April 10, 2007
IS IT JUST A sign of my advancing middle age, or is more happening in less time? Have technological progress and enhanced productivity actually sped up the pace of history? I find myself pondering these questions as I look back on the past 10 years for clues to the next 10. In many ways 1997 seems like yesterday. Yet so much has happened that in some ways it already seems like distant history. Since then, the Dow Jones Industrial Average has more than doubled, and the MSCI EAFE index of overseas markets has gained more than 80%.
Yet beneath this seemingly placid surface were some of the market's most jarring swings: the collapse of Long-Term Capital Management and an Asian stock market panic in 1998; the technology boom and bust, with the Nasdaq Composite losing 78% of its value from 2000 to 2002; the post-bubble recession; the surge of easy credit and low interest rates; the real estate, oil and commodities booms. And the dizzying 400-point drop in the Dow on a single day earlier this year, which heralded the return of long-dormant volatility.
Through it all, and even as the pace of events seemed to accelerate, SmartMoney has made the case for the long-term view of investing. In a world of day traders, rapid-fire in-and-out hedge funds and instantaneous computer-driven program trading, the old-fashioned buy-and-hold approach seems almost quaint, not to mention unfashionable. And yet its virtues seem to be ever more manifest: lower costs, lower risk and, most important of all, avoiding the emotional, crisis-oriented instincts of the herd.
For our 15th-anniversary issue, we've taken what we've learned over the past decade and a half to create another 10-year portfolio. To identify our top-10 stocks this time, we also demanded a demonstrable history of sales growth. Then, as in past years, we sorted through the remaining stocks one by one, looking for common themes that were likely to play out over the next decade. In the end, we identified four themes: clean water, health, wireless technology and global growth.
Bear in mind that any portfolio that aims for above-market returns inherently carries more risk. We recommend investing in the entire portfolio, as I will.
WATER SERVICES
Fresh water is becoming an increasingly important commodity. Water-infrastructure and water-treatment companies will clean up as emerging and developed economies build and rebuild their systems. Tetra Tech (TTEK1)
Tetra Tech is a consulting firm specializing in water-resource management and environmental cleanups. Eighty-five percent of its revenue is water-related, though it may be best known as the company that in 2001 tested the Hart Senate Office Building in Washington for anthrax contamination. The firm seems well positioned to benefit from growing environmental awareness and spending by both government and private companies. The Environmental Protection Agency, for example, estimates that water-infrastructure repair and improvement will require $277 billion in spending over the next 15 years. And the company has said that overhauling aging sewer systems in the U.S. alone will require more than $100 billion worth of work over the next 20 years. Tetra Tech recently won sewer work in Louisville, Seattle and Toledo, and improving state budgets should keep the new work flowing.
Watts Water Technologies (WTS2)
At first glance, you might not think a company that invented a hot-water valve in the early 1900s would be a high-growth prospect for the next decade. But Watts Water Technologies, which supplies water-control, purification, safety and flow devices to the construction industry, should see strong gains in the years ahead. Though the company benefited in recent years from the robust market for residential construction and renovation, which is now in a slump, its commercial construction business continues to be strong. Watts's greatest opportunity, however, lies with large municipal, state and national water infrastructure projects, both in the U.S. and abroad. One of Watts's faster-growing areas is pollution control; it makes valves that prevent waste water from backing up into the fresh-water supply.
HEALTH
Demographics favor medical-equipment manufacturers, from dental equipment to respiratory care to imaging systems. Natural foods, too, will continue to grow as Americans adopt healthier lifestyles. Sirona Dental Systems (SIRO3)
It may be that no one enjoys a visit to the dentist, but health- and appearance-conscious baby boomers are sure going. Dental implants are rising more than 10% a year, and the market for cosmetic dentistry is growing at a 13% clip. Thanks to new high-tech products from Sirona Dental Systems, people may find the trips increasingly pleasant and productive, and dentists are finding them increasingly profitable. Sirona designs, manufactures and sells dental chairs, treatment workstations and instruments such as the soft-tissue laser, which can make oral surgery faster and less painful. But the biggest drivers of the business, at $100,000 each, are its computer-assisted dental-design systems. Patients can get crowns made and installed in a single visit, eliminating the need for a temporary crown and a return visit. Only 7% of dental practices now feature the equipment, so there's plenty of room for growth.
Viasys Healthcare (VAS4)
Viasys Healthcare is a cluster of high-technology medical-equipment and diagnostic companies that focus on respiratory care and neuro diagnostics — the monitoring of the brain and nervous system. The company, which originally specialized in ventilators, went public in 2001 and has made 11 acquisitions since. Today 66% of its revenue comes from respiratory care and diagnostics, 21% from neuro care. Other specialties include artificial hip and knee joints as well as parts used in artificial hearts — all areas that should benefit from the aging of the baby boom generation. We expect Viasys to continue its acquisition strategy, concentrating on smaller companies that focus on respiratory care and neuro care. So far the company's acquisitions are paying off in greater economies of scale, especially in manufacturing and distribution, which have produced higher profit margins.
OSI Systems (OSIS5)
OSI Systems is a hybrid medical/defense company, with half of its revenue from medical equipment and half from scanning and inspection equipment and optical gear used by the defense and aerospace industries. Imaging is the technology that ties it all together, which means OSI should benefit from two major trends: an aging population with greater demand for medical care as well as continued defense and security spending. OSI's medical-equipment division makes everything from patient-monitoring to anesthesia systems. OSI bought the unit from General Electric (GE6) in 2004, after European and U.S. regulators ordered GE to sell it to resolve antitrust issues.
United Natural Foods (UNFI7)
Wherever you run into organic produce, chances are it got there thanks to United Natural Foods. The company is the largest national distributor of organic and natural foods, offering more than 40,000 products from 17 distribution sites nationwide. It serves the gamut of clients, from Whole Foods (WFMI8) and Wal-Mart (WMT9) to small specialty retailers, so it seems positioned to profit from growth in demand for organic products wherever it may occur. It faces no significant competition: Wild Oats, a natural foods chain that recently agreed to be acquired by Whole Foods, contracted with a rival distributor in 2002, but brought its business back to UNF three years later.
| Next: Wireless Telecom & Global Growth10 |
WIRELESS TELECOM
As broadband-like speeds come to wireless communications, demand for ever more sophisticated handsets and the infrastructure that powers them will drive the industry's next leap forward. Powerwave Technologies (PWAV11)
Powerwave Technologies makes the amplifiers, antennas and other equipment that enable wireless phones and handheld devices to transmit and receive voice and data. Powerwave's parts are used in base stations, which are installed on towers and on top of buildings by the wireless carriers. Besides benefiting from continued growing use of cell phones and other handheld devices worldwide, the company should benefit from two important subtrends: the shift to 3G, or third-generation, phone networks and the spread of a new wireless technology known as WiMax. WiMax, a wide-area broadband technology that is rolling out in cities like Chicago and San Francisco, is an industrial-strength version of the Wi-Fi network in your home. A WiMax signal can carry up to 30 miles, and it's 20 times faster than current mobile technologies. Powerwave makes the antennas and base station hardware for WiMax, and it has only one major competitor, Andrew Corp. (ANDW12)
Brightpoint (CELL13)
Brightpoint is the middleman for the wireless industry and should be ideally positioned to profit from its continued growth. The number of worldwide cell phone users is expected to jump 58% to 4.1 billion by the end of the decade, according to Gartner Group, a research firm. Nokia (NOK14), Samsung, Motorola (MOT15) and almost every other maker hire Brightpoint to install the software that makes their phones compatible with wireless-service providers and to deliver them to retailers. Although Brightpoint is the largest U.S. distributor of cell phones, it handles only 5% of the transactions worldwide, leaving it plenty of room for expansion.
GLOBAL GROWTH
Globalization is creating new opportunities in areas as disparate as market research and global air transport. Our two picks give investors worldwide reach as the global economy grows. Harris Interactive (HPOL16)
Best known for its Harris Poll, ubiquitous during American election campaigns since the 1950s, Harris Interactive is one of the top 15 market-research firms worldwide. It seems ideally positioned to profit from a continuing demand for proprietary data and information in nearly every field. Market research is a $26 billion industry worldwide and should grow 5% to 7% a year over the next five years, according to the European Society for Opinion and Marketing Research. Harris should grow considerably faster than that, thanks in large part to the Internet. The firm was among the first to recognize the potential for the Web to revolutionize information gathering and polling, launching its first online research panel in 1997. Today 57% of its research is Internet-based, and it has a bank of 6 million registered participants available for studies.
Atlas Air Worldwide (AAWW17)
Atlas Air Worldwide offers an unusual opportunity to profit from growing global trade, a trend we expect to intensify in the coming decade. The company, which has a fleet of 35 Boeing 747s, leases its planes, complete with crew, maintenance and insurance, to shippers, a business that's growing at 17% a year. To accommodate rising demand, the company ordered 12 additional 747s in 2006 and has options for 14 more. That seems a prescient move now that continuing setbacks for Airbus's superjumbo A380 are making it harder for competitors to expand their fleets in the high-capacity, long-haul markets that are Atlas's specialty. What's more, Atlas can now fly more cargo in and out of Asia; the U.S. Department of Transportation recently awarded the carrier four more routes into China, bringing the total to 16.
