Robots may take our jobs someday. But in the meantime, they might just help boost returns on our stock portfolios.
Consider the Robo Global Robotics and Automation Index ETF (exchange traded fund), launched in 2013. It's up about 40 per cent in the past year, and more than 20 per cent year-to-date. What's more is the automation industry is expected to grow to more than $1-trillion within a decade from about $200-billion in 2016.
If you're looking for stocks in this fast-growing segment, consider these picks from analysts and money managers who follow the sector.
Josh Olson, senior technology analyst, Edward Jones Research, St. Louis, Mo.
Many large firms in the automation space are conglomerates where robotics and related technologies make up just one arm of the business. Among them are the multinationals Honeywell International Inc., General Electric Co. and even Alphabet Inc. (Google). "It's the early days in terms of what a company like Google is able to monetize now in the robotics world, but it's going to be more in the mix going forward, and that's one of the reasons we have a buy rating on it," Mr. Olson says.
In contrast, pure-play automation companies tend to have smaller market capitalizations, though the following two companies are global leaders in their respective areas, he adds.
Analog Devices Inc.: This Massachusetts-based semiconductor company specializes in converting analog signals to digital and vice versa. "They're really a big part of the automation expansion in the industrial sector" in terms of sensors required for robotics. "ADI is also a well diversified business, and that makes them a little less sensitive to big macroeconomic changes," Mr. Olson adds. The downside is the cyclical semiconductor sector is nearing its peak – though diversification should insulate ADI from a bear market better than its competitors.
Trimble Inc.: Based in Silicon Valley, Trimble began as a GPS technology firm, and it has leveraged that expertise to become a leader in automation of heavy equipment in construction and agriculture. "Think of big construction projects and farms where these automated machines operate with incredible precision while helping drive down labour costs," Mr. Olson says. Adding to its profitability is its deep involvement in analytics and planning of large-scale projects. "It's a holistic solution to project management that ties automation with information analytics and planning," he says. Like all technology companies, its core business is always exposed to disruption risk. "It's a very competitive space," so today's winners can quickly become tomorrow's has-beens.
Alex Cutulenco, equity research analyst, Gravitas Financial Inc./SmallCapPower, Toronto
Canadian firms in the automation space tend to be very small and, in turn, high-risk/high-reward propositions. The following two companies fit the description well: small-cap firms with the potential to become dominant players in their fields.
AcuityAds Holdings Inc.: E-commerce is a fast-growing part of the retail industry, and as it expands, companies that monetize the Web through advertising revenue will thrive. Enter AcuityAds, which specializes in programmatic advertising, "the automatic process of pairing advertisers like Audi and Microsoft with publishers – websites which get a lot of consumer eyeballs – via an online ad exchange," Mr. Cutulenco says. "Acuity has already proven its competitive advantage with continuously rising revenues." Still the industry is evolving quickly, and the firm could be supplanted by a competitor offering a better product. The upside is once AcuityAds's clients use its platform, they keep using it, a sign its products and services work well.
Carl Data Solutions Inc.: The "Internet of things" space – of which automation is a key technology – is expected to grow to a $1.1-trillion market by 2025. A byproduct of that growth will be massive amounts of data generated by a growing assortment of equipment, tools and devices for personal use. This bodes well for Carl Data Solutions, a Canadian junior company specializing in big data analytics using automated processing. The company already has recurring revenue from clients such as municipalities and is expanding into oil and gas and waste management. The downside is its share price is trading at 12 times its sales for the past year, compared with competitors trading at about nine times, meaning the firm may be overvalued by comparison. Still, the "upside remains, considering its undoubtedly strong growth opportunities."
Colin Fisher, portfolio manager and president, StableView Asset Management, Toronto
Most people assume automation eliminates the need for humans, but a large portion of the industry is focused on hybrid technology in which workers' abilities are augmented through automation and robotics. "So it's not full automation," Mr. Fisher says, "but rather technologies like autopilot, where the human pilot is still flying the plane but certain parts of the flight are automated."
Clarocity Corp.: A Canadian company with operations in the United States, its real estate appraisal platform allows users to dramatically augment the number of properties they can appraise. And the need is great. "What's happened in the States is about 35 per cent of the appraisers have disappeared," he says, adding that many have retired. "In many markets the number of days to get an appraisal is north of 30 days, and the cost has doubled or tripled." Clarocity's platform uses analytics software to improve accuracy. Without this technology, appraisers can often manage only one or two properties daily. With Clarocity's platform, "they can do six or seven in a day," Mr. Fisher says. Moreover, the company's market position – its product is used by many different customers – makes it difficult to supplant. Yet as a very small firm, its share price is prone to high volatility.
Avante Logixx Inc.: A home security provider, Avante Logixx might not appear all that innovative, or automated. But what sets it apart is its focus on high-end, high-tech security. "It's got some analytics software with the ability to tell whether it's a human or an animal creeping around your house." Rather than relying on a manned security centre to watch video monitors, this technology alerts security guards of potential problems detected by a large network of camera feeds. The company also provides home automation services, and so its biggest risk is large competitors in that space. For the time being, however, Avante Logixx is cash-flow-positive and increasing its share of the high-end home security segment.