Concinnus Financial Annual Investor Letter And 5 Investment Trends For 2021
Updated: Jul 7, 2021
2020… goodbye and good riddance. To those of you that have been directly affected by COVID-19 -- from getting sick to losing work -- our hearts go out to you. Unfortunately, 2021 isn’t off to a great start either, and many of you have added worry that the stock market is due for another crash, and that a change in power in Washington D.C. could hasten a downturn in your investments.
But as we pointed out in a recent note, the best investors are optimistic. There’s always something to be worried about, but there’s always opportunity too. This played out in 2020. In spite of an unprecedented situation arising from COVID-19, all of you at Concinnus Financial ended last year with double-digit percentage investment returns. We live in uncertain times, but we believe there is still plenty of opportunity. We therefore present the five trends we see playing out in 2021 and beyond.
1. The self-employment boom has arrived
This first chart is from the Federal Reserve Bank of St. Louis. This is one of the more astonishing things we’ve seen develop as a result of the pandemic. In fact, this is our 2020 chart of the year. In a normal recession, small businesses take it on the chin. Many unfortunately close down. New business applications decline. And while the pain was very real for many small businesses in 2020, there was also a staggering boom in new business applications and self-employment, the likes of which have never been seen before.
Your eyes don’t deceive you. New business applications exploded to over one million each quarter during the pandemic -- peaking at over 1.5 million during the third quarter. For many households, layoffs, furloughs, and work-from-home was the last straw after years of minimal pay raises and businesses asking for more and giving less.
We see technology as making this possible for many. Big tech has been a destructive force on society, but it also has the potential to do good. New e-commerce platforms like Etsy, Pinterest, Shopify, and Wix make starting a business and reaching audiences online easier than ever. And when we’re talking e-commerce, retail shopping like Amazon is just the tip of the iceberg. We’ve talked to lots of people that are turning their skillset into a consulting business, a hobby into a solid side-gig to supplement their income, and finding other unique ways to market what they do and build something for themselves.
We see this as a great trend for the economy overall, and there are investable businesses that aren’t big tech, supporting this boom in small business and self-employment. We think it’s a win-win for those who aspire to forge their own path forward and investors looking to bet on this new and more localized economy.
2. CPS is the new rent
In a world forced into isolation, some areas of the economy were hit harder than others. Commercial real estate was one, and as it turns out, many businesses discovered maintaining a commercial office space was a redundant expense -- an effect we’ve dubbed the “redundancy crisis.”
In place of rent, businesses are accruing expenses elsewhere, and yielding them cost savings and better return on investment. We’re calling this CPS. CPS being our acronym for cloud, payments, and shipping. We’ll talk more about digital payments below, but cloud computing is a massive megatrend set off by Amazon a decade ago that will continue to be of special interest. Cloud computing (a service performed remotely at a data center and accessed via an internet connection) is expected to grow to $300 billion in global spending this year, and we think the figure will exceed $1 trillion a year globally by the year 2030.
Cloud is a wide and far-reaching industry encompassing everything from streaming TV to business cybersecurity to software managing digital advertising and shipping. We continue to see lots of companies entering this space to take advantage of new business needs and will remain a core area of our investment focus.
Nothing is safe from tech disruption
You likely noticed in the last year the number of companies in your portfolio increased dramatically. That was an intentional decision we made last spring after the stock market “crash” when the COVID-19 lockdown began. As you have heard countless times on media outlets, 2020 was not a normal recession. Lots of organizations -- and more importantly, people -- were deeply affected. However, disruptive technology trends that were already in play were accelerated because of the pandemic.
If the last decade was marked by the rise of mobility (the smartphone, triggered by Apple’s iPhone), e-commerce (embodied by Amazon), and cloud computing (also Amazon, but Microsoft and Google too), the next decade could hold an even more pronounced impact from technology in overlapping industries. Specifically, we see healthcare, transportation and energy, and banking ripe for disruption, providing consumers with new choices and lower cost. And for us as investors, these new trends are more profitable than the old guard.
3. Healthcare and insurance
If ever there was an industry to be worried about, it’s healthcare. Americans spent $3.8 trillion on healthcare in 2019 according to the Centers for Medicare and Medicaid Services (CMS) and National Health Expenditure Accounts (NHEA) -- nearly 18% of U.S. gross domestic product (GDP). Suffice to say that’s a big number, one that the NHEA expects to increase by more than 5% a year and reach $6.2 trillion by 2028. Paired with less than satisfactory ranking of actual healthcare service, suffice to say this is a broken system.
As you can see from the above chart from CMS, health insurance is where the vast majority of this spending came from. This is what many technology companies are gunning for with their disruptive services, aiming for lower cost and better health outcomes. We believe tech is only just beginning to scratch the surface here. We’ve already had some early success with Teladoc, which pioneered remote care via phone or video conference. Others are joining the fray. And we see plenty of opportunities for companies like Clover Health (a Medicare advantage insurance company) and Veeva Systems (cloud software for pharmaceutical and biotechnology companies) to grow in the years ahead.
4. Energy and transportation
Tesla was a huge story the last few years, some of the reasons good, some just downright controversial. The company has almost single-handedly spurred on a slew of electric vehicle (EV) startups, many of which are attracting no shortage of investor attention. Many of them will eventually flop, a few will thrive, but it's becoming increasingly clear the auto industry will not look the same in another decade. EVs, and some degree of autonomous driving, are the future.
Rather than pick the winning auto manufacturers, though, we still see semiconductor and hardware designers as the most profitable bet on this space (as well as a general play on every other industry that is facing tech disruption). Big winners in the last decade like NVIDIA and Skyworks Solutions still have lots of upside.
Along with transportation, the overlapping energy industry could also face rapid change. Energy and utility companies will uncover new ways to profit and update America’s (and the world’s) power grid. But even in this realm, we still see semiconductors as the basic staple that will benefit -- and the most profitable way to ride the trend. Whether it’s a car, a battery, or a wind turbine, chips are at the heart of the engineering design.
5. Finance and banking
We’ve been getting lots of questions about how to play an eventual economic rebound in the wake of COVID-19. 2021 could be the beginning of a normalizing in economic activity, and hard-hit industries like travel, restaurants, and apparel retail (who needs new clothes when you’re stuck at home) could be in store for a rally.
Rather than pick favorites, though, we like digital payments. It’s a growth industry that continues to offset cash payments both here and abroad, and it’s highly profitable. Take Visa for example. The card payment network was negatively impacted last year as travel and retail spending decreased. But even in a bad year, Visa reported profit margins of 50%. Talk about an enviable business model.
Outside of digital payments, financial technology is also starting to make serious inroads to the traditional banking system. Use of “digital wallets” like PayPal and its subsidiary Venmo continue to rise. Square and its Cash App are adding new features, like the ability to purchase stocks. We see digital wallets to keep up the pace in the next year as the need for a traditional bank account diminishes.
Some final notes on politics and investing
As for political concerns. A change in power can cause serious anxiety, and those feelings only get exacerbated by the media (both on TV and social media). Our long-standing advice stands: Ignore the noise when it comes to your investments.
That being said, new challenges for some businesses loom. But in the short-term, we think ongoing stimulus will offset a possible increase in corporate taxes (current tax proposals will not affect the vast majority of U.S. households). But rather than play politics, we pick businesses we think will do well regardless of changes in tax code and politics. A business that will live or die because of a tax increase is not an investable one.
Nevertheless, we are always on the lookout for things that could cause upheaval in markets. We expect there to be a 10% or greater correction in 2021, as there usually is almost every year. But as always, we view these inevitable downturns as an opportunity to buy more of the companies we own that are proven winners -- and new ones that look just as promising.
We think 2021 will be the start of a new period of economic growth. There will be bumps in the road over the next five to 10 years and fear is still running high due to the pandemic, but a new crop of businesses look poised to grow in the years ahead.