I love secular growth stories. Love them. Manufacturing process and design automation is one of them. Companies are constantly looking for tools, software and technology, such as robots or lasers, to make processes smoother, cheaper and more consistent. These trends have plenty of runway and there are various high-quality ways to invest in the theme.
For example, it takes time for design and specification engineers to adapt or redraw products using cutting edge 3D CAM software. Smaller-batch manufacturing and product and resource flow efficiency is also in flux. Power efficiency and elimination of redundant asset costs is being pursued. The ultimate ideal is the connectivity and communication of basically everything. The knowledge leads to higher-response times, production efficiencies, cash-flow optimization -- and all at reduced cost.
All together, we see accelerating trends in mass customization, decentralization, communications and business cases changing the traditional engineering and manufacturing landscape.
The purpose of this piece is to initiate dialogue on several companies that are on our watch list. Over time, we will discuss each one in great detail and assess the relative attractiveness of each stock. One word of caution, however: Some participants in this trend are not always amazing investments. Look at what happened to the 3D printing sub-sector after a couple of years of strong revenue growth: they all blew up. Why? Greedy investors in aggressive growth companies bid the stocks of these companies to outrageous levels by extrapolating aggressive growth trends in perpetuity -- obviously a dangerous game for those caught holding the bag toward the end.
The valuations in this group of innovation names span from "traditionally cheap" to "traditionally expensive" on a P/E basis. Each of these companies, though, have very solid underlying growth fundamentals. What's important is that that we dig to find underlying inflection points in these businesses from an end-market and technology perspective.
My annoying valuation hang-ups sometimes prevent me from getting involved, especially when a stock is at or near highs. I always feel as if I'm waiting for a pullback. However, this group of unknown innovation growth names has gotten slaughtered over the past year.
Is it time to get involved? Of all of these names, my favorites at the moment are Skyworks Solutions (SWKS), Entegris (ENTG), TE Connectivity (TEL) and Proto Labs (PRLB).