Secular is the term used to describe trends that are long-term in nature and not affected by short-term seasonal, cyclical, or economic factors. Secular trends are driven by fundamental changes in critical areas such as technology, politics, and demographics, as well as societal changes which drive consumer behavior. While secular trends are expected to continue for the foreseeable future, they are by no means permanent and investors need to keep an eye on changing dynamics.
A lot of money can be made in the stock market by identifying secular trends and the companies that will benefit or be harmed by them over the long term. Secular trends can be positive or negative for different companies, industries, and sectors so it is important to keep an eye out for both directional trends. This article will take a look at some of the common factors behind secular trends we are seeing to gain a perspective on what type of businesses and markets might be affected.
Secular Trends Have Large Market Effects
As stock market prices are driven by the expectation of future earnings and cash flows, the emergence of and changes to secular trends can have a large effect on valuations. Industries and sectors experiencing the tailwinds of secular benefits will see their P/E multiples rise as investors raise growth expectations.
On the other hand, industries experiencing negative secular trends and headwinds will see market valuations shrink as lower growth expectations are priced in. Depending on the severity of the negative secular trend and the profitability of the industry, these trends can have devastating effects or be a slow bleed where investment opportunities can still exist at the right price.
Both positive and negative secular trends can get taken out of proportion by investors causing bubbles or pullbacks in companies being affected by the secular trend. When calculating growth rates, investors need to be aware of both directional trends. As we look at various broad factors driving secular trends we will discuss both positive and negative secular trends being seen in various areas.
Factors Driving Current Secular Trends
Secular trends vary from country to country based on current and past political policies which drive long-term changes. As mentioned previously, secular trends can also be related to societal factors and technological advancements. Below are some of the main factors driving secular trends across various industries and examples of companies riding the trend.
Global warming is a societal and political issue driving long-term changes in many areas of life and leading to long-term secular trends; both positive and negative. The issue of global warming is driving long-term positive secular trends in areas such as green energy and electric vehicles. Some of the high-flying stocks being helped by these secular tailwinds are Tesla (at its +300x P/E) and NextEra Energy (with its +134.5x P/E).
Interestingly, the entire automotive industry seems to be getting caught up in the bubbly electric vehicle valuation multiples despite the low probability that people are suddenly going to be buying more cars because they are electric…
On the negative side, the issue of global warming is causing negative secular trends in the carbon-producing oil and gas industry as investors start to price in the end of the internal combustion engine. Other high carbon-emitting industries are also likely to see disruption and higher costs as they begin to be charged for their emissions and need to make technological advancements to become more efficient, as well as purchase carbon credits.
Health & Well-Being
Consumers continue to get more health-conscious and this is driving various secular trends across many industries and sectors. From health foods to home workout equipment, the drive of consumers for health and well-being products is driving numerous secular trends across consumer staples and discretionary businesses.
Being positively affected by health and well-being secular trends are companies such as Peloton with their home workout equipment, Beyond Meat with their perceptively healthier meatless burgers and large grocer Whole Foods.
In terms of a negative secular trend in the health and well-being category, tobacco is a classic example. The now known risks of smoking cigarettes have led to slowly declining sales for decades. In the United States, individual cigarette sales have decreased from 398.3 billion in 2001 to 203.7 billion in 2020 according to Statista. This 48.9% decrease over 19 years implies a simple negative 2.6% growth rate annually. Because of this negative secular growth rate, companies in the tobacco industry trade with low valuations and high dividends.
While the internet might seem like an old invention in this tech-savvy day and age, it is still enabling many new secular trends to occur. The internet lowered barriers to entry in many industries, made advertising more effective and achievable for new businesses, and allowed new levels of scale and mediums of communication to be created by technology companies and platforms.
Industries being affected by the use of the internet include e-commerce on the positive side (Amazon or Shopify), brick and mortar retail on the negative side (Sears), and travel and leisure (Airbnb) to name a few. Even transportation companies such as Uber have benefited from the connection and scale of new platform internet-based businesses. Courier companies such as FedEx have seen home deliveries surge from all those e-commerce packages.
As more of our information goes up on the internet, positive secular trends are also being created in cyber security spending. Lastly, with more information available through the internet, better, more timely, and inter-connected decisions can be made. The terms artificial intelligence and the internet of things (IoT) have emerged to classify businesses and products in these developing areas.
The Takeaway for Investors on Secular Trends
Secular trends are long-term in nature and are driven by fundamental changes in critical areas such as technology, politics, and demographics. The growth rates being created by secular trends should be taken into account in valuations. Investors also need to keep in mind that the markets can get carried away with the level of growth expected by secular trends, which causes bubbles or buying opportunities in the market.
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