New, fast growing industries often attract strong competition which can lead to substandard returns for investors. Ironically, often the reason for such an unprofitable environment is that investors, seeking to benefit from favourable industry conditions, are willing to provide plenty of capital which encourages new entrants.
One way around this problem is to back companies that stand to benefit indirectly, through related activities. These companies can often remain under the radar, as attention is instead focused on the industry in question.
Here are two examples of such companies listed on the ASX.
Altium Limited (ASX: ALU)
The Internet of Things removes the need for humans to transfer information across the internet by connecting objects directly using electronic sensors. These "smart" devices are able to operate with little input from the user and can tell when they need replacing.
Altium doesn't make these products, but it provides software that is essential to the process. It develops printed circuit board (PCB) design software and whilst there are competitors, Altium is the fourth largest company in the global marketplace.
Furthermore, the top four companies in the PCB market make up 91% of revenue and so there is a relatively small number of companies competing in a rapidly growing industry. Also, new entrants would find it difficult because the specialised software that Altium makes cannot be easily replicated, as it is the result of decades of research and development.
Revenues are currently growing at over 10% per year and thanks to low variable costs, profits are set to grow far more quickly. With the Internet of Things just beginning, there is no reason that Altium can't keep growing for many years.
Lifehealthcare Group Ltd (ASX: LHC)
3D printing could potentially provide cheap customised joint implants and is already used by surgeons to visualise unusual fractures and deformities. In general, medical devices are improving all the time and so manufacturers must invest heavily to stay ahead of the curve.
As a major distributor of medical devices in Australia, Lifehealthcare Group benefits from the aging population but is not handicapped by the constant evolution of the industry. It has recently partnered with a medical 3D printing specialist providing low risk exposure to an exciting sector.
In a recent interview, CEO Daren McKennay explained that Lifehealthcare's strategy is to deliver exceptional customer service and expand into new product lines with strong growth prospects.
Simple strategies tend to work well, and as a local company, Lifehealthcare has an advantage over its large multinational peers when it comes to responding to customer needs.
