Industries & Themes

Industries Followed

Barrington Research currently focuses its equity research in the following five industries/sectors:

Business Services - Companies that provide services to other commercial enterprises, such as uniform rental, credit card processing, business process outsourcing, and miscellaneous commercial services. Also includes publishers of software and services companies that implement or consult business customers with regard to information technology and software.

Consumer - Makers of durable and non-durable household products. Includes retailers whose marketing strategy focuses on a limited product line, such as bookstores, operators of pharmacies and drug stores, or who distribute through limited or unique channels such as catalogs or via the Internet. Also includes also providers of consumer services such as education, training and miscellaneous consumer services.

Healthcare - Manufacturers and distributors of medical equipment and supplies used mainly by health-care providers. Includes pharmaceutical manufacturers (both branded and generic), pharmaceutical distributors and healthcare service providers. Special emphasis on the dental industry.

Industrial and Industrial Technology- Manufacturers and distributors of industrial products including machinery, capital goods and tools. Includes manufacturers and distributors whose technology and high-tech products are primarily directed toward industrial production and/or quality control. Manufacturers and distributors of electrical parts used in the fabrication of finished products. Includes ceramics and transistors.

Media & Entertainment - Companies engaged in the development, production or distribution of movies, television shows and pre-recorded music. Includes television, radio and cable broadcasters, as well as companies that publish newspapers, books, magazines and other information-service companies that produce original material.

Investment Themes

There are few investment approaches more rewarding than identifying major new trends or investment themes before they become widely recognized and then finding those industries and companies that should be the major potential beneficiaries. Investors should always be searching out those outstanding companies that meet most, or all of, the usual stringent selection criteria. But often, much less than perfect companies may outperform them because they are in the right place at the right time, riding the wave of a positive investment theme. Frequently, being aware of major trends may also help investors avoid bad investments in companies that are negatively impacted by the trend.

Our research department is constantly searching for, and tracking, such investment themes as part of the process for building and maintaining an attractive research coverage list of companies.

There are very long-term themes often spanning decades, frequently associated with demographics. There are also shorter intermediate-term themes, such as the periodic strong relative performance of small-cap stocks. Some are of even shorter duration, but quite powerful. Some themes may counteract each other. For example, the Graying of America demographic theme has a positive influence on travel, but an equally positive Internet theme may have significantly negative effects on travel agents who should have been positively impacted by the demographic theme. Oftentimes, several positive themes may reinforce each other. The Graying of America may be a plus for the investment industry and so are other themes like long-term disinflation and financial deregulation.

An important investment theme may generate a sizable number of potentially positive sub-themes and further selection is required. Then, we fall back on our other disciplines-focusing on the most attractive industry niches, which may be comprised of a reasonably small number of individually attractive market-leading companies.

Theme investing is not always as simple as it appears in theory, given the need to sort out the themes and counter themes and the periodic over-enthusiasm and then excessive pessimism of investors during long-lived themes. But it is a very enlightening investment discipline that contributes significantly to the investment process and one that is constantly pursued at Barrington Research. Below, we discuss a number of the current themes that we have been pursuing or investigating.

Technology: All economies need investment to grow and it most frequently takes the form of new technology, which, just as frequently, tends to have far-reaching effects throughout the economy and can never be ignored as an investment theme. It is represented in our coverage on several fronts. On a broad electronics basis, we cover companies active in producing the connectors, fuses and many of the other components that allow all the systems to run. We also cover many of the IT consulting companies that provide the systems integration and other tasks needed to help companies keep up with rapidly changing technologies.

Industrial Technology: Much of the technology spending finds its way to the factory floor. The rise of global capitalism and aggressive international competition has put tremendous pressure on manufacturers to reduce costs and increase efficiency to remain competitive. They have learned that the best way to reduce costs is to build quality into the process. Increasingly this means substituting technology for labor. We closely cover the machine vision industry, which substitutes computers and software (essentially computers that see) for the human eye for inspection tasks. It is the only way to reach the cherished zero defect goal. Increasingly, quality also means the ability to track and trace products throughout the manufacturing process and we cover companies that provide the equipment to read barcode marking to accomplish this goal. It is also important to transport the information from the factory machines to the front office and through the Internet to remote locations. Much of our industrial coverage focuses on companies that assist in that process.

Graying of America: There was a tremendous surge in new births as veterans returned from World War II in 1946 anxious to start families and get on with their lives. Tracking these so-called baby boomers through their life cycle to determine the impact of this population surge on the various segments of the economy is certainly nothing new, but a very effective investment theme nevertheless. They will now be adding to the aging of the population. By the year 2010, 20% of the U.S. population will be over 65 and the first of the baby boomers will start turning 65, adding significantly to the trend. There are many economic and investment ramifications of these trends. Two related sub-themes we are following are healthcare, leisure time, and investment services.

Health Care: With the population both aging and living longer, the demand for medical facilities, pharmaceuticals, medical information and dental services will be booming. With their increasing voting power, it is a safe bet that more government assistance, such as the current pressure to add prescription drugs under Medicare, will be implemented. At Barrington Research, we have been focusing on the dental industry, drugstore chains and distributors of medical and laboratory products.

Leisure Time: With an improving standard of living, real consumer spending on recreational products and services has already been growing at a 6% rate for a number of years. Aging baby boomers will be particularly large spenders in some categories. In fact, there is a very direct positive correlation between advanced age and rounds played in golf. For this reason, we cover the golf industry with a focus on the two leaders: Fortune Brands (Titleist and Footjoy) and Callaway Golf.

Education: There are a number of underlying themes we track that favor investment in education. There has been growing dissatisfaction for many years with the quality of public education, with the resulting growth of for-profit post secondary schools and pressure to turn education over to the private sector on a broader basis. Demographics are also favorable with the growth of the echo boomers, children of the baby boomers, and the reduction of the armed forces, previously a significant competitor for high school graduates and an important source of training. The Internet and the overall technology revolution are also pluses for private education spending. The need for retraining created by escalating technology and the shift from old economy to new economy jobs is growing. Adults over the age of 25 currently represent over 43% of enrollments in post secondary schools.

Restructuring/Consolidation/Outsourcing: Under the pressures of aggressive international competition, most industries are consolidating, utilizing rigorous asset management entailing restructuring, and looking to outsource activities to others who can perform operations more efficiently and inexpensively. We are constantly looking for the most attractive low-cost providers with excellent acquisition and post-acquisition skills, whatever industry they are in. We have found many in the uniform rental, dental manufacturers and distributors, education and general manufacturing industries, to name a few. One of our favorite beneficiary industries for outsourcing is the financial services industry with companies like Fiserv, Bisys, Jack Henry and SEI.

Small-Cap Investing: A favorite continuing theme in our coverage is small-cap and mid-cap investing. Over long periods of time, smaller stocks tend to outperform large companies for many intuitive reasons. It is easier, for example, to maintain above-average growth from a smaller base. They may operate in attractive niches that can continue to grow even in an unattractive overall economic environment. They are usually flexible enough to move quickly to meet new challenges and opportunities in a meaningful way. At times, the favorable long-term relative performance trends are interrupted by macro trends or investor sentiment. We have just gone through an extraordinary unfavorable period for such stocks occasioned by an unusual focus on short-term trading and a strong demand for the high liquidity of large companies. It took both absolute and relative valuations on secondary stocks down to record low levels and we believe that is now changing, creating a very good investment opportunity.