Editor's note: When a sector is shifting rapidly, it can mean big investment opportunities...
That's why Empire Financial Research editor Berna Barshay believes it's important to learn as much as you can about a select few market sectors. By fully understanding a specific area of the market, it's much easier to identify the winners and avoid any potential pitfalls.
But what else can you do to position yourself to succeed in ever-changing environments?
As Berna details in today's Masters Series essay, you must also be ready to adapt...
Be Willing to Change Your Mind or Get Left in the Dust
Sectors that go through a lot of change – like consumer, as well as tech, media, and telecom – offer great complexity and great opportunity...
As I explained yesterday, investors who get to know a few areas really well are more likely to root out hidden assets, identify new growth companies, and spot potential takeout targets.
Understanding an industry deeply also helps you avoid "value traps" and identify when the world is changing in a way that will dethrone former winners and crown new ones.
When things are changing fast, it can be confusing... and picking winners and losers may seem daunting. But rapid change also offers massive opportunities to make money, and industry expertise and experience can help you parse the winners from the losers.
For instance, if you recognized early last year what was happening in e-commerce, you could've made big gains...
When the world locked down last spring, people still needed stuff. They still needed to eat. And kids still outgrew their clothes. The only difference was that we were staying home all of the time.
We all knew that was going to be a great setup for the titan in the e-commerce space, Amazon (AMZN).
But when Amazon had to slow down deliveries to prioritize essential orders, it opened a window for people to experiment with ordering groceries and other goods from Target (TGT). As a longtime observer, I knew Target was prepared and had been investing in its "omnichannel" capabilities – that is, selling both in-store and online – for years.
I told Empire Financial Daily readers that Target would gain sustainable market share thanks to prior investments and was prepared to meet the surging demand in its e-commerce division. Since that call, TGT shares are up roughly 50%.
Meanwhile, you probably know the top-performing stock in the benchmark S&P 500 Index last year was electric-vehicle maker Tesla (TSLA)... But can you name the second-biggest winner in the S&P 500?
Believe it or not, it was online crafts marketplace Etsy (ETSY). I can't tell you how many times I've heard investors who've probably never visited Etsy's website mock it... But ETSY shares were up more than 300% last year.
Many moms of small children have turned to Etsy to find customized decorations for a birthday party or an obscure component for a Halloween costume – trust me, we don't make fun of Etsy!
Familiar for years with the company from such searches, I quickly noticed that Etsy was a first mover in fashion fabric masks... And if you can think back to March 2020, they weren't easy to find early in the COVID-19 crisis.
As I anticipated, Etsy converted new customers seeking masks into returning customers looking for everything to make their homes more comfortable – from unique home-décor pieces to jewelry-making supplies to seeds and planters for new hobbyist gardeners. I wrote about the business pickup I saw happening for Etsy last May in Empire Financial Daily... And ETSY shares are up more than 90% since then.
When things are changing fast, good investors know to change their minds...
If you had asked me in late 2019, shortly after its initial public offering, what I thought of home-exercise company Peloton Interactive (PTON), I would've given you a long list of reasons why I didn't think the company would prove to be a good investment.
Primary on my list of objections was that I thought the company's total addressable market ("TAM") was too small. I thought the universe of consumers willing to pay $2,500 for an exercise bike was relatively limited and Peloton would quickly burn through its base of potential customers and hit a growth wall.
I also objected to the valuation... I thought that people were putting a big multiple on equipment sales that were one-time and lumpy in nature. While Peloton also has a business selling recurring subscriptions to content that syncs up with its at-home bikes and treadmills – which is very attractive, predictable, and high-margin – equipment sales still made up the majority of Peloton's revenues at the time. The subscription part of the business deserved a big multiple, but the equipment sales didn't.
My final objection was that successful boutique fitness businesses thrive on relationships...
By that, I mean your relationship with your favorite spin instructor, who can serve as a cheerleader, spiritual guide, or coach... your relationship with your fellow boot-camp workout buddies... and even your relationship with the front-desk staff at your yoga studio.
Boutique fitness studios offer a high-touch customer experience akin to visiting a Ritz-Carlton hotel or a luxury department store like Neiman Marcus.
Sure, an instructor online might call out your name in a live class twice per year while you virtually work out with friends. But that can't replace the experience of seeing friends in real life – where they could give you advice, join you for a post-workout coffee, or share a selfie after a personal milestone.
Peloton could never replace the experience of boutique fitness. I thought it might be a good substitute for people living in suburbs, small cities, or rural areas where the "real thing" wasn't available, or for people who worked long hours and couldn't make it to a studio during regular operating hours.
But of course, we all know what happened in March 2020 as the pandemic struck...
Literally overnight, in-person classes were removed from the menu. It no longer mattered if Peloton online classes weren't as good as studio classes. Suddenly, online was the only game in town.
I no longer worried that Peloton's TAM was too small. The demand was suddenly too great for the company to even keep up with it, and customers had to wait weeks for the delivery of their $2,500 bikes.
People who cared about staying in physical and mental shape through exercise needed their fix, even with studios closed. People who never would have considered a Peloton before suddenly had to have one. (I freely admit I was one of those people.)
The Peloton still isn't as good as live, in-person fitness classes, in my opinion. As a friend of mine put it the other day, it's like you really want a Coke, but you'll settle for a Pepsi.
Once you pay for a $2,500 bike, you'll likely keep paying that $40-per-month subscription... because without it, your $2,500 bike becomes an expensive coat rack. And you'll probably keep paying that $40 even after your gym reopens and you're using the bike less frequently... because that upfront initial spend is a sunk cost.
Simply put, the pandemic changed the game for home-exercise companies in general – and for Peloton most of all...
Overnight, the world had changed... so my opinion on Peloton did as well. I called out Peloton as a pandemic winner back in early June 2020.
I quickly went from wanting to short the company – or bet that it would go down – to embracing it... because I recognized a temporary change in the world would have lasting effects, at least in the case of Peloton.
PTON shares traded for less than $48 the first time I wrote about the company. By January 22 of this year, they had more than tripled. As I noted in Empire Financial Daily that day...
PTON shares probably fully reflect the company's bright future at this point and could see a pullback later in the year, as Peloton catches up to its backlog of orders and investors look to post-COVID recovery plays and sell some of the big winners of the pandemic.
That pullback actually came sooner than I expected...
I got lucky and practically nailed the top with this one. But the important lesson is that once a major change is obvious and widely known... you need to reassess your investments to see whether the risk-reward setups are still attractive.
Consumer behavior and spending patterns will undoubtedly look a lot different in the second half of 2021 than they did in the second half of 2020.
Right now, I spend a lot of time thinking about what comes next for consumers who have lived through the pandemic. In Empire Financial Daily, I've discussed differentiating between the new habits we developed over the past year to see which ones will stick and which ones won't... because that will point us to the right stock ideas.
The only constant in these sectors is change. And the natural result from that constant evolution is an abundance of big investment opportunities.
Regards,
Berna Barshay
Editor's note: Berna has used her sector expertise to establish an incredible track record... For example, while on Wall Street, she led folks to a 1,663% gain with auto-parts retailer AutoZone (AZO) and a 2,547% return with energy-drink maker Monster Beverage (MNST).
This Thursday, June 10, at 12 p.m. Eastern time, Berna is holding a special event to discuss her approach... She'll join Empire Financial Research founder Whitney Tilson to reveal just how you can accelerate your wealth and potentially earn huge returns in the years ahead.
In short, Berna and Whitney have identified a "hidden" corner of the market that could lead you to 100%... 200%... and even 500% gains in the next few months. Plus, just for reserving your spot for this free event today, you'll receive five free investment reports valued at nearly $500. Get started right here.