Citi's global quantitative strategy team has enjoyed resounding success in ranking the world's most promising and profitable investment themes. The list is currently topped by Video Game Growth – a sector that has generated eyepoppingly strong performance, as I noted previously in the GlobeInvestor newsletter – and their Top 10 also includes virtual reality stocks.
Citi strategists analyze 84 different style and sector investment themes each month and measure their success according to earnings and price momentum, growth, quality, risk and valuation. The process has been effective – the most promising areas identified have generated a return of 57 per cent since June 2013, besting the benchmark by 17 per cent.
According to this methodology, the 10 most lucrative investment themes in the current market are (in order): video gaming; medical technology; timber; auto electronics; cyber security; manufacturing onshoring in developed markets; virtual reality; emerging markets; manufacturing; and financial technology, or fintech. The accompanying table shows six of these themes.
The promising outlook for the gaming and virtual-reality sectors makes Nvidia Corp., Nintendo Co. Ltd. and Sony Corp. compelling options for investor portfolios.
As the dominant provider of graphics processing units – technology to process and display graphics – Nvidia is not only poised to benefit from video game growth and virtual reality, but also from the development of artificial intelligence. Nvidia products increase the speed of processes like landmark identification for autonomous vehicles, speech recognition and the type of image interpretation that is already assisting doctors read the output from magnetic resonance imaging (MRI).
For Citi technology analyst Kota Ezowa, it is explosive growth in virtual reality applications that will drive Nvidia's stock price higher. Mr. Ezowa believes that a combination of gaming and commercial demand will increase total spending on virtual reality from a current level near $25-billion (U.S.) to $80-billion by 2020 and an astounding $569-billion by 2025. The likelihood that Amazon.com will develop a virtual shopping mall tailored to individual tastes, as one example, seems high.
Many competing analysts have grown cautious on Nvidia recently after its strong performance, but Citi maintains its buy rating and 12-month target price of $145 on the stock (it now trades around $136).
Nintendo and Sony are more straightforward plays on video gaming. Citi recently initiated analyst coverage on Nintendo and forecast profit growth of 37 per cent for the next year. Analyst Minami Munakata expects strong sales for the company's new mobile gaming platform Switch and sees potential stock price upside of 77 per cent if bullish projections become reality. The analyst also notes that Nintendo is set to open a theme park, emulating Walt Disney Co.
Sony's business diversification makes it harder for gaming revenue to move the needle on total profits, but Mr. Ezowa recently raised his target price by 12 per cent and now expects roughly a 9-per-cent appreciation in the coming year.
Investment-wise, Nintendo looks interesting, but the accompanying line chart underscores that Nvidia, with its 10-fold return over the past four years, is clearly the star of the show where this theme is concerned. Nvidia's valuation levels reflect this success with an expensive trailing price to earnings ratio of 44.9 times. It remains the case, however, that the company is front and centre for a number of exciting secular growth stories and, for investors careful about entry points, considerable investment upside seems available over the longer term even if Mr. Ezowa's growth projections for virtual reality are not fully realized.
|Theme/stocks to watch||Symbol||3M Return %||YTD Return %||3Y Ave Ann Return %||P/E Ratio TTM||P/E Ratio Fwd|
|Sony Corp. (ADR)||SNE-N||13.4||26.8||30.0||N/A||17.3|
|Nintendo Co Ltd (ADR)||NTDOY-OTC||32.7||31.3||36.6||N/A||31.4|
|CRISPR Therapeutics AG||CRSP-Q||-13.1||-22.5||N/A||N/A||N/A|
|Takara Bio Inc*||4974-Tokyo||0.1||-1.3||15.5||137.5||N/A|
|Delphi Automotive PLC||DLPH-N||13.9||28.1||10.3||13.2||12.7|
|Renesas Electronics Corp*||6723-Tokyo||-8.8||1.7||12.9||20.6||21.3|
|Palo Alto Networks Inc||PANW-N||-25.4||-7.7||22.5||N/A||42.2|
|GoerTek Inc -A*||002241-Shenzhen||21.6||34.7||9.7||30.8||23.0|
|Global Payments Inc||GPN-N||14.8||29.0||37.6||46.1||22.1|
|Alibaba Group Holding (ADR)||BABA-N||24.1||42.1||N/A||54.2||29.1|
|* denotes non-North American market. Source: Citigroup|
Source: Scott Barlow/Citi