The best investments can often be the ones no one is talking about. The technology is too new or overlooked. The company is turning around but investors don’t believe it yet. Or, sometimes, the business is just so boring that no one bothers to even take a look.
Part of our job as an active manager is to scour the market for all possible opportunities, especially the ones that don’t make headlines. Recently, we have added or increased positions in three industries that could certainly be considered off the beaten path. We think their stories are more than compelling and hope you will too.
1. Salvage Auctioneering
You might think that with all the hype around self-driving and autonomous vehicles that automotive safety would be on the rise. And in some very important ways, that is certainly true. Technology is helping make driving safer, but the investment story isn’t that simple.
All the technology in cars has an overlooked side effect on repairability. Due to the pervasiveness and complexity of today’s automotive technology, more vehicles are being irreparably damaged because the tech is either too difficult or too cost prohibitive to repair.
This is causing insurers to mark the cars as ‘totaled’—even if they remain perfectly drivable—choosing to leave the vehicle with the salvage industry instead. And once there, the industry has multiple ways to make money, including repairing the car and auctioning it off with the salvage title, and/or stripping it for parts to resell and scraping the remainder for metal. Either way, the salvage industry wins.
Someday, the autonomous vehicle dream may become truly viable, but in the here and now, that dream is just that. In the meantime, we think the salvage industry is well positioned to continue driving value for investors along the way.
2. Consumer Credit Analytics
Big tech is leveraging data to disrupt so much of everyday life, but sometimes, the old way of doing things is just fine. Take credit scores, for example.
The report is simple enough: Give each consumer a numeric rating so that lenders can make an educated guess on your creditworthiness. But don’t mistake the simplicity of the business for it being easily replaceable. Credit scores have been a financial industry staple for decades, underpinning mortgages, credit cards, car loans and more, and they are even used in common investment vehicles such as in pass-thru securities (e.g., asset-backed securities).
Credit scores have basically become common language for financial services. This gives the tool a weightiness. Lenders are comfortable using it, investors make important decisions on it, and consumers know how to understand it.
We think the multi-sided network effects give this industry monopoly-like characteristics. Providers capture what may seem like a substantial fee each time a score is pulled, but when rolled into the closing costs of buying a home or a car, it is nominal. This gives the industry strong pricing power, and we think there remains a long runway of growth ahead.
3. Packaging
What could be less exciting than packaging materials? The packaging products industry is stable, mature, and fairly defensive. Yet, the industry is going through more change and has more opportunity than meets the eye.
Sustainability is a major trend, and for many consumers, that goes beyond the products themselves. Packaging has become part of the experience. Would a new iPhone feel as cool without the fancy box it came in? Maybe some of you wouldn’t care, but many people do, or at least they subconsciously do.
Environmentally conscious manufacturers of everything from normal goods to perishables and frozen foods are looking to packaging providers for higher quality, sustainable alternatives. Paperboard and other paper-based packaging materials are on the rise.
Providing green packaging is no easy task, and as providers ramp production of their variety of paper packaging products, we see the potential for efficiency gains and margin expansion. These new growth opportunities, potential productivity gains in making the material, as well as a few other factors package together to make this a compelling industry.
As much as we like these areas of opportunity, every potential investment should be considered from a total portfolio perspective. All of our investment strategies are actively managed with risk monitoring built-in, helping ensure that our portfolios are consistently positioned for changing market environments.
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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.
