In a recent letter to clients, I wrote how the investment industry will likely have to reassess how it defines industry sectors. For instance, Google (Alphabet) is obviously, and correctly, classified as a technology stock. However, Tesla gets lumped in with the rest of the automotive group, and Amazon is considered a consumer discretionary company just like, say, Tractor Supply Co.
We can discuss the merits of these classifications, but do investors really buy Tesla because it makes cars? Or because Amazon sells stuff which you used to buy at the store? Perhaps, but I would counter there are companies which are incredibly disruptive forces in their respective industries, and investors love them primarily for that reason. The three I mentioned are simply low-hanging fruit.
Intuitively, there will be a small number of true disrupters in any economy, which means there were be a lot of base companies. The former will develop new products, services, and technologies which will change how we live our lives and conduct business. The latter will battle it out for market share in what is left of any one economic sector. By the time the dust settles and the smoke clears, a large segment of current corporate America will be, as Charles Dickens might have said, “without a situation.”
The trick will be choosing the likely winners and avoiding the losers, but make no mistake about it: unless the government gets involved and/or there is an evaporation of capital in the global economy, there will be an enormous amount of consolidation in the U.S. economy over the next decade as corporate Darwinism weeds out those “stuck in the middle” firms.
Historically, this would suggest there will be an enormous amount of merger and acquisition activity, and there might be. However, I believe it is more likely the healthier firms in an industry will be far more apt to simply let lagging firms fail on their own, as opposed to buying their capacity. Why? Because there is already “too much” capacity in much of the economy.
While the auto industry is increasingly dear to the Alabama economy, how much capacity does it need in the United States and how much does it have? Would you say cars are still in a growth stage? Or would you think, overall, it is a relatively mature sector, which will grow more proportionately with the population than it did decades ago? At least in terms of units sold over a multi-year period? Yep, that would be my vote.
(Read the full article as previously published in the Montgomery Advertiser on June 12th, 2017)