If you are to make one resolution for 2016 with respect to buying stocks, make it a promise to understand the big themes driving a company's financial statements.
For example, you don't necessarily want to own an Apple (AAPL) simple because "everyone wants the latest iPhone." The more intelligent thought process, one that could open up ideas beyond just Apple, would be to understand human beings want to be connected to real-time developments around the clock. That growing hunger by people to know more things quicker will continue to underpin sales not only for Apple, but for the broader supply chain of chip manufacturers and a glass maker such as Corning (GLW). If there is no understanding of the theme causing profits to rise or fall, then knowing whether to buy a stock or sell it becomes infinitely harder.
Seeing as the world of finance is essentially dead this week thanks to the New Year's holiday, I decided to develop three simple themes for 2016. In my view, the themes below are poised to become even stronger next year, and indeed are almost guaranteed not to crumble barring a global depression or new Cold War.
Theme #1: Earth is getting warmer
Even if you don't buy into what is causing the planet to get warmer, the reality is that the planet is getting warmer. The World Meteorological Organization expects global average temperatures this year to reach a record high. By the end of 2016, based on most forecasts floating around, global temperatures will reach another record high, which would mark three years in a row of warmer temperatures.
In other words, 2016 could be another year of warm winter weather that wreaks havoc on sales and profits at outdoor apparel manufacturers such as Deckers Outdoor (DECK) and Columbia Sportswear (COLM). Department stores such as Macy's (M) could be harmed if they didn't learn from this year's warm fall by planning inventories of winter jackets and sweaters in 2016 lean and mean.
On the other hand, with temperatures staying warmer for longer in a given year, I think that will mean more people tending to their gardens and lawns longer. Keep in mind, homeowners traditionally have let plants die after October and haven't returned to gardening until the spring. I fancy people will want to take advantage of the abnormally warm weather and keep their home exteriors as neat as possible. That should benefit Scotts Miracle Gro (SMG).
I like how the company is preparing to expand Roundup to new categories in 2016. Further, it struck a shrewd deal with Monsanto (MON) to gain a first peak at the company's product pipeline, a critical move to maintain a competitive lead over rivals. Considering this, as well as tame inflation for raw materials Scotts uses in production, the company should fare well. The stock has gained about 5% in 2015, outperforming the major averages.
Theme #2: The Chinese people will spend more on frivolous things
The Chinese are moving beyond only being able to afford the basics of life, and their discretionary spending is taking off. In turn, there is a huge investment theme being created despite the slowdown in broader GDP.
According to McKinsey, growth in spending on annual discretionary categories in China is forecast to exceed 7% between 2010 and 2020, and growth of 6% to 7% annually is expected in a second category of "seminecessities." McKinsey says both of these categories are growing faster than spending on actual necessities, which are expected to grow around 5% a year, or about the same as expected GDP growth. While the government's crackdown on luxury items will continue to hamper names such as Louis Vuitton, Coach (COH) and Prada, the merchandise that Nike (NKE) sells does not fall under the luxury category.
I expect Nike to get a huge boost in its Chinese results in 2016 as the government promotes exercise and as more explore the brand with their newfound disposable income. The rising global popularity of basketball also will be a boon to Nike in China.
Theme #3: Baby boomers don't want to die just yet
In spite of many years of draining hard work, baby boomers are dead-set on not kicking the bucket just yet. They not only want to prolong their lives, but also the quality of those lives; after all, what is the sense of having a nice nest egg if one can't walk on a plane to take a vacation.
To get a handle on this investment theme, consider these tweet-worthy statistics. Born between 1946 and 1964, there are about 76.4 million baby boomers in the United States, and in 2016 they will all be approaching or at retirement age. In 2016, so many people will be drawing Social Security that the money needed to cover benefits will be more than what those workers from Generation X/Y will be paying in taxes.
Rather than try and invest in food companies and retailers seeking to hawk organic food, the better way to play baby boomers fighting to stay alive longer is through a gym company such as Planet Fitness (PLNT). The membership rate is senior-friendly (dirt cheap), and the setting is what a senior needs (lots of circuit exercises/machines to build up confidence in working out).
From a business standpoint, I am a fan of the company's franchise business model (highly lucrative), significant pipeline of new gyms for the next five years (franchisees sign agreements in advance) and the sizable lead the chain has in terms of locations operated. Scale is king in this business, and Planet Fitness has it -- along with a desire to expand more aggressively outside the U.S.
