What are the ‘Next Big Things’ which could be long-term game-changing innovations? Matthew Castel, portfolio manager of Logos LP, looks at four intriguing trends in manufacturing, healthcare, finance, and cyber security and highlights some favorite investment ideas within each of these development markets.
Steven Halpern: Our guest today is portfolio manager Matthew Castel of Logos LP. How are you doing today, Matthew?
Matthew Castel: Doing pretty well, thanks.
Steven Halpern: Well, thank you for joining us. Unlike many managers that have increasingly shifted their focus to short-term market moves, you remain very comfortable taking a long-term approach to investing. Could you tell our listeners a little more about Logos LP and your underlying investment strategy?
Matthew Castel: Absolutely. Logos LP is a private investment fund that approaches investing through four main principles. The first one is that we’re long term investors, as you said, and so, as business investors, we take a long-term approach to investing, because we believe that the majority of market participants have a short-term orientation and this creates attractive opportunities to look well beyond the next few quarters.
The next principle is that we look for absolute risk adjusted returns, so we attempt to generate the highest risk adjusted returns in any market.
The next principle is that we stay concentrated, so we invest heavily in our best ideas and we don’t dilute returns through over-diversification.
And the last principle is that we look for value. We typically only invest in businesses that are selling for significantly less than—our conservative estimate—of their intrinsic value.
Steven Halpern: Now, in line with your longer-term focus, you recently released a fascinating report called Four Next Big Things, which focused on four specific areas that you consider to be long-term game changing innovations. Now, the first one you highlight is increasing automation within manufacturing. Can you expand on that?
Matthew Castel: Absolutely. While artificial intelligence stories are always dominating the headlines, you know, people are scared about artificial intelligence and what-not, people actually are starting to underestimate the massive impact of just more simple robotics and 3D printing.
Robots worldwide are driving down the cost of manufacturing and the cost of operating such robots is becoming much less than the cost of human labor, and also, its much less of a headache. These robots can work 24/7 and they’re becoming so sophisticated that they can perform most human jobs, but the disruption doesn’t stop here.
Although the hype surrounding 3D printing over the last year, or so, has kind of cooled off, in the future, we expect even robots to be replaced by powerful 3D printers that may even allow us to design our own devices. Imagine being able to 3D print electronics like your own TV—or watch—and so these are the kind of game changes we see in the manufacturing sector.
Steven Halpern: Now from a long-term perspective, what companies would you point to for investors to focus on this market?
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Matthew Castel: To focus on this market, there is one particular name that we’re really bullish on. That’s Rockwell Automation (ROK). This is a provider of industrial automation, power, control, and information solutions that help manufacturers achieve competitive advantages for their business and so they provide industrial automation, power information services for manufacturers and energy producers.
Their results rely heavily on investments in factories, chemical plants, and oil and gas fields, and actually they just reported their earnings and their earnings rose 14% in their latest quarter, thanks to stronger margins and low costs. It is a great name that we like.
Then another name would be Cognex Corporation (CGNX). Cognex is a provider of machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes where vision is required.
Steven Halpern: Now, the second innovative trend you highlight is the impact of big data and mobile on the healthcare industry. What’s the story here and what companies do you think might benefit from those trends?
Matthew Castel: We think this is kind of a perfect storm, where there are several factors that have made healthcare ripe for disruption. We’re talking about an aging population, increasing healthcare costs, increasing illness, new regulatory reforms, and increased consumer demand for health information and self-care products.
These factors intercept really nicely with the growing mobilization of the world, and so that gives us mobile health. Here we have companies such as Apple (AAPL) working on platforms geared to storing data from wearable sensors, like, for example, the Apple watch, that can monitor blood pressure, blood oxygenation, heart rhythms, temperature activity, and other key vital signs.
This data will allow artificial intelligence-based e-physicians to advise personal health issues the second they arise. Think about it. Just being able to look at your watch, for example, and it can tell you if you have an infection and confirm maybe if you’ve had a heart attack and things like that.
There is also another disruption to healthcare and this is the increasing sophistication of data analytics or deep learning. Medical test data are now becoming more actionable and the cost of human genome sequencing is actually decreasing all the time. When you combine these things, we think there’s a potential for massive disruption.
Steven Halpern: Now, is there a specific company that you would recommend to get on that trend?
Matthew Castel: Absolutely. One company we really like—that we think has a lot solid fundamentals—is Medtronic (MDT). This is a medical technology services and solutions company. The company offers its products to hospitals, physicians, clinic, patients, and they’re always engaging in the most cutting edge technology and R&D, and so, their portfolio includes things like surgical, respiratory monitoring and vascular therapy solutions.
One other company that we also really like in this area is Edward Lifesciences Corporation (EW) and this is focused on technology that treats structural heart disease and critically ill patients. They also manufacture heart tissue valves, repair products used to replace or repair a patient’s diseased or defective heart valve.
Steven Halpern: Now there’s another game changing trend you point to, what you call the democratization of finance. Can you explain what this means and perhaps highlight any stocks to watch in this area?
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Matthew Castel: Absolutely. This trend that we’re looking at here is kind of the fact that current financial system, and over the past, things have been kind of stacked against the average investor. Now what we’re seeing is a shift in the balance of power towards transparency and empowerment.
Information and knowledge about investing in the financial industry have never become more accessible and technology continues to level the playing field bringing investors even closer to their advisors, markets, and investments.
Here we have things like low cost index funds. We have online portfolio management, robo-advisor software providers like Wealthfront, SigFig, Betterment, and we even have major established traditional investment managers like Charles Schwab introducing its own robo-advising services, the Schwab Intelligent Portfolios.
Then another, sort of, trend that we like here is crowd funding. This is actually shaking up adventure capital industry, making it less relevant, as individuals and companies can now look to platform like Indiegogo, or Kickstarter, to raise money.
In addition, peer-to-peer loan services like LendingClub and Prosper Marketplace are enabling individuals to circumvent the banking industry by offering a platform where borrowers and investors can connect.
Steven Halpern: Now are any of these companies public entities that somebody could invest in or is this just a general area to keep an eye on.
Matthew Castel: This is more of a general area. As I mentioned, there are some companies there like Wealthfront, SigFig, and Betterment that are very attractive takeover candidates for acquisition by the big banks.
Charles Schwab (SCHW), as I mentioned, is aggressively pursuing the robo-advisor agenda, and then the LendingClub (LC) in the peer-to-peer loan services space, is also a public company that is investable.
Steven Halpern: Now finally, we only have a minute, but you point to a fourth trend that unfortunately is becoming much more commonplace and that’s the increasing need for cyber security. What do you see developing here and perhaps you can highlight a name or two for investors to consider?
Matthew Castel: Absolutely. I’ll just explain that really quickly. Basically, every day almost, we’re seeing companies being attacked by cyber terrorists, you know, stealing data, breaching firewalls, and so the public is beginning to lose trust in businesses that fail to safely handle their data.
In fact, cyber security is actually become indispensable to business success. There are a lot of players in this arena, but several stand out due to their market leading products.
We like network security companies like Imperva (IMPV). We also like Palo Alto Networks (PANW), which remains at the forefront of network firewall technology.
And we also like Cyberark (CYBR), which has developed incredibly new ways to isolate servers and combat the comprise of insider privileges. These would be the three companies that we will be looking closely at in the cyber security sector.
Steven Halpern: Well, thank you very much for sharing a truly fascinating look at some innovative markets. Again, our guest is Matthew Castel of Logos LP. We appreciate you taking the time today.
Matthew Castel: Thanks a lot, Steven. I really appreciate it.
