mm best shares 2016

A MoneyWeek SpeciAl inveStMent RepoRt

The best shares to watch in

2016

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The Best Shares to watch 2016

DronesIf 2016 is anything like 2015, you’ll be hearing a lot more about drones. 2015 was a breakthrough year for drones entering the public consciousness—and public airspace! In February, Paris was gripped by the mysterious appearance of several drones hovering over key landmarks. Meanwhile, over in the US, a small drone caused a major scare when it crashed inside the grounds of the White House at 3am on an early May morning. The Secret Service only learned of the drone when the pilot of it, a man in a nearby park, told them. And in September, a 26-year old New York school teacher was arrested for crashing a drone into the stands of Louis Armstrong Stadium during a US Open tennis match.

At the moment, such incidents are rare enough that they lead to headlines. However, these sights could become a lot more common. The industry is aggressively lobbying the authorities to relax restrictions on commercial drone flights.

Eventually, we could see drones used for everything from routine law enforcement to parcel deliveries. Drones could use your smartphone do identify your location and deliver parcels to you, according to a patent filed with the US Patent Office last year by Amazon. Amazon is in a race with Google to see who can commercialise autonomous, self-flying drones first.

In August of 2014 it was revealed that Google’s famous research and development branch, the ‘X-Lab’, was testing a drone delivery system in Queensland, Australia. It was dubbed ‘Project Wing.’ Google’s prototype drone delivered a chocolate bar, dog treats, a first aid kit and a chocolate bar up to distances of one kilometre.

Drones aren’t going to replace lorries anytime soon. But the pieces are falling into place for their use in everyday life. Smart investors could profit by getting in now. Let’s take a look at some of the barriers. And then, some of the opportunities.

The new rules on drones aren’t as restrictive as they lookIn February 2014, America’s Federal Aviation Authority (FAA) published a list of proposed changes to the rules governing the use of drones in the US. While it’s far from the free-for-all some may have wanted, it will expand the range of tasks they can carry out.

At the moment, any non-military use is effectively banned. While companies can be given special permission, it’s not automatic – only a small number of requests have been granted so far.

In this MoneyWeek report, based on the work that appeared in MoneyWeek magazine throughout 2015, you’ll find a preview of what could be some the best shares for 2016. Please keep in mind the shares previewed below are not recommendations. And predicting the future in the fast-moving world of technology is a fool’s errand. That said, please enjoy this free report from the editors of Money Week. Make sure to check your mailbox for updates on these trends in Money Morning and your weekly magazine.


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However, the new rules would replace this blanket ban and allow daytime flights at heights of up to 500ft. Of course, drones would still be banned from flying near airports or directly over people, and would have to remain in the sight of the operator at all times. While these restrictions aren’t trivial, they will allow a legal drone industry to emerge for the first time.

The new rules are only provisional. But they’ve still prompted a firestorm of criticism from the industry. The biggest complaint – as you might imagine – is the need for constant visual contact between the operator and the drone. Companies argue that this is unnecessary, as drones can be remotely monitored. And, if the technology evolves, drones will be able to ‘talk’ to each other and manage their own flight-paths in the same way that driverless cars do not need constant human supervision. Industry representatives also question the need for restrictions around airports, arguing that the chances of a plane-drone collision are remote.

The drone industry that spends nearly $190m a year on lobbying. It has the ear of politicians eager to boost an emerging sector, and a potential source of high-quality jobs. It’s safe to say that further change in the favour of drone operators is likely. Like any new disruptive technology, it will take time for people to get used to the innovation. Eventually, it will seem routine. .

But aren’t people opposed to this? Never mind the risk of crashes, what about privacy? Could an ex-lover spy on you with a drone? Could drones be ‘weaponised’ and used as weapons for terrorism, assassination, or murder? Shouldn’t we be cautious and worried?

You might be surprised. The public (in the US at least) is pretty open to the idea. A recent survey by Ipsos found that two-thirds of people think the police should be allowed to use drones to fight crime. And nearly half are happy for parents to use them to spy on their children.

Once drones become more common, you can expect these numbers to shift further in favour of wider use – particularly if there’s a clear benefit in terms of convenience, or reduced crime. After all, we’re prepared to post large amount of detail about our private lives on the Internet in ways that would have been unimaginable in the past.

And only five years ago there were concerns that Google’s Street View mapping technology was breaching privacy laws by taking photos of people in the street, capturing their car licence plates and even views of their gardens. Yet despite a lot of complaints, almost every country around the world now allows it.

A £4.2 billion market and growingEven without any changes to the current rules, drones are increasingly big business. Market research firm Teal Group thinks that current global spending on unmanned aerial vehicles is around $6.4bn. This could rise to $11.5bn within a decade.

Most of this is currently related to the armed forces. However, there is growing demand from agriculture. More and more farmers around the world are using drones to monitor their fields more efficiently. This ‘precision agriculture’ allows them to alter irrigation and fertiliser use to boost yields and operate more efficiently.


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Meanwhile, many enthusiasts and small companies are ignoring the law and building their own systems, or buying off-the-shelf kits. The Consumers Electronics Association estimates that sales of commercial drones in the US alone will increase from $130m this year to $1bn by 2018.

As mentioned at the start of this report, Amazon has hinted at plans to start a drone delivery service that could deliver parcels from warehouses to a customer’s door within minutes. And Google is creating a fleet of drones that could provide internet connections to African countries that lack the infrastructure. Drones won’t simply replace traditional methods of delivering goods and services. They’ll allow goods and services to be delivered to places where it wasn’t previously possible. That’s a major positive.

The drones themselves—the technology and the software that run them—are also rapidly evolving. For instance, several companies are developing small-scale drones that would reduce safety concerns. Others are focusing on computer-run systems that could guide themselves with minimal human input.

How to invest in dronesAt the moment the drone market is broadly split into large companies that cater to the military side of the business, and smaller firms that have a large role in the civilian side. So if you own any defence stocks, you probably already have some exposure to the theme. If not, here are five to keep your eye on for 2016:

1. Invensense (NYSE:INVN). Invensense isn’t exactly a drone manufacturer. But if drones take off, it will be a key part of the commercial growth of drone fleets. Why? Something called a ‘microelectromechanical gyroscope.’ Without getting too technical, this is the technology that allows for motion detection in electronic devices. You’ll find it in the iPhone 6, the Samsung Galaxy, the Nintendo Wii, and if you play games, Oculus Rift. The technology allows for things like image stabilisation (when you’re taking a photo). But more importantly, devices with the technology can ‘know’ where they are in space and time and communicate this information with other devices. Properly networked, with a common communication protocol, autonomous drones could ‘talk’ to each other and avoid crashes.

2. Google (NASDAQ:GOOG). This is another indirect play on drones. Google needs no introduction. But what does it have to do with drones? In addition to project wing, Google has an even more ambitious project called ‘Project Loon.’ The goal of that project is to bring the Internet to every corner of the globe. It would be achieved with a drone the size of a jet liner, powered by the sun, flying at an altitude of 65,000 feet. Talk about thinking big!

3. GoPro (NASDAQ:GPRO). You probably already know about GoPro as the company that made ‘action cameras’ an everyday reality. But last year, the company’s 39-year old billionaire Chairman announced the company would build its own ‘quadcopter.’ But rather delivering products, the drone promises to change the way people see and record their lives. Camera drones are already staples and major sporting events. But think of weddings, movies, music videos, or really anything where a person wants to record their life from above and show the world. GoPro created a new category of product for sports enthusiasts. If it can marry its camera technology with drone technology, it may very well create another new category, and make investors quite happy.


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4. Da Jiang Innovations (DJI). This is one to watch for 2016 because you can’t buy it yet! DJI is the world’s leading seller of drones. Industry sources say the company was on track to sell over 500,000 drones for a $1 billion in sales in 2015. It’s come a long way since being founded in Hong Kong in 2006 by Frank Wang, then a student at the Hong Kong University of Science and Technology. The company’s flagship model is the Phantom drone, although it began rolling out higher end models last year. It’s based in Shenzhen on the Chinese mainland now. Its latest offering integrates software that, among other things, allows you to program a flight path for the drone, or, have the drone follow you from a distance discretely using the GPS tracking information in your mobile device. Watch MoneyWeek for news of an impending initial public offering (IPO) for DJI. It’s been described as the ‘Boeing’ of the drone industry.

5. 3D Robotics (3DR). Founded by former Wired magazine editor Chris Anderson, 3DR is also a private company you can’t buy as of now. But that may change in 2016. The company is hot on the heels of DJI with its ‘Solo’ drone. And a bit like Apple, the company’s marketing message appeals to the end users sense of empowerment through technology. A slick presentation on the company’s website begins with the phrase from science fiction writer Arthrur C. Clarke that ‘Any sufficiently advanced technology is indistinguishable from magic.’ Anderson tells 3DRs customers that with the Solo (which also integrates GoPros camera technology), ‘You can be the subject of your life’s story, not just the director.’

As you can see, the drone industry seems to be on the verge of a massive commercial explosion. It’s not just a hobby anymore. It’s a business. And for investors in 2016, that’s great news. Now, let’s move on to something a bit more ominous.

CybersecurityAt 11:32 am on July 8th, 2015 the New York Stock Exchange halted trading on all securities. The halt lasted for three and a half hours, as the exchange sought to track down the problem. When trading resumed, the exchange released a statement in which it said that the ‘root causes’ of the outage were ‘determined to be a data configuration issue.’ All open orders were cancelled and trading resumed normally the next day.

On that same day, while the NYSE frantically sought the cause of its trading problem, United Airlines grounded all of its flights in North America. The company cited a computer ‘glitch.’ It elaborated later, saying it was ‘a network connectivity issue.’ Without further comments, flights resumed later in the day.

Were these deliberate attacks? Did someone—a foreign government, a lone wolf, or a teenager in his basement with mischievous mind—expose critical flaws in the key systems that run our financial markets and transportation system? That’s the question cyber security firms are trying to answer. Investors should take note in 2016. Why?

When trading resumed on the NYSE, a handful of cybersecurity stocks were the first to rise. For example, one such company was Imperva (NYSE:IMPV). It provides data and application security for companies in the energy and finance sectors as well as government agencies. Antivirus company AVG Technologies (NYSE:AVG) also rallied when trading resumed.


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A matter of life and deathHacking isn’t just potentially expensive – it could be deadly.

You might have seen a video doing the rounds on the internet which illustrates this quite terrifyingly.

Two hobbyists, Charlie Miller and Chris Valise, made headlines in the US when they hacked into a Jeep Cherokee that was driving along a highway. They started with the radio and the temperature.

Then they hit the brakes, bringing the car to a standstill.

Of course, this was a controlled experiment, so no one was hurt. They did it to highlight potential security issues. But it’s easy to imagine a terrorist, a generic misanthrope, or just a bored prankster causing chaos by doing the same during the rush hour.

This problem will only get worse the more we rely on technology. Two years ago, when Miller and Valise did a similar experiment, they had to physically connect their laptop to their victim’s car. Now they can take advantage of the wireless technology that comes as standard. (Ironically this wireless connection is designed to make it easier to diagnose faults.)

When cars become driverless – which is more than possible in the foreseeable future – you run the risk of being completely at the mercy of the machines operated by malicious hackers.

And you don’t have to be paranoid to see this happening to other essential infrastructure, especially as we move from hard drives to cloud storage. The number of devices connected to the internet is expected to grow tenfold, from 2 billion to 25 billion, between 2010 and 2020.

Both cases tie in with another major trend – online crime is rising fast. Banking fraud in the UK rose by nearly 50% last year. Fraud related to credit cards now totals nearly £500m.

A similar thing is happening in the US. A study by LexisNexis suggests the total value of fraudulent payments to businesses rose by 38% to $32bn in 2014.

Payment fraud isn’t the only type of online crime. Theft of intellectual property and records and the draining of bank accounts are also big problems.

The total cost of cybercrime is hard to estimate. It depends on how you measure it, and whether you take direct and indirect impacts into account. And it’s always worth remembering that most of the people who measure this stuff have a vested interest in making the figures look as shocking as possible.

That said, it’s pretty obvious that as more and more of our information goes online and more of our transactions take place there, then more crime is going to migrate online too. So whether the total cost to the global economy is $375bn or $575bn (both estimates you’ll find online), one thing is clear – defending against cybercrime is going to be an ever more


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important issue.

The market in cybersecurity is huge – and getting bigger fastAs a result, governments are increasing their spending on online security, even as they cut back other aspects of public spending. For example, the US government will spend a record $14bn this year to meet security threats across the country.

At the same time, firms are also increasing spending. They need to protect themselves from reputation-destroying security breaches. But it’s also a response to new regulations.

The Jeep stunt has prompted American politicians to propose legislation to force car firms to upgrade security on their cars’ networks. Last year, in an effort to get firms to spend more, the White House issued guidelines urging them to do more to protect their data.

And this goes far beyond car manufacturers. A recent Accenture survey suggested that 90% of financial institutions plan to significantly increase spending on cybersecurity, with two-third rankings cybersecurity as the most pressing operational issue, even above credit risk.

In any case the global market is now large and growing rapidly. Estimates put the size of the market at between $75bn and $85bn, with infrastructure firms accounting for $45bn alone, and on course to reach $120bn within a few years. Here are the three largest cyber-security stocks you can buy today:

1. Check Point Software Technologies (NASDAQ:CHKP). Firewalls, virtual private networks (VPNS), intrusion prevention systems (IPS), Checkpoint has an entire suite of software solutions for companies looking for network protection. At the time of writing, it has a market capitalisation of $US14.2 billion on revenues of nearly $1.5 billion in fiscal year 2014.

2. Fortinet Incorporated (NASDAQ:FTNT). Fortinet’s product offerings focus as much on data protection as network protection. It’s one thing to close the windows and lock the doors. But you want to put your valuables in a secure location just in case. In modern day business, the ‘data’ your business generates is both indispensable and valuable. Fortinet had a market capitalisation of US$7.2 billion at the time of writing.

3. Palo Alto Networks (NYSE:PANW). Palo Alto’s products defend your organisation from cyber-attacks and control the number of applications running on your networks. It offers both hardware and software solutions for cyber-security. It had a market capitalisation of US$13.56 billion at the time of writing.

Bigger doesn’t always mean better for investors. But if you’re just getting started with cyber security stocks in 2016, start with the large firms and work your way down to the innovators. This will be an area to watch in MoneyWeek for the future. Stay tuned.

Online entertainment There’s probably no trio in entertainment more controversial than Jeremy Clarkson, Richard Hammond and James May.


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But you can’t deny that their BBC show Top Gear has a lot of fans. Even after Clarkson punched a producer, a million people signed a petition for him to be kept on.

If you’re like most people, you would have assumed that after the trio left the BBC, they would be signed up by Sky or ITV to do a similar show under a slightly different name (the rights to the original title are owned by the BBC).

As expected, they have agreed to do a Top Gear clone. But the way they’ve decided to go about it is quite unexpected – and it’s proof of a dramatic shift in the media industry that smart investors should be taking advantage of...

The old TV business model is breaking down Clarkson and co haven’t moved to another channel, or even a cable TV service. Instead, they’ve cut a deal with Amazon.

That’s partly for legal reasons – a clause in their contract made it tricky to go and work for another British TV channel so soon. But it also shows just how rapidly the TV landscape has changed.

Once upon a time, you only had terrestrial TV. Then you had satellite and cable for those who were willing to shell out big bucks for premium services like football or the latest films. Then Freeview came along for those who weren’t.

But now all of these services are facing challenges from broadcasters who deliver TV content over the internet. These change the market in two ways: they make it easy for new firms to compete with established providers, and they allow users far greater control over what they watch.

In effect these companies are betting that customers will prefer a more tailored product, rather than a more general service filled with stuff they don’t want.

The market is cottoning on to this quickly. If you go shopping for a new TV these days, you’ll almost all of them are branded as ‘smart’ devices – internet enabled, so that you can stream content – even the budget models.

Viewers are also changing their habits. One thing keeping US TV executives up at night, for example, is the phenomenon of ‘cable-cutting’, where people cancel their cable services entirely in favour of streaming what they want, whenever they want.

Even those keeping their services are watching less ‘normal’ TV – viewership in the US is falling by around 10%-15% each year.

An epic clash for content This fight between traditional TV and streaming services is hotting up with Amazon entering the market, which is selling streaming services as part of its Amazon Prime package. Unlike its rival, Netflix, which took a long time to become established, Amazon has huge brand recognition and a large user base, which should help it gain market share.

Amazon is also making its own shows. It recognises that one of the best ways to get


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customers in this new world of media is to produce content that people want to watch.

The classic example of this is Netflix’s remake of the BBC mini-series House of Cards. The new version, starring Kevin Spacey, has helped to make Netflix a household name.

So Amazon would like a hit like that – and the new show by Clarkson and team is definitely part of that. They’ll also be looking at buying rights to stream shows that have already proved to be hits.

Of course, the networks and cable TV firms aren’t taking this threat lying down. Some are trying to follow the classic strategy of squashing the competition by merging into ever larger firms. In May of 2015, for example, Charter Communications agreed a $75bn merger with Time Warner Cable. But this hardly solves the underlying problem – that customers want and can get more choice elsewhere.

So other networks have taken a different approach, bidding more and more for top shows and events in the hope that this will help them to retain viewers.

Studios are king (for now, at least) So how should you play this?

The obvious decision is to invest on one of the companies involved in streaming. The problem is that they are very expensive, with Amazon (Nasdaq: AMZN) and Netflix (Nasdaq: NFLX) trading at 30 times and 50 times 2018 earnings respectively. There’s also a chance that they will lose out to a new upstart, or their profits take a battering amid the competition to grab viewers.

Instead, the power – and the profitability – in this business has shifted in favour of studios and TV production companies, as platforms (which is ultimately what the streamers, cable companies and networks are) compete to buy their content.

There are many companies in the sector that are worth investigating. One option is Lionsgate Entertainment (NYSE: LGF). This very successful TV and movie studio has a strong exclusive deal with Netflix, which includes the hit TV series Orange is the New Black. Lionsgate trades at a much more reasonable 18 times 2017 earnings.

Research your investments for 2016There are many non-technology shares that could do well in 2016 as well. You’ll read about those shares in the pages of Money Week. From hard-rock mining to retail to emerging markets, you don’t want to confine yourself to just one sector.

And when it comes to technology and the future, it doesn’t hurt to have an expert who specialises in the field, someone with years of experience analyse breakthrough technologies and companies. At Money Week research, that’s Dr Mike Tubbs.

Dr Tubbs has his own fortnightly publication called Research Investments. He analyses research and development (R&D) spending trends at firms to generate a large portfolio of world-wide, world-class tech firms. Look for his work regularly in the pages of Money Week to see how you can benefit in 2016.

mm best shares 2016

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