“It is not the strongest of the species, nor the most intelligent that survives. It is the one that is the most adaptable to change that wins,” wrote Charles Darwin. The principle was in action again at last week’s annual Consumer Electronics Show, held in Las Vegas.
Previous shindigs have written the epitaphs for camcorders, CDs and GPS devices. This time the ubiquitous laptop was cast onto the scrap heap. The exhibition halls were buzzing with ultra-slim touchscreen tablets and handsets running faster processors on lower power with longer battery life.
Gartner, the research house, predicts that by 2013 the number of smartphones being used will surpass PCs. Meanwhile, the Chinese government recently reported that nearly 300 million of its citizens now access the web from mobiles. That said, the darlings of the sector do not come cheap. The $873bn consumer electronics industry is predicted to grow by 10% in 2011. Yet for investors, much of this optimism has already been baked into the price. If you want proof, then just take a glance at the eye-popping valuations of Apple, ARM and Amazon.
So, if you’re seeking value I suggest you look further down the food chain. Go for underperformers that tick all the right boxes with regards to capability and brand – and have turnaround potential.
Dell (Nasdaq: Dell) falls squarely into this camp. To date it has struggled to crack the consumer sector, but that is changing. It is soon launching a snazzy range of Android-powered ‘Streak’ tablets. Founder and CEO Michael Dell shelled out a hefty $100m buying 7.37 million shares in December at an average price of $13.57. Surely that’s a confident sign of better things to come.
The 64 million dollar question for investors, though, is what’s coming down the research and development pipe. What are the next big developments that could produce a glut of ten-bagger stocks? Here are three of my favourite mega-trends that should help shape the world in the 21st century.
1. Mind-reading devices
BAE Systems (LSE: BA) has recently invented a new £250,000 helmet for the Typhoon Euro-fighter. It allows British pilots to shoot down enemy jets simply by looking at them. Multiple targets pop-up in the pilot’s visor, at which point all he has to do is stare at the hostile aircraft to activate an attack. The next step is to add ‘mind-reading’ sensors, which allow pilots to fly their jets purely by thought. Sounds impossible? Well, it’s coming. Scientists at the University of Chicago have already invented a brain-controlled Iron Man suit: a mechanical body shell – or exoskeleton – that can be controlled using only the mind. But that’s not all. Researchers are already using brain-computer interfaces to provide the disabled with neural-guided wheelchairs.
Better still we may not need to wait too long to see these developments in action. Twelve months ago Hitachi (JP: 6501) said it had invented a headset that allows owners to operate electronic devices telepathically (effectively willing the television to change channel, for example, or the air-conditioning to turn on). Products are set to hit the shelves in 2014.
Other listed groups working on brain-computer interfaces include car giants Toyota (JP: 7203) and Honda (JP: 7267). I’m sure there are also plenty of other companies researching the area – especially in sectors such as healthcare, law enforcement and gaming. Presently, their inventions are no doubt under lock and key.
As for possible headaches, if the technology fell into the wrong hands it could be used for criminal purposes. There are also concerns about civil-rights issues and abuse of privacy laws, so it’s a fair bet that at some point tighter regulation will be introduced.
2. Genetically modified humans
The government has warned that more than ten million of us in Britain, almost one sixth of the population, will reach our 100th birthdays. This has many implications, not least the impact it will have on scarce NHS resources. And how will the rest of the West cope? Then there’s China, with its looming ‘one baby’ demographic bombshell.
One solution is to improve health in later life through gene therapy, whereby a human’s unique genetic blueprint is modified organically. This is the ‘holy grail’ of personalised medicine because it should help the elderly fight off diseases such as cancer, arthritis and dementia. Gene therapy typically works in three ways. Firstly, by replacing harmful genes with healthy copies. Secondly, deactivating mutated genes that are malfunctioning, and lastly by introducing new genes to treat a debilitating condition.
Most big pharmaceutical firms, such as GlaxoSmithKline, Pfizer, Roche and AstraZeneca, are already working on gene therapy, as are smaller plays, such as Onyx Pharmaceuticals and Genzyme (although the latter isn’t cheap, given Sanofi-Aventis’s takeover intentions).
A less expensive option may be to buy into ISIS Pharmaceuticals (Nasdaq: ISIS). This US stock dominates the closely related area of ‘Antisense’ drugs. Many of today’s most common diseases, such as cardiovascular conditions, cancer and diabetes, are caused by ‘bad’ proteins being inappropriately produced in the human body. Chemical drugs attack these dangerous cells. But the side effects can be extreme and their efficacy poor. In contrast ISIS’s ‘Antisense’ treatments function one stage earlier in the production chain and stop these disease-causing proteins from ever being made by the cell. These treatments work by switching off the genes that tell the cell to make the offending protein. No normal cells are harmed, so the side effects are much less pronounced and the medicines can be tailored to each individual patient.
ISIS has protected this unique discovery to the hilt (it owns 1,600 patents), and currently has 24 drugs in the pipeline. Most of these are being jointly developed with heavyweights such as Bristol Myers Squibb, Eli Lily, GlaxoSmithKline and Novartis.
ISIS’s first potential blockbuster is Mipomersen, which is aimed at substantially reducing cholesterol levels. The compound has passed Phase III clinical trials. Its partner, Genzyme, is on track to file for marketing approval in America and Europe over the next six months.
Gene therapy, though, is not for the faint-hearted. It is leading-edge stuff, and therefore carries substantial risk with which investors need to be familiar and comfortable.
3. Man-made life forms
This brings us neatly to the third game-changer: ‘life, but not as we know it’. For many years, genetic engineering – think GM crops and Dolly the Sheep – has been used to modify living organisms by mixing genes from one creature with the genes of another. However, we are now on the verge of going much further, and of formulating entirely new and completely artificial forms of life within the laboratory.
Synthetic biology hit the headlines in May 2010. Back then, a team of scientists at the J Craig Venter Institute in San Diego revealed that they had manufactured synthetic DNA and inserted it into a living cell – in effect creating a totally new species of life. A similar experiment was performed recently when Princeton University researchers built inorganic proteins.
This discovery is a quantum leap forward and perhaps the biggest scientific break-through in a generation. Critics argue that the work hasn’t actually created life itself, because the artificial genes cannot survive without a natural host cell. Nonetheless, what these experiments demonstrate is that whole new species can be engineered in a test tube. The scope that synthetic biology could have within the field of medicine is vast, and other substantial benefits include concocting bacteria that can eat harmful oil slicks or absorb greenhouse gases, grass that turns into biofuels, or perhaps even trees that can grow into wooden buildings.
What’s more, eventually the technology could be used both to create new variants of existing life forms and to synthesise entirely new animals from scratch without relying upon any host organism. Obvious barriers include ethics: this sort of work conjures up images of Dr Frankenstein, and can provoke accusations that scientists are trying to play God. The associated moral issues will be at least as difficult to resolve as those that occur in the laboratory.
No wonder the American government is apprehensive, especially if such knowledge should fall into the wrong hands. Synthetic biology could, in theory, be used to devise the most powerful bioweapons imaginable. Additionally, the greater the complexity of the synthetic DNA, the greater the potential for error.
As such, President Obama has recently issued guidelines to protect the public, ensure ethical standards are maintained and prevent dangerous new species being released into the environment.
All the same, and despite these considerable reservations, the upside of these innovations is staggering. However, from an investment perspective, there are unfortunately very few publicly traded synthetic biology stocks. One that should be on your radar-screen is Life Technologies (NASDAQ: LIFE).
In June it purchased a stake in Synthetic Genomics Inc, a privately-owned organisation founded by Dr J Craig Venter and Nobel laureate Hamilton Smith. That suggests, in short, that Life is going places.
• Disclosure: I own shares in BAE Systems.
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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