After FedEx Corp. reported upbeat financial results this week, it became clear that the global shipper is making great strides in cutting costs and riding improvements in the global economy.
Quarterly earnings rose more than 7 per cent over last year, and the shares popped 6.2 per cent on a relatively sunny outlook for the rest of the year.
But there's another factor that is far more important to FedEx's success over the longer term: The company taps into a powerful trend of consumers buying stuff over the Internet, rather than in stores, and getting it delivered to their homes.
FedEx is a clear example of a company that benefits from a broad and lasting shift in the business landscape. It conforms to what some strategists call a secular trend or a thematic investment, where the bullish case unfolds steadily over a number of years.
It has less to do with the success of an individual company and more to do with a sweeping shift in the business landscape – and the share price gains can be spectacular for companies that exploit their crucial role in the change.
In the case of FedEx, the stock has risen 96 per cent over the past 10 years, not including dividends, beating the S&P 500 by 24 percentage points.
There are plenty of other companies that play into secular trends.
Credit-card companies are perfectly positioned for a move away from cash transactions and toward e-commerce. Visa Inc. has risen 380 per cent since its initial public offering in 2008, and MasterCard Inc. has risen 1,800 per cent since its IPO in 2006.
Railways have been around for a long, long time – but they have emerged as a fuel-efficient way to move commodities and other goods across North America.
And as the global population grows, companies that can boost food harvests look like a good bet. They include fertilizer producers such as Potash Corp. of Saskatchewan Inc.
Strategists at Bank of America acknowledge that their global research into stocks is increasingly theme driven.
"We believe that thematic investing can outperform in the brave, new, post-QE world," said Michael Hartnett, chief investment strategist, in a late-April note, referring to the Federal Reserve's tapering of its bond-buying stimulus program known as quantitative easing.
Capital flows, he added, tend to follow themes – and he identifies water, waste and an aging population as some of the key ones.
Even the strongest secular trends encounter some turbulence, of course. Concerns about the global economy have challenged some of the more bullish assumptions.
But the overall direction tends to be up. FedEx is now 23 per cent higher than it was before the financial crisis; Canadian National Railway Co. is 124 per cent higher; and Visa is 137 per cent higher. Even though Potash Corp. is still struggling with lower fertilizer prices, the share price has rebounded 39 per cent from its recent low in July, 2013.
The idea here is that you can't keep a good secular trend down for long because short-term concerns get pushed aside by longer-term potential every time. That makes any selloff look like a gift.
The tricky part is valuation: Trends don't come cheap, especially during a spectacular bull market and encouraging global economic growth.
Based on reported earnings, Visa, CN, FedEx and Potash Corp. are all a tad pricey, with price-to-earnings ratios ranging between 21 and 25, or higher than the S&P 500's average of 18.
But they're worth the premium. These sorts of investment ideas aren't based on fanciful promises of big profits in the distant future. They're making big money now – and with the secular trends looking far from exhausted, it's clear that profits will continue to grow for years to come.
David Berman