The Perfect Plays for a Transformed Economy

While the pandemic has led to profound changes in the way we work and live, many expect to “get back to normal” if and when vaccines and treatments are at hand. Sure enough, much of the economy will re-open for business.

But the near future is likely to look quite different than the recent past. The pandemic has spurred renewed emphasis on technology, and how it can transform our basic tasks, communications and purchases. That’s why software stocks have been strong in 2020. (The iShares Expanded Tech-Software Sector ETF (IGV) rose 80% from mid-March through September 1.)

But we’re also learning how machinery can also play a more major role in changing how our nation’s goods and services are produced. Two quick examples help set the scene.

Our nation’s meatpacking plants highlight the terrible human toll that working in close proximity can exact. As of Monday, at least 42,537 meatpacking workers in 494 plants tested positive for Covid-19, and 203 workers had died, according to the nonprofit Food Environmental Reporting Network. In response, U.S. meatpackers are now following the lead of their European cohorts by automating much more of the arduous process of turning cows, pigs and chickens into packaged food. In Denmark, slaughterhouses run by robots means the entire country had just 10 incidences of Covid-19 among 8,000 industry workers, according to Wired magazine.

Another takeaway: Those Danish meat processors have far lower labor bills, and thus higher profit margins.

In the service sector, the changes will be equally profound. Hotel check-ins, for example, are becoming touchless — replete with digital keys, thanks to apps — enabling guests to walk right past the front desk on the way to and into their room. That means a smaller front desk staff can handle a larger volume of guests more safely.

Let’s not be callous. We’re also taking about major job losses as various types of work get automated and obsoleted. Time magazine notes that 40 million jobs have been lost in the U.S. in the current downturn, and 42% of them won’t likely be coming back, due to technology, robotics and automation.

The good news: a proper focus on job re-training can help displaced workers learn new skills and move back into the economy with potentially greater earnings power than they had before.

The equally good news: times of profound economic transformation create myriad new opportunities for investors as disruptive new business models emerge. And many of them will be relying on artificial intelligence (AI) and machine learning to re-invest how we work and play. Machine-learning uses statistics to find patterns in massive amounts of data.

Take LivePerson Inc. (LPSN) as an example. The company’s name is a clear misnomer. LivePerson is using AI-chatbots to start to replace some of the 265 billion calls made to people-manned help desks each year. These chatbots have proven the ability to get customers’ questions answered faster and more accurately than their human counterparts. One airline client found that customers were 33% more satisfied when working with a chatbot.

LivePerson was founded in 1995 and for many years, was a sleepy grower. Revenues increased just 7% annually from 2014 through 2019, to a recent $291 million. Now, new customers are signing up at a fast clip. Second-quarter revenues surged 29%. By next year, they should reach $440 million, according to consensus forecasts.

Even though shares of LivePerson have been climbing higher this year, they remain quite inexpensive compared with rivals. Analysts at Summit Insights note that the average software-as-a-service company is valued at 14 times projected 2021 sales. LivePerson’s multiple is just half of that average. Yet this is also a company that is quickly rolling out a broad set of new AI-based communications tools for clients, expanding its potential target market from a current $2 billion to an eventual $60 billion in what the company calls the “conversational space.”

Action to Take: Look for shares to keep climbing up to that peer group sales multiple, pushing shares up to $90. That would be a great time to lock in profits with a roughly 80% gain from current levels.

As noted earlier, automation is also having a profound impact on machinery and industry. There is a range of great companies in this group but I prefer the basket approach, as innovation is playing out in so many areas.

The iShares Robotics and Artificial Intelligence Multisector ETF (IRBO) and Robo Global Robotics and Automation ETF (ROBO) are good choices, but both of those funds have a higher weighting in software-focused AI companies, some of which are still unproven.

Instead, the Robotics & Artificial Intelligence ETF (BOTZ) has a greater emphasis on the companies making actual machinery in use across a growing number of fields. Hardware firms make up more than two-thirds of this fund’s portfolio, which carries a 0.68% expense ratio.

This isn’t just a fund built for this year and next. It’s poised to prosper from trends playing out over the next decade.

Action to Take: Buy shares of the Robotics & Artificial Intelligence ETF (BOTZ) up to $32 and set a five-year price target of $60.