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GLOBAL
SECTOR VIEW
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Technology
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The opinions are those of the authors as of June 2016 and are subject to change at any time
due to changes in market or economic conditions. The comments should not be construed as a
recommendation of individual holdings or market sectors, but as an illustration of broader themes.
Carmel Wellso
Director of Research
COMMUNICATIONS
inflection point in the second half of 2015, and mobile search and advertising revenues
have since become even more pivotal drivers of revenue growth for Internet companies.
> Social media is becoming a hub for original content development and discovery.
Entertainment content is being shared with greater frequency. Creators are seeking
new ways to develop content for this medium and participate in the monetization
derived from it.
We anticipate an
increase in new
pay-TV products
and service
bundles as we
exit 2016.
> We anticipate that there will be an increase in new pay-TV products and service
bundles as we exit 2016. The integration of existing pay-TV and digital content will
create opportunities for both new and existing providers to add value and differentiate
their offers. While we expect increased competition, we also expect legacy distributors
that have invested in additional content rights, better navigation tools and enhanced
network services will be able to gain market share with the highest-value customers.
> We expect the next wave of advertising growth to be driven by effective data
companies can develop advertising and measurement models around it. More
content than ever will be viewed, but this will occur across a range of platforms,
rendering existing business models less effective. Future advertising revenues for
content companies are harder to predict.
> Despite the large reach of social media, content on these channels lacks the
Investment Implications
> We like Internet service companies with dominant digital advertising platforms.
Large platforms benefit from a positive feedback loop. The scale of their platforms
creates enriched customer data that should add more value for the consumer and the
advertisers seeking to better understand the viewing and consumption habits.
> Given the demand for analytics to compare advertising campaigns across
platforms, we are investing in companies that are tackling this challenge. It also
helps inform the media we own.
> Among pay-TV distributors, we prefer companies that can package multiple
services with their robust broadband offerings and are investing in technology
that enhances the value of the content bundle to consumers. We like the
heightened new product development in video services that is leading to greater
consumer choice.
40%
36%
35%
30%
25%
23%
22%
25%
20%
16%
15%
13%
10%
5%
12%
10%
4%
0%
Print
Radio
Time Spent
TV
Internet
Mobile
Advertising Spending
Source: Interactive Advertising Bureau, KPCB Internet Trends 2016; U.S. Market 2015.
CONSUMER
has only widened. The change has been fueled, in part, by social media enriching
experiences as these platforms facilitate greater sharing.
> U.S. home improvement spending and car sales continue to grow at a strong
pace. Rising home values are encouraging households to invest in home improvement
projects they delayed after the 2008 financial crisis. These purchases tend to be late
cycle, as consumers are more apt to use credit on such items.
Mobile ordering
and loyalty
programs are
increasing in
popularity.
increasing. It creates opportunities for these companies to gather more data on their
customers, which can translate to targeted ad campaigns and additional purchases.
steadily declining. The price transparency from mobile and online shopping hurts
a number of apparel and retail companies. These companies are being forced to
make large investments to improve the multi-channel shopping experience, and such
expenditures stand to squeeze margins over the near term.
> Amazon presents challenges to legacy brick and mortar stores. The company
continues to gain market share, and its free shipping policies are putting further
pressure on its competitors profitability. Physical retailers continue to suffer from
excess capacity as companies have been hesitant to cede market share. This has
acted as a weight on margins.
> The deflationary environment in Europe continues to be a headwind. Luxury
Investment Implications
> We prefer consumer discretionary companies that are less impacted by the
migration toward online and mobile sales. Many of our companies sell products
that require a consultative sale, or are too large to ship.
> Given the growing preference for e-commerce, we are avoiding mall-based
apparel retailers, especially companies that dont sell their own brands. Lower mall
traffic has also led to a decrease in spontaneous purchases.
> The potential for sector consolidation may result in optionality on certain stocks.
While several pockets of the sector suffer myriad headwinds, some companies have
attractive assets that may command a premium to existing stock prices should a wave
of consolidation commence.
12
Members (Millions)
10
CA
2
R*:
7.2
6
4
2
0
2011
2012
2013
2014
2015
Loyalty Customers
ENERGY + UTILITIES
more quickly than anticipated. While the curtailment of North American production
which we foresaw has been a factor, other supply-side developments have also
contributed to rationalization. Fires in Canadas oil sands and unrest in Nigeria have
taken a substantial level of production offline.
> Despite these supply shocks already pushing the price of crude toward $50 per
Rationalized
supply and tepid
global demand
should keep oil
prices rangebound for much
of the remainder
of the year.
barrel, we maintain our view that prices will be bound between $50 and $60 for
the remainder of 2016.
Investment Implications
> As equilibrium returns to North American markets, we view larger service
companies as advantaged over smaller peers. These companies had the financial
strength to maintain equipment and capital expenditure (Capex) during the downturn,
which now enables them to more rapidly meet the needs of drillers. Halliburton, which
focuses on North American production, is one company that we view as especially well
positioned to maintain or gain market share.
> Seasoned management teams matter. The downturn exposed which companies
could effectively allocate capital and manage balance sheets. Some producers
resisted the temptation of raising additional equity, which would have diluted existing
shareholders. Disciplined companies are also likely to use the upturn to reduce debt
and judiciously increase production.
> Contrary to prevailing sentiment, we see potential value in large-cap E&P
companies. It may seem that these companies are thwarted by having committed
to capital-intensive oil sands or offshore projects. Development expenses, however,
are being disbursed in a deflationary environment, meaning the initially projected
returns on capital may not be far off the mark. We have identified opportunities to gain
exposure to long-life, slow-declining assets that have benefited from a lower-thanprojected Capex environment.
9,500
7,000
4,500
2,000
Jun
Jul
Aug
2014
Sep
Oct
2015
Nov
Dec
2016
Jan
Feb
Mar
Apr
May
5-Year Range
FINANCIALS
Improved data
collection
and analytics
collected by companies has grown, the breadth and quality of the analytics provided
has improved as well. Such data are in high demand for functions such as trading,
execution, index construction and risk management.
represent a
tremendous
opportunity
for financial
companies.
will likely stall as the lack of clarity on an exact path forward for the UKs exit will
disincentivize long-term investment.
Investment Implications
> While we remain extremely cautious on European banks, we believe that core
northern European banks with retail operations and pricing power represent the
most attractive method to maintain exposure to the sector within the region.
> The ongoing transition to electronic payments, in our view, remains one of the
more attractive spaces in financials. Among our largest holdings within the sector
are companies that we believe stand to benefit from growth in electronic payments and
private-label credit cards. The latter segment has the potential to be especially accretive
for businesses given the associated ability to collect data and build customer loyalty.
> We believe that global insurance companies represent the most attractive
4%
3%
2%
1%
0%
2011
Citigroup, Inc.
2012
JPMorgan Chase
2013
2014
Wells Fargo & Co.
2015
Bank of America
Source: Bloomberg.
HEALTH CARE
prices have translated into significant premiums in recent deals, a trend we expect to
continue. The flurry of activity is not isolated to biotechnology. Device makers, including
those focused on cardiovascular and spinal care, have commanded attractive prices.
> Pharmaceutical companies have continually had to readjust their portfolios to
Companies are
rationalizing
their product
portfolios to
Administration (FDA) approvals to top last years record of 45, 2016 should still
register a robust number. Quicker approvals are the hallmark of the increased efficacy
of many new treatments and their ability to address high, unmet medical needs.
accommodate
shifts in the
economics of
the industry.
the field of presidential candidates has been winnowed and the election draws closer,
investors should be in a better position to differentiate between rhetoric and what may
ultimately be feasible.
> A backlog of pending approvals stands to put downward pressure on a select
Investment Implications
> We remain cautious on select specialty pharmaceutical companies, recognizing
that recent challenges have yet to fully dissipate. Debt-driven merger and acquisition
activity has resulted in leveraged balance sheets. At the same time, external pressure has
likely dented a business model reliant upon sizable price increases.
> Effective capital allocation remains critical to stock performance. Large-cap
companies that have overpaid for acquisitions have been punished by investors
while those that have consummated promising deals have been rewarded. Similarly,
management teams that have a proven track record in allocating capital toward
innovative products will continue to be perceived favorably by the market.
> As consolidation among payers threatens to weigh on revenue growth,
innovative cancer therapies stand out as an area where insurers are more
amenable to covering novel treatments.
70%
58%
60%
53%
50%
40%
30%
27%
20%
10%
0%
Chemotherapy
(1975-2010):
Yervoy
(March 2011):
Opdivo
(December 2014):
Therapy Combination
(year of approval/usage)
INDUSTRIALS &
MATERIALS
the June Brexit vote. Low rates have continued to support slow but stable growth,
particularly in western Europe. Autos have been particularly strong.
> The U.S. does not appear well positioned for a robust recovery. Although the first
two months of 2016 were strong, growth has been sluggish since then. However, both
residential and nonresidential construction segments have strengthened and, as a
result, we see room for continued growth.
Merger and
acquisition activity
remains high in
nearly all areas
within industrials,
and is being
supplemented by
> Merger and acquisition activity remains high in nearly all segments of the
early in the second quarter, the outlook remains healthy for industrial companies tied
to Chinese consumers.
> Despite recent strengthening in crude oil prices, energy companies are still at
companies able
risk. The lack of stability in the sector has made it difficult for companies to effectively
manage their projects.
to execute cost
synergies.
currencies due to the strong dollar has had a negative impact on companies reported
financial performance, due to translation accounting. As Europe is a much bigger
market for U.S. large-cap multinationals than emerging markets, currency concerns
from Europe are a greater risk due to the recent Brexit vote.
Investment Implications
> Without high-conviction cyclical growth factors, we generally focus on company-
by consolidation.
$1000
2.0%
1.5%
1.0%
$800
0.5%
0.0%
$600
-0.5%
-1.0%
$400
-1.5%
-2.0%
$200
2000
2003
Residential (left)
2006
Structures (left)
2009
2012
-2.5%
2015
TECHNOLOGY
customers experimented with cloud based services, mission-critical functions are now
being placed on the cloud. Expense and security considerations are key drivers. The
broad adoption of the cloud, including software as a service (SaaS) and infrastructure
as a service(IaaS), has resulted in impressive growth rates for industry leaders, such as
Salesforce.com and Amazon Web Services, even off large revenue bases. The same
dynamic, however, has placed legacy software and hardware companies under pressure.
The broad
adoption of
software by
devices that
historically did
not utilize it has
accelerated
due to cheap
connectivity.
growth elusive, companies are seeking to reap synergies from consolidation in order
to fuel earnings growth. Aiding the trend are founders and CEOs of possible targets
becoming more open to selling. Discounted valuations and cheap financing have also
played a role in furthering deals.
> Software eats the world continues unabated. The declining cost of connectivity
in several legacy names have come under pressure, many investors continue to hold
them due to attractive dividend yields and their still-dominant position in industry
benchmarks. Yet, investors often do not understand the risks to underlying business
models. This is especially true for software companies that were slow in adopting
SaaS and hardware firms that overlooked the threat of the cloud.
> Privacy considerations may cast a shadow over certain Internet names.
Technology has moved faster than regulation. Eventually, governments may reassert
their influence. Alphabets Android mobile platform approaching 85% of global market
share could serve as a catalyst for greater scrutiny. A spotlight on the issue may also
cause Internet users, who have largely been complacent, to re-examine their attitude
toward privacy.
> Global economic growth remains challenged. While low growth poses a risk across
Investment Implications
> We continue to avoid larger legacy companies whose existing business models
smartphones garner headlines, we believe that other segments, including autos and
health care, may have more attractive growth trajectories, as they are earlier in the
lifecycle of software adoption.
> Within enterprise architecture, a bifurcation is developing. We favor companies
that do not have legacy product lines that must be wound down. New entrants with
novel approaches and platforms stand to gain an ever greater level of market share.
1 6 | Global Sector View
$70
$60
40%
$50
30%
$40
20%
$30
$20
10%
$10
$0
50%
0%
Q2 2013
Q2 2014
Q2 2015
Q2 2016
Source: Bloomberg.
GUIDING PRINCIPLES OF
JANUS RESEARCH
>
> Develop
> Employ
>
>
>
> Seek
to anticipate change,
dont just analyze it.
>
C O M M U N I C AT I O N S
C O M M U N I C AT I O N S
CONSUMER
CONSUMER
Denny Fish
ENERGY + UTILITIES
FINANCIALS
H E A LT H C A R E
H E A LT H C A R E
John Jordan
Ethan Lovell
INDUSTRIALS +
M AT E R I A L S
TECHNOLOGY
TECHNOLOGY
Brinton Johns
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