It's that time again to dust off our crystal balls and share which company is best positioned to deliver outsized returns over the coming year.
This time last year, I shared my view that Universal Display (OLED) , which currently resides in the Trifecta Investing portfolio, would be a strong performer as usage of organic light emitting diode displays exploded. During the year, we had a number of confirming data points from Applied Materials (AMAT) and others, and it didn't hurt that Apple (AAPL) adopted the technology for its new flagship iPhone. The wind up was OLED shares soared more than 200% in 2017, easily besting the S&P 500 and Nasdaq Composite Index that rose more than 18% and 28%, respectively.
I still see OLED shares as a strong performer in 2018, and next week's annual technology trade show, CES 2108, should remind investors of the opportunities for the technology in markets outside of smartphones, such as TVs, automotive lighting and eventually general illumination.
It's pretty much the same evolution we've seen with light emitting diodes (LED), but the big difference between Universal Display and LED company Cree (CREE) is it sells consumables (chemicals) and has a high margin licensing business. That allows the company to capture a nice push-pull dynamic as the not only the addressable market for OLED displays expands, but also as more players look to enter the fray. OLED shares are one to hold in 2017.
My 2018 stock pick? Amazon.
In terms of what company and shares are poised to deliver outsized return in 2018 and fits my thematic way of looking at the world, I have to go with Amazon.com (AMZN) . (The Trifecta portfolio is LONG Amazon.com shares.)
Readers like you are probably musing to themselves, "we already know about Amazon" and that's probably true... more or less. Let's remember that while Amazon is expanding its retail footprint with moves into private label products -- ranging from sporting equipment and its line of basics to apparel -- as it expands into other markets like mattresses and furniture increasingly across the globe, its secret sauce is the higher margin Amazon Web Services (AWS) business.
AWS is the cash generator that allows Amazon to competitively grow its business and disrupt existing industries along the way.
Similar to the push-pull dynamic I mentioned above, Amazon is sitting at the nexus of people and businesses increasingly moving their lives into the digital world. For consumers, there is digital shopping with delivery as short as two days plus streaming services and a growing list of services, including Amazon Pay.
The 2017 acquisition of Whole Foods put Amazon in a prime position to expand its presence in the digital grocery market, and in my view, replicate the disruption we are currently seeing at malls across the country. Along the way, Amazon will garner greater consumer wallet share, and odds are the price cutting at Whole Foods was just the beginning of what's to come in terms of synergies to be had.
The nutshell translation on that is more consumer wallet share to be had from Amazon as more consumers shift their spending dollar to digital vs. brick & mortar. While we would like to think it's "the Millennials", the reality is the average consumer, who is increasingly saddled with debt, is looking to stretch the disposable dollars they do have and Amazon is a likely beneficiary. Especially with two-day shipping or less, there is far less of a need to go to brick & mortar retailers.
Here's the thing: even though digital year-end holiday shopping rose more than 18% compared to overall holiday shopping's year over year move of 4.9%, according to MasterCard (MA) , e-commerce's share of total retail sales during the 2017 holiday shopping season is estimated to only be in the low double-digits. Keep in mind, the year over year growth rate for digital holiday shopping was at its highest level over the last six years, and it's rather likely this migration to digital shopping will continue in 2018.
At the same time, businesses across the globe continue to migrate to the cloud, and even the White House's American Technology Council is contemplating adopting cloud at a number of federal agencies as part of its IT modernization. Should this come to pass AWS is a prime contender, and in my view, it would goose the growing rate of cloud adoption in the private sector. In other words, more cash flow for Amazon to put to work expanding its business.
Natural fits: pharmaceuticals and banking
Toward the end of 2017, we heard much chatter about Amazon entering the pharmaceutical market and some about it entering banking. I have to say both seem like naturals given Amazon's logistics capabilities. It already has credit card on file, as well as ample experience in gift cards, and Amazon Pay. The only question is will Amazon attack these opportunities on an organic basis by building it themselves or be an opportunistic acquirer, much the way it was with Whole Foods? With $24 billion in cash and equivalents on hand at the end of September, and odds are healthy cash generation during the seasonally strong December quarter, Amazon has ample fire power to put to work.
One of the pushbacks that tends to put investors in the no-go zone with Amazon is what they see when putting the shares under the P/E microscope. This is where I remind you that there are a number of valuation tools to use, and with AMZN shares it's the PEG ratio. Based on current consensus expectations, Amazon is poised to grow its earnings 80% per year over the 2017-2019 time frame, and is currently trading at a PEG ratio of 1.05 on 2019 EPS expectations of roughly $14. For long-term investors that understand Amazon is a stock to hold, not trade, there is a windfall to be had as Amazon makes steady progress toward those EPS expectations over the coming year. Any strategic moves like the Whole Foods one last year could accelerate that timetable.
Now a word of caution -- Amazon tends to be very tight lipped (just listen to one of its earnings conference calls) and tends to make investments for the long-term. From time to time this doesn't jive with Wall Street expectations, but Amazon is building a business for the long-term. Investors should view those moves as opportunities.
Yeah, AMZN shares had a great move in 2017, but it's far from over.
