacherous race in the months ahead should check out the escalating competition in the world of streaming video-on-demand TV. It promises to be the media industry’s equivalent of the Badwater Ultramarathon, the annual spectacle in which a steely group of endurance athletes gather in the arid lowlands of California and race uphill on foot for 135 miles. In the summertime. In Death Valley.
By this time next year, AT&T’s WarnerMedia division, Comcast’s NBCUniversal, Walt Disney, and Apple will all have released sinewy new streaming video services, taking on the existing ones from Amazon.com, CBS, Hulu, and Netflix. It’s unlikely that any of these media and tech giants will escape this looming showdown unscathed.
As I see it, there are really several things going on:
No question about it, the competitive landscape is tightening, and it means more choices for consumers.
More choices mean we are likely facing a content war that will in all likelihood result in lower quality content being created simply to fill the streams.
A content war means we can expect more content to head back to those that created or own it. Disney is doing this with its Marvel movies and Netflix, NBC Universal is doing this ahead of launching its own streaming service. Time Warner is starting to do this with its DC Comics content that has aired on the CW and enjoyed a close relationship with Netflix… and so on. More content removed, means more money needs to be spent on replacing it.
A content war also means good content will get more expensive, and with Apple reportedly spending up to $15 million per episode for some of its programming, it means a company will need a big budget to compete.
That’s the big question as all these service roll out, and the initial Disney+ price point of $6.99 per month caught many off guard, especially since it is substantially lower than Netflix.
A number of streaming entrants have businesses other than streaming, which should allow them to invest as well as compete in the streaming market. AT&T has its core mobile business; Amazon has its retail juggernaut and Amazon Web Services; Disney has its parks, licensing and content business as well as a robust character library. Netflix has…. Netflix, which means that unlike the others it relies entirely on its streaming video service to compete and to fund its content creation.
And those are just the obvious points.
Do I think Netflix’s days are over? Will it become the Myspace of streaming video services?
Hard to tell, but I think we can agree Netflix will face far tougher days ahead compared to the ones it has already seen, while the newcomers enjoy a valuation reset should their streaming video services capture subscribers.
Make no mistake it will be a tricky battleground that will require continual reinvestment. I say this given the following findings from Park Associates:
Not bound by long-term contracts, streaming subscribers can easily be lured away. In surveys, Parks Associates found that 28% of consumers said they have subscribed to a streaming service to check out just a single title.
This of course raises the question over Netflix lacking other businesses to drive profits and cash flow so it too can continually reinvest in its streaming content library. If Netflix has to respond with subscription price cuts, it more than likely means tapping its balance sheet yet again, which will impede profits from falling to the bottom line.
It’s going to get tricky, but most changing landscapes usually are.
CONTACT: Chris Broussard (571) 293-1977 firstname.lastname@example.org
Tematica Research®, LLC, a thematic investment research firm based in the Washington, DC Metro area today announced the launch of the Tematica Research Cleaner Living Index (CLNR). The index is a thematic approach to ESG investing that looks to capture those companies that are riding the tailwinds of Tematica Research’s Cleaner Living investment theme, which focuses on the shifting consumer preference for food, beverages, personal care and beauty items, home cleaning and lifestyle products and services that are deemed to be better for you, your body, your home, workplace and the environment.
What is Cleaner Living
Cleaner Living has moved more and more into the mainstream in recent years as consumers become more conscious of the ingredients and materials used in the foods they eat and the products they surround themselves with on a daily basis. Cleaner Living seeks to eliminate, wherever possible, artificial chemicals, additives and ingredients that are deemed to have potentially harmful effects, as well as avoid the materials or technologies that can damage the planet through pollution or depletion of natural resources. This includes:
Cleaner Groceries: Natural, organic, non- GMO and even gluten-free foods, as well as products that specifically avoid using preservatives, artificial sweeteners, saturated fats and artificial chemicals.
Cleaner Dining: Healthier fare restaurants that have adopted a more natural, less processed menu with the elimination of GMO’s, trans-fats, and artificial ingredients.
Cleaner Health & Beauty: Natural skincare & makeup, toxin-free toothpastes, shampoos, soaps, feminine hygiene and baby products with more natural ingredients and fewer or no preservatives.
Cleaner Homes & Buildings: Cleaning products with more naturally derived active ingredients, free from irritating chemicals, artificial colors and fragrances; low VOC paints, rugs, furniture, and mattresses; products and technology focused on the purification of water and air in your home.
Cleaner Planet: Products that have high recycling content or are made through environmentally friendly processes such as sustainable materials. This includes products and technologies designed to use less material and energy to reduce their environmental impact compared to fossil fuels and other petrochemical-based solutions. Examples include biofuels, wind and solar power, electric vehicles, solid-state lighting and other renewables.
Compared to a decade ago, the range of Cleaner Living solutions has expanded significantly. It was not that long ago that in order to find these type of foods and products, consumers had to shop at places such as Whole Foods or your local health food store. Now, shoppers not only find them on the shelv es of nearly every local grocery store, but Cleaner Living products are now among grocer branded private label products.
As consumers increasingly flock to these cleaner options, many companies have repositioned their offerings to capture this preference evolution in consumer spending. Christopher Versace, Chief Investment Officer of Tematica Research states, “We are still in the relatively early innings for this thematic shift when it comes to Cleaner Living. Some companies are further along in their transformation than others. But as more consumers seek healthier and environmentally friendly options, we’re seeing an increase in the number of companies looking to accelerate their transformation within the Cleaner Living theme on either a ‘build it’ or ‘buy it’ basis.”
About the Tematica Research Cleaner Living Index
The initial constituent list for the Tematica Research Cleaner Living Index (CLNR) comprises more than 50 companies whose businesses each derive at least 50% of their sales or profits from one or more aspect of Tematica’s Cleaner Living investing theme. In keeping with that theme, the constituents are comprised of companies across several sectors and include food, beverage, and snack, companies; restaurants; health and beauty as well as home care products; and utilities, recycling and auto companies among others. As more companies shift their businesses to capture the benefits associated with the Cleaner Living tailwind, it means over time there will be new entrants to the index. Given the degree of M&A activity we are witnessing as companies look to hasten that transformation, we are likely to see constituents removed as well.
In addition to that thematic exposure, the constituents must have a minimum stock price of $10 at the time the index is reconstituted as well as a minimum market cap of $250 million and a minimum average daily trading volume of 100,000 shares over the trailing 30-day period. A company’s thematic exposure to the Cleaner Living theme is captured in Tematica Research’s proprietary Thematic Scorecard. This database of roughly 2,400 stocks has been scored across each of Tematica Research’s 10 investment themes based on each company’s exposure to the theme as reported in publicly available information.
The Tematica Research Cleaner Living Index (CLNR) is available through Bloomberg, Reuters, FactSet, and other data aggregators, as well as the Tematica Research website and is available for licensing for the use in a variety of exchange traded products or as a data overlay in portfolio screening and management. The Tematica Research Cleaner Living Index is being calculated by Indxx.
Today the Washington Post featured a piece that highlights what we at Tematica have been saying for months and is highlighted in our Middle-Class Squeeze investment theme. All is not well in many American households at a time when unemployment is at a 50-year low, there are more job openings than there are job seekers and the powers that be keep telling us how great things are. The Post article noted:
A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported Tuesday, even more than during the wake of the financial crisis era.
This is particularly concerning given that a car is often more important than even making a mortgage payment or a credit card minimum payment as it is how most people get to work.
A car loan is typically the first payment people make because a vehicle is critical to getting to work and someone can live in a car if all else fails. When car loan delinquencies rise, it’s a sign of significant duress among low-income and working-class Americans.
Given that the population has increased since the Financial Crisis, the actual percent of auto loan borrowers that were 3-months or more behind on their payments is at 4.5% versus the peak of 5.3% in late 2010, but the record high number is concerning at a time when the economy is supposedly firing on all cylinders. What happens when it really does slow?
We are seeing similar worrying signs in the recent Federal Reserve Senior Loan Officer Survey which found that demand for consumer loans is in full-on contraction. This is not something you see when the economy is strong and people are confident about their financial future.
We will be discussing this and much more in our Context and Perspectives piece to be released later this week.
An article in this week’s Economist points out some phenomenal data that speaks to our Global Rise of the Middle Class investing theme. While the Middle Class in many developed nations is under pressure, part of our Middle-Class Squeeze investing theme, we are seeing technology help leapfrog infrastructure needs in many emerging markets. In India, mobile data is giving people access to the global economy in ways that was utterly impossible just a few years ago.
Just three years ago there were only about 125m broadband internet connections in India; by last November the number had reached 512m. New connections are growing at a rate of 16m per month, almost all on mobile phones. The average Indian phone user now consumes more mobile data than most Europeans.
Incredible economies of scale possible in the most populous nation on earth make for business models that are not feasible elsewhere.
So as not to limit the market to people who can afford smartphones, Jio also launched its own 4g feature-phone, the JioPhone, which it says is “effectively free”. Customers pay only a refundable deposit of 1,500 rupees ($21) for the device, with which they can use WhatsApp, watch YouTube and take pictures. As Mr Ambani said last year, for most users their Jio connection “is not only their pehla [first] phone but also their pehla radio and music player, pehla tv, pehla camera and pehla Internet”.
Which has lead to incredible adoption rates.
Data in India now cost less than in any other country. On average Jio’s users each download 11 gigabytes each month.
The opportunities here are staggering, but as we’ve seen pushback on globalization in much of the developed world, so too is India looking to protect is domestic companies from foreign competition. Draft rules revealed last July would require internet firms to store data exclusively in India. Another set of rules that went live last October require financial firms to store data locally, too. On December 26th India passed rules that hit hard at Amazon (AMZN) and Walmart (WMT), which dominate e-commerce there, preventing them from owning inventory in an attempt to protect local digital and traditional retailers.
Investors are well served to look beyond just the U.S. economy which is facing growth headwinds from slowing population growth, aging demographics and enormous debt loads with a mountain of unfunded liabilities across pensions and Social Security. In India, a country with a massive population that is relatively young and with productivity levels well below those of developed economies, small improvements can generate enormous returns for both its citizens and investors.
Millennials and their spending habits have been targeted as one of the reasons behind reduced demand from homes, cars and retail sales. New research, however, from the Federal Reserve points to the reason behind those spending habits as the simple fact that they spend less because they have less money to spend. In many respects that comes as no surprise given the magnitude of debt levels between the levels of student loan and credit card debt they are juggling, but that has also impacted their level of savings with more Millennials having nothing saved.
While it may come as a surprise to some, the above revelation that a growing percentage of Millennials are living lives that are in tune with our Middle-class Squeeze investing theme.
In recent years, slow home construction, declining new-car sales and the poor performance of brick-and-mortar retailers have all been blamed on the “unique tastes and preferences” of those born between 1981 and 1997. That means millennials have been accused of killing everything from canned tuna to the suburbs.
Actually, though, millennial habits are not so different from that of previous generations, “once the effects of age, income, and a wide range of demographic characteristics are taken into account,” according to a new paper by the Federal Reserve.
Younger people are spending less because they have less money to spend, the Fed concludes.
“Millennials are less well off than members of earlier generations when they were young, with lower earnings, fewer assets, and less wealth,” write authors Christopher Kurz, Geng Li and Daniel J. Vine.”
For family income,” they write, controlling for age and work status, “Generation X and baby boomer households have a family income that is 11 percent and 14 percent higher, respectively, than that of demographically comparable millennial households.”
In recent months we’ve seen grocery companies intermingle their businesses with pharmacy companies, which are also looking to drive business with in-store medical clinics. With rising labor costs and other inputs, both grocery and pharmacies are turning to technology to drive their capabilities and services to foster traffic and sale as well as restrain costs if not drive them lower. We are now seeing artificial intelligence and augmented reality, aspects of our Disruptive Innovators investing theme, starting to be introduced into their effort to capture revenue and profits.
Two Safeway stores in the Phoenix area are now offering artificial intelligence-powered medical clinics through a partnership with Akos Med Clinic.
This first-of-its-kind clinic utilizes technology developed by AdviNOW Medical so that many common conditions, such as sinus infections, earaches, sore throats, rashes, UTIs, strains and sprains, can be quickly and effectively treated.
As patients sit in front of a computer screen and simple-to-use, FDA-approved medical devices, they are guided by AR on how to collect their own data, such as weight, temperature, blood pressure and blood oxygen content, as well as ear, nose and throat images and chest, lung and abdomen sounds. Follow-up questions are asked until a diagnosis can be made, with the total process typically taking less than 15 minutes.
The data collected is then sent electronically to an Akos healthcare provider, who will then video chat with the patient to confirm the AI-collected information, verify the diagnosis and confirm or change the treatment plan. A healthcare professional will also be on-site if assistance is needed.
The AI also sends the prescription and/or test orders to the appropriate healthcare partner, and will follow up with the patient to check health status and schedule a follow-up visit, if needed.
Over the next 12 years, all of the baby boomers will have moved into the senior generation, resulting in a major structural shift in core demographics of the United States. From 2010 to 2030, the percent of the population over 65 will increase from 13 percent to 19 percent, while the percent of the U.S. population aged 20-64, the primary working years, will decrease from 60 percent to 55 percent.
This demographic shift is the core of our Aging of the Population investment theme, which zeroes in on the reallocation of spending and consumption habits that is beginning to occur. More and more, Baby Boomers are taking money that in the past was utilized to support their young and growing family and are now using it towards caring for themselves as they grow older. The Aging of the Population theme encompasses financial services, real estate, digital retailers, technology and obviously healthcare. We’ve written many times about the nursing shortage predicted as Boomers reach a point where they demand more medical assistance and day to day care, and we’ve shared with subscribers to our research a couple of stocks that are riding those tailwinds as healthcare systems deal with the coming crunch.
A recent article in U.S. News and World Report points to another interesting component of the nursing shortage, one that could essentially be viewed as a self-inflicted pain point for Boomers, and that is the retirement of nurses that are Boomers themselves:
Although the Great Recession delayed the retirement of many nurses, now that the economy has improved, older nurses are leaving the workforce. This mass exodus of older nurses is putting pressure on many hospitals and health care facilities around the country, and finding a way to bridge the gap between baby boomer generation nurses who are leaving the workforce and millennial nurses who are entering has been both a challenge and an opportunity. Source: Is There a Coming Shortage of Nurses? | Patient Advice | US News
The impact of retiring nurses isn’t just being felt on hospital floors and in doctors’ offices — many of these nurses are also the faculty at nursing schools and it is resulting in a signifacant bottleneck for the next generation of would-be nurses to fill in the ranks:
A recent report from the American Association of Colleges of Nursing found that “U.S. nursing schools turned away 64,067 qualified applicants from baccalaureate and graduate nursing programs in 2016 due to insufficient number of faculty, clinical sites, classroom space, and clinical preceptors, as well as budget constraints.” This mismatch between supply and demand could yet get worse, given that “the average ages of doctorally-prepared nurse faculty holding the ranks of professor, associate professor, and assistant professor were 62.2, 57.6, and 51.1 years, respectively. For master’s degree-prepared nurse faculty, the average ages for professors, associate professors, and assistant professors were 57.8, 56.6, and 50.9 years, respectively,” the AACN reports Source: Is There a Coming Shortage of Nurses? | Patient Advice | US News
Several months ago we speculated Amazon would do more with the cashierless checkout technology that powers its handful of Amazon Go stores, and that now seems to be the case. We should expect Amazon to be tight-lipped per usual on what its plans are, but whether it means to keep the technology in-house at its Whole Foods Market, Amazon Bookstores and its Four-Star Store or license the technology to other retailers it’s likely to set off a wave of change that fits with our Disruptive Innovators investing theme. The risk of a competitive response or if Amazon does license the technology is low paying jobs, which would make widespread adoption of the tech a tailwind for our Middle-class Squeeze investing theme.
Amazon.com Inc. is testing its cashierless checkout technology for bigger stores, according to people familiar with the matter. If successful, the strategy would further challenge brick-and-mortar retailers racing to make their businesses more convenient.
The online retail giant is experimenting with the technology in Seattle in a larger space formatted like a big store, the people said. The systems track what shoppers pick from shelves and charges them automatically when they leave a store. Although the technology functions well in its current small-store format, it is harder to use it in bigger spaces with higher ceilings and more products, one of the people said, meaning it could take time to roll out the systems at more larger stores.
It is unclear whether Amazon intends to use the technology for Whole Foods, although that is the most likely application if executives can make it work, according to the people. Amazon has previously said it has no plans to add the technology to Whole Foods.
The cashierless system is already in use at seven Amazon Go convenience stores in Seattle, Chicago and San Francisco. The company plans to build more of these small stores, according to one of the people familiar with the matter. Each is typically less than 2,500 square feet and sells a range of drinks, prepared foods and groceries.