Table of contents:
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
Prerequisite readings:
First, identify the fast growing industries
How to find industries' projected growth rate?
You can first insert a prompt like this on Google Bard
What are the fastest growing industries in the next 5 years?
Please provide response in a table format that includes their expected CAGR.
Please provide source too.you should then get a response similar to this:
or you could also use BingChat, (make sure to set it to be in "More Precise" mode).
Next, you can use sites like Statista.com, to crosscheck the figures.
You can also refer to this sheet of mine which I update periodically to keep track of some of the highest growing industries.
Avoid shrinking industries
It is important to note that the projected Consumer Price Index (CPI) CAGR from 2023-28 is 2.5% (source: International Monetary Fund (IMF) World Economic Outlook, October 2022)
That means prices of goods & services are expected to increase by 2.5% per year during this period.
Hence, any industries growing less than 2.5% per year would be considered to be a shrinking industry (example: Newspaper publishing, landline telephone companies).
Long-term investors ought to avoid industries which are shrinking or stagnating.
Growth investors should opt for industries which are growing or growing fast.
Give preference to industries which growth rate is higher than your required rate of returns.
Assuming if your targetted annual rate of returns is 15% to reach your financial goals.
It is strategic to give preference to industries which estimated growth rate are higher than 15%.
(reason): it will be easier for companies in it to sustain a revenue growth of 15% as well.
It is easier to for companies to acquire new customers in a growing industry, than it is for them to compete and win customers from other existing players in a mature industry.
Secondly, opt for the industries where Barriers of Entry is high
When a company is operating in an fast growing industry
and the barriers of entry is high,
the chance for the company to sustain their high revenue growth will be higher.
Industry growth rate | Barriers of Entry | Attractiveness | Examples |
High | High | Great |
|
High | Med | Good |
|
High | Low | Low |
|
High barriers of entry become even more important when the industry growth rate is low.
Industry growth | Barriers of Entry | Attractiveness | Examples |
Low | High | Ok |
|
Low | Med | Low |
|
Low | Low | Low |
|
Note: the attractiveness column is purely from a standpoint of the 2 variables above (Industry growth rate & Barriers of entry) and does not take into consideration other important factors such as:
Business Model
Business Moat (Switching costs, Network effects, Brand recognition, etc)
Financial performances
etc
This is important because it will help to ensure the valuation of your stocks maintain at a healthy range.
Using the reasoning of Price to Sale valuation.
PS Ratio formula =
i) Total Revenue / Market Cap
or
ii) Revenue per share / Share price
(Revenue / Shares outstanding) / Share price
It is imperative that the Revenue growth should be at least on-par with Share price growth over the long-run, otherwise the company will become overvalued.
For example, assume over a period of 5 years:
Revenue growth | Share price growth | from P/S ratio standpoint |
10% | 15% | = stock will eventually become overvalued |
15% | 15% | = stock will maintain as fairly-valued |
20% | 15% | = stock will eventually become undervalued |
Identifying fast-growing industries is an essential skill for investors who want to generate attractive returns over the long term.
By following the steps outlined in this article, you can learn how to identify industries that are well-positioned for growth, and avoid industries that are shrinking or have low barriers to entry.
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