“China factory activity contracts in May” CNN
“Europe Stocks Drop Most in 10 Months on Stimulus Concern” Bloomberg
Ouch! Investors woke up Thursday morning to a triple-digit market decline after a slew of bad economic reports.
Typically during panic sell-offs I like to revisit my favorite big picture themes. What I love about these secular trends is that you can count on them for growth whenever scary headlines appear. This gives me conviction to hold when I would rather hit the sell button.
Here are my top three trends and how to play them.
Too much oil
Over the next five years we are going to witness an unprecedented boom in North American energy production as new projects ramp up in the Alberta oil sands, North Dakota Bakken, and Texas Eagle Ford.
High prices and technological innovation has unlocked vast, unconventional resources in the U.S. This has completely reversed the trend in falling American output and is reshaping the global oil industry. According to the IEA, North American energy supplies could increase by 3.9 million barrels per day between 2012 and 2018.
It may be tempting to look to at pure-play producers like Kodiak Oil & Gas to play this boom, but that would be a mistake. Rapid production growth from upstream players is slamming right into a wall of low prices due to bottlenecks in the energy supply chain.
Instead, the best way to play this boom are mid-stream companies like Enbridge Inc (USA) (NYSE:ENB).
The key problem in the oil business is the lack of capacity to ship new supplies from well-head to market. This has created a massive demand for new energy infrastructure and Enbridge Inc (USA) (NYSE:ENB) is right in the middle of that development. The company has $35 billion in secured and potential projects that could propel earnings growth at a mid-teen clip over the next five years.
In addition, Enbridge Inc (USA) (NYSE:ENB) boasts a solid 2.6% dividend so investors are paid to wait. The company has a 55-year history of shelling out dividends and a policy of rewarding shareholders as profits grow.
Healthy living
There’s a revolution in lifestyle as people, from millennials who want the quality of their food verified to babyboomers striving to stay young, begin paying more attention to what they eat.
Organic retailers have been on the front line of this trend with the segment growing 12% annually over the past 15 years. And there’s still plenty of expansion left with analysts projecting the space double in size over the next decade.
Whole Foods Market, Inc. (NASDAQ:WFM) remains the best pure-play on the healthy living trend.
The stock was in the doghouse for most of last year when big players like Costco Wholesale Corporation (NASDAQ:COST) and The Kroger Co. (NYSE:KR) started adding their own organic offerings to their stores. But fears were unfounded. Last quarter Whole Foods Market, Inc. (NASDAQ:WFM) reported a stellar 6.9% same store sales growth figure with no signs that rivals were biting into their business.
Consumers trust the Whole Foods Market, Inc. (NASDAQ:WFM) brand. They want to be reassured that their food is safe, sustainable, and ethical. That’s something rivals don’t offer.
This brand strength has allowed the company to become the most profitable name in the grocer business reporting a 6.3% operating margin last year. This has translated into a strong 15% return on equity last year. That’s doubly impressive when you consider that this number was achieved without any help from debt.
But the real story here is expansion. The company is planning to open 1,000 locations in the United States, triple its current store count. In addition Whole Foods Market, Inc. (NASDAQ:WFM) has less than 15 stores in Canada and the U.K. giving the company a long growth runway internationally.
Best of all Whole Foods Market, Inc. (NASDAQ:WFM) has a lot of catalysts that could send its share price higher. In their last conference call management hinted that they’re seeing little evidence of cannibalization in core markets like Boston. That could mean the touted 1,000 store target may be too low. In addition the company is also rolling out its loyalty program which could increase sales through more targeted promotions.
The mCommerce boom
The retail landscape is rapidly changing due to growth in smartphone and tablet ownership. This development has led to an explosion in mobile commerce. Last year, mobile sales increased 31% making it the fastest growing segment in retail.
According to estimates provided by eMarketer, mobile accounted for less than 7% of total U.S. eCommerce sales in 2011. By 2016, mobile commerce will account for nearly 25% of online retail.
Amazon.com, Inc. (NASDAQ:AMZN) is the top name poised to benefit from this trend.
Amazon.com, Inc. (NASDAQ:AMZN) was one of the pioneers in the mobile space giving the company the most time to develop and refine its offerings. Amazon has a great portfolio of mobile apps that are easy to use and integrated across all of its platforms (mobile, desktop, tablet, etc). Competitors are playing catch up.
These efforts are paying off. The company owned 10% of U.S mobile retail sales in 2012. According to a Citigroup Inc (NYSE:C) research report, Amazon.com, Inc. (NASDAQ:AMZN) generates $3-$5 billion in mobile sales accounting for nearly 10% of the company’s total revenues. This could grow substantially as the category matures.
Yet Amazon.com, Inc. (NASDAQ:AMZN)’s critics continue to complain about thin operating margins and scant returns. They want to see the company cut back on its expansion plans to focus on short-term profitability.
But CEO Jeff Bezos has his eye on a bigger prize: complete retail domination. And he has the patience and financial resources to do it.
Expensive investments today will give Amazon.com, Inc. (NASDAQ:AMZN) the size and scale necessary to make its business model profitable in the future.
Bezos isn’t managing Amazon.com, Inc. (NASDAQ:AMZN) to please shareholders next quarter. Profits will follow once the company ends its expensive investment program. As earnings start to become more visible, it will be a big catalyst for a higher share price.
Foolish bottom line
The big benefit to sticking with secular themes: they provide a tailwind that allow companies to grow earnings and expand margins through erratic economic cycles.
The trends listed above won’t disappear when the next European debt auction sours or if Congress gets tangled in another round of budget gridlock. As an investor, that gives me the courage to hold through the occasional market panic.
The article 3 Big Picture Themes for a Market Sell Off originally appeared on Fool.com and is written by Robert Baillieul.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Whole Foods Market. The Motley Fool owns shares of Amazon.com and Whole Foods Market. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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