Investing Trends in the ‘Internet of Things’

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

Almost every day, there are data points and other signposts that inform us and give insight on the changing investing landscape. At times like now, when market volatility is picking back up, these signposts are like the North Star that ship captains once used to navigate during rough seas, and they help me identify and monitor transformational changes that are at the heart of my PowerTrend investing framework. I’d like to share two examples that I came across in just the last few days: the price of sugar and the Internet of Things.

Earlier this week, The Wall Street Journal gave us a great example in an article that addressed the double-digit percentage rise in sugar prices. While a growing number of people have come to the view that sugar is one of the more recent evils of the day, as subscribers to my Growth & Dividend Report are aware, I still love my Kit Kats that are products of The Hershey Company (HSY).

Poring over that Wall Street Journal article, we find raw sugar futures prices have climbed nearly 40% over the last few months, which marks the strongest move since 2011. But when compared against the sharp falls in oil, copper, steel and other commodities, the jump in sugar is a head and shoulders standout.

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What’s responsible for the surge in sugar prices? Simple supply and demand is the answer. Specifically, 2015 is the first year in several in which production (better known as supply) is falling below worldwide use (demand). What this has done is reverse course, leading to shrinking sugar inventories. When supply shrinks amid rising demand, you know what happens — prices move higher.

When I see price spikes like this, be it with commodities like cotton, wheat, corn, beef or chicken, I quickly ask, “Which companies are likely to see their costs increase, and have their profits and earnings come under pressure?” As we were reminded this past earnings season for the September 2015 quarter, companies that miss earnings expectations or offer weaker-than-expected guidance tend to see their shares get a drubbing, falling 10-20% or more.

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In the case of higher sugar costs, one of the first companies I think of is the one behind my Kit Kats — The Hershey Company. Others include Mondelez International (MDLZ), more likely known to you as the company behind Cadbury chocolates as well as one of my favorite cookies of all time — Oreos; Tootsie Roll Industries (TR); and sugary beverage companies like PepsiCo (PEP), Coca-Cola (KO), Dr. Pepper Snapple (DPS) and cereal and yogurt company General Mills (GIS), among others.

The other article that caught my eye was one that discussed a new forecast by research firm Gartner, which sees 6.4 billion connected devices in 2016, up 30% year over year. Whether I hear big promises from political figures or explosive market forecasts, I try to boil them down into very simple terms. In this case, 6.4 billion connected devices in 2015 means that each day 5.5 million new objects will be added to what we call the Internet of Things. That’s a term that refers to the industrialization of the Internet by companies ranging from General Electric (GE) and Honeywell (HON) to Starbucks (SBUX) and many others.

Smart Home

 

Source: Target Corp.

While many think of their smartphone as their primary connected device, the Internet of Things will give rise to the Connected Car, the Connected Home, eHealth applications and devices as well as many others. I kid you not when I say that while at the San Francisco MoneyShow I ventured over to Target’s (TGT) Connected Home showcase and saw a wirelessly controlled crock-pot, pet feeder, lock and lights among almost two dozen smartphone products.

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If we think about these connected devices, the key to them interacting with us or other machines is that they need to be connected, which increasingly means wireless connectivity that can be cellular, Wi-Fi, Bluetooth or some combination of the three. To me, that means companies like Skyworks Solutions (SWKS), Qorvo (QRVO), Avago Technologies (AVGO) and others are the key enablers whose RF (radio frequency) semiconductors can make those connections happen.

The best part is, investors don’t have to buy pricey shares of Apple stock to make money in the Internet of Things’ tailwinds. In my latest research, I’ll tell you about an Apple partner — trading for less than $5 a share — whose technology could be the key that unlocks the entire mobile pay industry. Learn more here. Change is inevitable in the markets but it also creates opportunities.

In case you missed it, I encourage you to read my e-letter column from last week about when to buy into a new ETF. I also invite you to comment in the space provided below my commentary.

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