Published on December 10, 2018
In his 2019 preview, Jim Callinan explains why he feels retail businesses are the likely engines for growth and shares his views on sectors and firms that should outperform.
A turbulent fourth quarter has prompted questions about the health of the U.S. economy and the strength of the stock market. In our view the American consumer is likely to be the biggest engine for growth in 2019, but investors will need to look in the right places to capture the benefit.
Selling conditions are excellent for consumer-facing businesses. U.S. unemployment is approaching all-time lows, consumer confidence is near all-time highs and according to the U.S. Bureau of Economic Analysis, personal consumption reached its highest level ever in 2018.
At the same time, retailers are finding increasingly creative ways to deliver products and services to customers, who they can target with laser-like precision.
Given all these factors, innovative companies that serve the American consumer, especially in subcategories we are watching closely like those below, should be well-positioned for rapid growth in 2019.
A study by Pew Research found that 79% of Americans now shop online, and recent data from the U.S. Department of Commerce shows that online sales continue to climb. Amazon gets the most of the publicity in the industry, but in our view the e-commerce revolution is far from over. In 2019 we anticipate niche players will continue to flourish.
Etsy (ETSY), which brings together sellers and buyers of arts and crafts into a central marketplace, is an excellent example. Previously, most handmade, vintage or custom goods were available only at local art fairs or on independent websites. Now, artists can use Etsy to reach a growing global audience 24x7, and buyers can purchase one-of-a-kind works of art that would have been difficult, if not impossible to acquire otherwise. The company is forecasting 300% sales growth by 2023 (above 2017 levels), and they also believe they have room to increase transaction fees.
Health and Fitness
According to a 2018 report published by the International Health, Racquet, & Sportsclub Association, the $30 billion health and fitness industry is expected to continue its annual 3-4% growth rate during 2019. While this is good news for health-oriented companies in general, we think there are two that are particularly well-positioned to take advantage of the trend.
Planet Fitness (PLNT) is a national chain of budget-friendly health clubs with monthly dues that start at just $10, which is a fraction of the cost of a typical boutique club. One of the reasons they can offer such low membership prices is they build their gyms in areas where stores have closed due to online competition, so they have been able to negotiate favorable rents.
Not surprisingly, offering a quality service at an exceptionally affordable price in an expanding market has been good for business. Planet Fitness projects it will grow from its current size of 1,000 locations to 4,000 locations by 2023, generating revenues of $2 billion.
Another company we like in this space is Medifast (MED), the manufacturer and distributor of structured weight loss products and programs. They are already a leader in the industry, and the company has developed a full-service offering that includes meals, coaching, and a robust distribution network. In addition, they have recently upgraded their digital platform, creating a better customer experience and stronger brand loyalty. The company also has expanded its market presence in Asia, where countries like China and Vietnam are starting to experience an increase in their overweight population. To meet the growing demand, the company is planning to increase the number of coaches it employs to 60,000 worldwide, which is roughly triple their current level.
Despite the historically low U.S. unemployment rate, wage gains for many Americans have struggled to keep up with inflation, creating a large class of consumers with steady paychecks but limited discretionary income. Companies who can cater to this expanding market segment by offering low-cost variations of popular goods and services may be particularly well-positioned for growth.
One company that sees big opportunity among value-focused shoppers is Trex (TREX), the leading manufacturer of wood-alternative decking. Historically the company has targeted wealthier customers, as their faux-wood products have always been more expensive than real wood. But in November they released a lower cost alternative that is 30% cheaper than the previous version, and still carries the firm’s standard 25-year warranty. The company estimates that the addressable market for their lower cost product is $150 million annually, and they are expecting at least one-third market share over the next couple years. This could add 3-5% to their top-line on an annual basis.
James L. Callinan
Vice President & Portfolio Manager
James L. CallinanView Bio
James L. Callinan
Vice President & Portfolio Manager
Jim Callinan graduated from Harvard College (B.A. Economics), New York University (M.S. Accounting) and Harvard Business School (M.B.A.). Mr. Callinan holds the Chartered Financial Analyst designation.
Prior to joining Osterweis Capital Management in 2016, Mr. Callinan was the CEO of Callinan Asset Management and Portfolio Manager of the Emerging Growth Partners, LP. Before that, he was Co-Founder & Chief Investment Officer at RS Investments and founded the RS Concentrated Small Cap Growth investment strategy. He also co-founded the RS Growth Group LLC at Robertson Stephens Investment Management in 1996 and managed the RS Emerging Growth Fund from 1996 until 2010.
He began his career at Putnam Investments as an equity research analyst in 1987 and served as portfolio manager for the Putnam OTC Emerging Growth Fund from 1994 to 1996.
Mr. Callinan is a member of the Bay Area Make-A-Wish Foundation Board of Trustees and the Jumpstart Northern California Advisory Board, the Weatherbie Capital Advisory Board, the President’s Committee on Communication for Harvard University and the Friends of Harvard Football Board.
Mr. Callinan is a principal of the firm and a Portfolio Manager for the emerging growth strategy.
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Opinions expressed are those of the author, are subject to change at any time, are not guaranteed and should not be considered investment advice.
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