Disruption is rapidly becoming one of the most watched themes among investors as corporate giants such as Amazon, Facebook and Twitter shake up traditional markets with their size, global reach and seemingly unlimited financial firepower.
Earlier this week I reported on an interview with Aswath Damodaran, first published in Goldman Sachs’ Fortnightly Thoughts magazine, in which Damodaran warned that the only way to avoid financial loss from disruption is to diversify across sectors and corporate lifecycles to capture both the mature and disrupting companies in every industry.
“Diversification shouldn’t just be across sectors, it should also be across corporate life cycles. So, if you’re buying mature stocks with price to earnings ratios less than 10x, because they look cheap relative to new players like Netflix, your portfolio is not diversified because you’re ignoring younger, higher priced disruptive companies.” Aswath Damodaran
Disruption is also the topic of this week’s Global Equity Themes research presentation from Credit Suisse.
Disruption: The companies to avoid
Credit Suisse’s Thematic & SRI Research Equity research team has analysed 1550 companies that are exposed to three main disruptive forces: 1) globalisation/competition 2) innovation and 3) regulation. The company’s been separated into two groups, those with the highest risk of disruption and those which appear to be “undisruptable”.
The team has identified three sectors that are most likely to be affected by these themes. Financials, Health Care and companies in the energy sector are more exposed to disruptive forces than most while Consumer Staples and Telcos appear to be the least at risk from disruptive forces.
Interestingly, it seems that the market is already rewarding those companies in sectors that are unlikely to suffer from severe disruption. Stocks highlighted as being the least at risk from disruption in a similar research note published by Credit Suisse earlier in the year have outperformed higher disruptive risk companies by around 1000 basis points since the beginning of April. A long/short basket of the key and undisruptable and disrupted stocks risk have outperformed the MSCI World index by 460bps since April.
Credit Suisse’s team gave each company in their study a ranking of one to three per disruptive force. As noted above there were three key disruptive forces considered and for the first criteria (globalisation) China was the primary consideration for the analysts. On the topic of technological innovation, analysts consider risks from Automation, Robotics, IoT, 3D-printing and Big Data to a company’s business model. And finally, on the topic of regulation, Credit Suisse found that many industries are coming under pressure from tightening regulation, which is depressing returns or increasing the need for investments in other sectors.
Some of the companies that Credit Suisse’s team of analysts believe are immune from disruption are Textron, Archer Daniels Midland Inc., Advance Auto Parts, Inc, General Mills and The Kraft Heinz Company. On the flip side, the companies that could be at the most risk from disruption are Waddell & Reed Financial, Denbury Resources, Walgreens Boots Alliance, EOG Resources and Pandora Media.