Most stocks tend to ebb and flow with the business cycle, but some of the best growth stocks are the companies that are set up well to ride multiyear trends and take advantage of changing conditions.
It's usually tech stocks that are front-of-mind when investors think of companies that are able to ride the wave of change, but there are times when stodgy old industrials have the opportunity to jump on an unstoppable trend.
Delivering on a changing retail landscape
Lou Whiteman (XPO Logistics): E-commerce had been taking an ever-growing piece of the total retail spending pie even prior to the pandemic, but COVID-19 has only accelerated the trend. More than $200 billion was spent on U.S. retail e-commerce sales in the second quarter alone, according to U.S. Census Bureau data, a 31.8% increase from the prior quarter.
Still, e-commerce represented just 16% of total retail sales in the quarter. Growth might slow some once the pandemic is over, but retail seems destined to continue to move toward online sales, and that is going to create a need for a lot of warehousing and shipping capacity.
XPO Logistics is well positioned to soak up a lot of that increased shipping demand. The company's XPO Direct service is a tech-fueled platform designed to help retailers better compete with the scale of Amazon by providing a suite of logistics products. The company expects Direct to be a $1 billion sales business by 2022, with opportunities for further growth from there.
XPO flexed its e-commerce muscle in the recently completed third quarter, delivering results that easily outpaced expectations thanks to strong growth in last-mile delivery and supply chain management. Post-pandemic it seems likely that many retailers will look to outsource more of their warehouse and fulfillment operations instead of taking on the hassles in house, offering new opportunities for companies like XPO.
E-commerce was a super-trend even before the pandemic, and XPO offers a lot of reasons for investors to get excited. COVID-19 has only emphasized the importance of online retail, and the shipping capacity needed to make it work. The growth will continue well past 2020.
Here's how to invest in China's electric-vehicle boom
John Rosevear (NIO): NIO's stock has surged in 2020 as the company has gone from a near-broke start-up trying to survive to a stable, fast-growing automaker with big plans and ample cash to fund them.
But that might just be the beginning of an impressive long-term growth story.
NIO's in an interesting spot. The market for electric vehicles in China is expected to absolutely boom over the next decade, and it's already seen as a leading up-and-coming "cool" brand.
While NIO isn't the largest maker of EVs in China -- and probably won't be -- its upscale, tech-stuffed vehicles exist in a sweet spot of the market, where customers are willing to pay up for features and stying that NIO has so far been able to deliver. That upscale focus (and growing credibility with upscale consumers) means its chances of getting to profitability, and of having good margins after that, are quite strong.
NIO will report its third-quarter results on Nov. 17. They should be quite good: Sales jumped over 150% in the third quarter, and the company now has plenty of cash in the bank after a series of funding rounds earlier in the year. I expect that CEO William Bin Li will share details about the next phase of the company's growth plan during the earnings call, and those could be a near-term catalyst for the stock.
It's true that the stock looks expensive given NIO's current level of revenue. But if you think of NIO as a home-grown Chinese alternative to Tesla, which is an increasingly plausible way to describe the company, then the company's top line -- and its stock price -- could have a lot more upside from here.
The U.S.-Chinese rivalry is not cooling down, but heating up
Rich Smith (General Dynamics): Last week I made the case for Huntington Ingalls being a good stock to invest in no matter who wins the U.S. presidential election. Because the U.S. Navy sits well below the 355 ships we need at a minimum to maintain adequate military presence in seas all around the world, it seems to me that the future will be very bright for anyone building warships for the Navy.
Today, I still believe this. But since I've already explained why I think Huntington Ingalls is a good way to play that trend, today I'll turn my attention to Huntington's greatest rival in the defense industry: General Dynamics.
Like Huntington Ingalls, General Dynamics does a lot of business building warships for the Navy. But unlike Huntington, GD is a more diversified player, also building tanks and armored personnel carriers for the Army, for example, and business jets for the civilian market. For risk-averse investors, this diversification is attractive -- but I think the core military shipbuilding business is still the most attractive aspect of General Dynamics, as the U.S. rivalry with China continues to grow.
With luck, this rivalry will never come to an actual shooting war, but even if it doesn't, the U.S. Navy still needs to build a huge number of ships just to avoid inviting challenges at sea. Already, the Chinese navy has overtaken the U.S. Navy in size, and with China looking to double the size of its destroyer fleet by 2025, the disparity is getting bigger, not smaller.
Because of this, I see little to no chance of the Navy's budget being cut -- but rather see it growing over time, to the benefit of General Dynamics. With the stock now down 21% over the last 52 weeks, and trading at a cheap 12 times earnings and just one times sales, General Dynamics stock has finally become cheap enough to buy.