In the last Penny Sleuth I looked back on a stunning 2013. The final figures are now in: the FTSE All Share Index returned 20.8% including dividends, and small companies did even better. What a year!
I said it last time and I’ll say it again – there’s more money to be made in this bull market.
Why do I say that? There are a couple of investing stories which are nowhere near played out. You could categorise them broadly as ‘technology’ stories. But allow me to be more specific.
The biggest investing story of the year
I’ve written a lot about ‘big data’ here in Penny Sleuth and in Red Hot Penny Shares. That term is just starting to cross over into the mainstream press, because it’s becoming increasingly obvious that it’s going to change the world in the next few years.
Basically, the amount of information in the world is growing at a fast and accelerating pace. The number you hear a lot is that 90% of all the information on the planet was created in the last two years. The investment opportunity is in decoding all that data and putting it to use.
What exactly does this data consist of? Well, from the minute we get up in the morning we leave a data trail. Our mobile phones and tablets log our location. We shop online. And then we talk about our lives online.
It’s clear how Amazon or Cineworld use this information to tempt us with offers and deals that are tailored to our buying habits. But that’s relatively simple to do.
Some data sets are ‘unstructured’ – that means they don’t fit easily into a spreadsheet or database. Unstructured data might include text, or other non-quantitive information. Until recently, it couldn’t be analysed properly, but more processing power has changed that. We can now handle the ‘three Vs’ of big data: large volumes of varied data that are changing with great velocity.
Big data sets are useful because they allow you to find previously hidden correlations. For example, Google Flu Trends uses data from internet searches to make accurate real time predictions of the progression of the flu in your area.
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A more quirky example is online music company The Echo Nest, which has a database of 35 million songs. It has attempted to classify the music based on a wide range of criteria, from what sounds alike to what music bloggers are saying about it. This has led to ‘taste profiling’ where your playlist allows accurate inferences to be made about your personality and preferences; such as your favourite TV shows and even the way you are likely to vote. Unless you keep an eye on the privacy settings on your music player, you could be giving away a lot of personal information just by listening to your favourite songs!
I have a couple of live recommendations of stocks which I expect to benefit from the big data revolution in my Red Hot Penny Shares portfolio. Technology giants such as IBM and SAP will benefit from this investing story, but if you can find small companies with dedicated exposure you, can make big returns.
Last year, Edward Snowden showed us the sinister side of big data. ‘Snooping’ by government agencies and commercial companies will remain a source of concern. But the data genie is out of its bottle, and its benefits will probably overwhelm attempts to regulate it. In fact, our whole attitude towards privacy seems to have changed radically during this time.
Medicine is my second big investing story for next year. The big pharmaceutical companies enjoyed strong growth up to a decade or so ago; they came up with blockbuster drugs to treat major diseases, but those drugs have now gone off-patent and are no longer money spinners. To find the blockbuster products of the future, the drug majors are using smaller biotech companies and research houses to carry out of the early stage research. And that opens up investment opportunities.
We are very lucky to have world-class medical research happening right here in the UK. The foundations for this are in our universities, which are home to three of the top four clinical research institutions in the world. New treatments based on genomics and ‘personalised medicine’ hold great promise. I hold a couple of those stocks in the Red Hot Penny Shares portfolio and the upside will be huge if they are successful.
There’s a catch though – it can take time to bring those drugs to market. That’s why I’m keen on diagnostic and testing companies. An innovative test can be developed and approved much more quickly than a new drug, and commercial adoption can be quicker too.
Just getting started
Although many of these growing tech companies need money to support their ambitions, they tend not to need as much capital as resources companies or manufacturers. Technology-based businesses also tend to have high margins, and their cost structure means profits can explode if a product really takes off. That’s what I’m looking for this year, whether in diagnostics or biotech or big data or any other type of stocks. I think the broader stock market will be focusing more on growth stocks over the coming year or two.
During the last few years of recession and low interest rates, stocks with defensive characteristics and high yields have been prized. But now, confidence is starting to build. The economy is beginning to grow again – the perfect environment for penny shares. If I’m right, 2013 is only the beginning of this bull market.
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