At Manning & Napier, we make many of our investment decisions based on bottom-up analysis. Our research team dives deep into hundreds of different companies, evaluating their fundamentals and their suitability as an investment.
What makes a good investment is constantly changing. We don’t subscribe to the notion that investors should think in terms of absolutes, as if they must increase or decrease one style or sector. Instead, we’re always re-evaluating our holdings on a security-by-security basis, each on their own individual merits as well as the whole, to ensure our clients the best results possible.
Today we’re looking at three stocks or industries that have caught our attention recently. Some are new investments, and some have been staples of our portfolios for several years. And we think you’ll notice that these opportunities stretch across a variety of styles, sectors, and categories today.
The Athleisure Trend
As we’ve spent more time at home over the last year, workout and athleisure apparel has come to dominate our closets. This trend was on the rise for several years, as wardrobes became more casual and going to a workout class came with its own dress code.
Lululemon has been on our radar for several years (read our case study from 2020 here). The company’s growth has been consistent and strong, moving far beyond the yoga-only clientele it first attracted. Fostering a cult-like following has aided growth, as the company has cultivated many loyal followers who are unlikely to switch to a different go-to brand any time soon.
Lululemon has a vertically integrated business model, both manufacturing and selling their own clothes. By cutting out the middleman, Lululemon saves money and keeps customers coming back for their unique, proprietary designs and fabrics.
Lastly, the company’s decision to eschew traditional marketing tactics have made it seem authentic and relatable, resonating with younger generations who gain more and more spending power as time goes on. We think the market is underestimating this company and how it will perform in the coming years.
Tailwinds for Industrial Gas
The industrial gas industry underpins the workings of a variety of essential industries including the energy, consumer, and healthcare sectors. Gases such as oxygen, hydrogen, and nitrogen are critical raw material inputs into a variety of products.
Economic distribution of these gases can be difficult. Customers require a large amount of the product, so transporting them far can be a challenge. Oftentimes, producers create gases onsite for their customers, linking to their own production facilities via pipelines. Industrial gas is a tough market to break into. It requires a huge degree of technical expertise, dense distribution, and long-term contracts for establishing onsite production. The top few industry leaders capture the vast majority of the global marketplace.
These gases are vital to thousands of companies, but for their specific use cases, they typically take up a small wallet share on the bill of materials. This low-cost dependency has enabled the industry to push prices annually, allowing them to boost margins over time and generate consistent earnings and dividend growth.
So why is now the time for this longstanding industry? We see certain secular tailwinds that are leading to increased demand. These include increased oxygen need for an aging population, helium used in diagnostic tests, and supply shortages in semiconductor production that create demand for certain gases.
We also see a potential future in which hydrogen is vital to a green energy economy, and producers of this gas stand to benefit immensely from this. For an industry known for its stability, we believe the market has yet to price in these considerations, making the area ripe for a long-term investment.
Semiconductor Growth
Semiconductors tend to be a little bit more volatile of a business, and recently, there’s been a pullback in the space, including some of the highest quality names due at least in part to severe supply shortages for many components. We see a few select companies as being in a great position to strengthen their long-term position from this downdraft, especially those with an expanding ability to solve complex problems.
And there are a wide variety of complex problems to solve for the most innovative chip companies. We see particularly strong demand for chips that accelerate the AI (artificial intelligence) algorithms used to power everything from intelligent recommendation engines to self-driving cars. The complexity of the problems AI is trying to solve is increasing at an exponential rate, driving strong demand for increasingly powerful chips across the data center ecosystem. Another example is the soaring demand for more advanced, more powerful gaming chips, especially in graphics processing units. Their prices have increased significantly in the past five years, further accelerated by the pandemic, allowing producers to increase margins far beyond what you’d typically expect from a component supplier.
Gaming and data center revenue have continued to grow quickly, beyond many expectations from the industry and investment analysts alike, with semiconductors underpinning much of their strength. The immense growth in these markets will continue to drive substantial demand for more innovation, and presenting large opportunities for the best positioned, most nimble semiconductor companies.
Putting it All Together
Looking at stocks from a bottom-up perspective allows us to find companies that have the potential to succeed in many different market environments. With recent volatility, many investors are wondering if now is the time to only own cyclical or value stocks, while others are wondering if they should ‘double down’ on high-flying growth companies. For us, we simply look for strong companies at prices that don’t outpace their true value, and our measured, disciplined approach is leading us to opportunities in both growth and value.
Enjoying this information? Sign up to have new insights delivered directly to your inbox.
This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.
