Investing In Innovation - Robotics, AI and Healthcare (Episode 22)

Right? That's a fair question. I think that's the same question. A lot of investors are asking and, you know, so far this year, I have must say there isn't anything industry specific it's driving the negative performance within the robotics and AI sector relative the broader market, other than, you know, no conviction right now, and a material change in the risk appetite that's suffered due to, you know, arising, you know, wall of worries, which I think you and a lot of your listeners are, are well attuned to, which would include, you know, rising rates and concern of slowing growth and fed tightening, you know, mixed in with 40 year high inflation and a rush Ukraine conflict, that's threatening, you know, supplies of key commodities. And that's, you know, put technology in kind of the eye of the storm. And the result has been very few places to high.

As you indicated, you know, our index is off more than the market. It's off about 30% from its all time, you know, high in, in 2021, but, you know, fundamentals, believe it or not remain, you know, quite strong across the board and valuation multiples have compressed really under the weight of the fastest rates inflation in decades, which is consistent with what you're seeing with technology technology is in the eye of the storm. So that's leaving the valuations of our index now more or less in line with historical average. So our index, believe it or not, you know, trades on earnings. I mean, there's a lot of technology indices and such that, you know, trade, you know, on revenues. And a lot of those indices I think are really suffering, pretty acute sell-offs. And you know what I would say here, you know, Kate is importantly, you know, we design the robo index to weather storms like these, you know, we understand that these sort of events do happen, but we are very steadfast in our belief that we're investing in best of breed companies with high revenue purity, with dominant market share with technology leadership and solid balance sheets.

And however, you know, there are periods like now where correlations go to one, it's hard to navigate that. And however, you know, we believe that this is the time to begin to invest in these companies, because these are the companies that are disrupting the world and really helping to drive, you know, much growth and productivity.

Well, I clearly believe that I've been in the investment industry for 25 years, and I can't say any one year has someone got up on the top of their desk and yelled, the coast is clear, there's no risk. And, you know, every year the risk changed. And, you know, I would make the comment that despite the negative market sentiment, believe it or not robotics demand, you know, is booming. And the world's leading manufacturer is a factor robots, you know, are actually struggling to keep up, you know, entering 2022 Fook, which is Japanese based in one of the global leaders in industrial robots, you know, was sitting on a record high order backlog, more than double that before the start of the COVID pandemic. And it's, they're sitting on more than a full year worth of sales. And in fact, they just reported yesterday and reported their orders were up 11%, you know, year of a year to a new high and believe it or not north American orders were up at half the 29%.

So, and, you know, as we head into earning season, we expect orders of many of the other, you know, robo members, you know, many names that, you know, your listeners may be aware of like Yaskawa or ADB and Tedy, but I would say not exactly household names or over own technology names, you know, like the fangs, you know, continue to, we think are gonna trend up, you know, as a number of powerful drivers are in place. First, you've got eCommerce, you know, the boom is driving really an insatiable demand for logistics, automation solutions. You've got, you know, new areas of warehousing and distribution operations that are evolving. You've got a rapid shift to electric vehicles. That's pushing car makers towards modular and flexible production systems that are highly automation sensitive. And then third, you know, as we all know, there are very pronounced labor shortages that are pressing and putting automation on the top of the business leaders' mind. So to viewpoint, you know, having said this, there is an extreme level of BARR and that tends to positive for equities as we look out of a reasonable period of time. And so we think that our sector is being mispriced.

Yes, it is.

Yeah. Well maybe if I could just comment on a couple of the sectors that I think are gonna kind of be real pivotal going forward. I can, you know, talk about some names that, you know, without a doubt, we love logistics and warehouse automation, and we see significant growth in the years that come, I'm not gonna go on the record of talking about what might or might not happen in the next three to six months. That's very difficult to know and sentiment, you know, can change. And, you know, when it does, you know, we think you're gonna be rewarded owning these companies, but, you know, think about when it comes to tracking our online orders as customers, we have one concern and one concern only, which is delivery time and date. And, you know, that sounds simple, but the backend fulfillment process is really complicated.

It's driven by multiple automation, technologies and solutions. So the fulfillment platform that's been developed by Amazon is really being attempted to be replicated globally. And COVID has only amplified this and retailers, you know, unexpectedly as we now see face a massive wave of online demand and establishing an efficient and a reliable supply chain is now a priority. And for investors, you know, in disruptive technology, you know, this transformation represents really an enormous growth opportunity in logistics and supply chain automation with believe it or not is one of our top performing sub sectors since we launched in 2013. So our index ETF has over eight, eight year track record. So investors can kind of see what we've been, you know, investing in talking about. So, you know, we just continue to hear from retail logistics executives that, you know, most of their warehouse systems and inventory, uh, management are not fully integrated and that just leaves a lot of room for technology to help.

So the need to think about for a highly flexible supply chain is becoming a requirement in this new area that we're entering. And the final point I kind of make is that consumers, you know, are the driving force in this new decade with, you know, increased demand. You've got higher expectations of product quality. We now, you know, are going in and we wanna create our own products. So there's a lot more customization. And, you know, we believe that much of this, or I'm quite certain that much of this is gonna require a constant stream of innovation and technology investment to redefine this supply chain. And this is all driven by, you know, automation. So, you know, in essence, there's just no secret that the race is on by retailers, by manufacturers, by logistics, fulfillment companies, to, you know, adjust to the ever changing needs. And this is gonna come go on for years.

So this is the area that I think investors really wanna be invested. We also, you know, love, you know, what areas are going to be disrupted by robotics and AI. And my colleague Nina DECA was on with you not too long ago where she talked about healthcare. And so one area that robotics is really transforming is in that of, of surgical robotics, you know, and contrary to the name, you know, robotics surgery is still performed by a surgeon, you know, and they use a computer to control a robotic arm as it operates on the patient and the robots arm, you know, it's steadier and gets you narrow than a human hand and therefore can help, you know, surgeons access areas of the body that are very difficult to reach and without tremors. So they can make small incisions, you know, drives lower recovery times. And they use machine intelligence in robotic assisted surgeries to drive efficiency and extreme precision and all of this results in, you know, better outcomes. And, and right now only 3% of surgeries are done with robotics. And we think that further adoption is inevitable and it's going to expand the market dramatically, you know, as we go forward. So, you know, we love that business because, you know, surgical, robotic providers operate on a razor blade model where revenues generat a model where revenue's generated through the sale of a system. And then they've, they've got give consumables and so forth. So it's a very, you know, good business model.

Yeah. True. I mean I think the important thing for investors and consumers to recognize is that we kind of have an undeniable inflection point because of performance capabilities of computing and the cost of computing is now created an array of use cases that, you know, years ago we're just sort of Elon Musk science fiction and what's happening in robotics. And AI is that these are technologies that aren't necessarily changing, you know, or eliminating certain industries what's really doing industry is what it's really doing is that it's smart automation. And so we're really in the early endings of this to continue for years and years to come. And we're only gonna get, you know, better edit, you know, as we have more data and more understanding of what we're doing and again, different than other technology, I guess exposures. I mean, again, we're invested in real companies with real technologies, real revenues. And I think our, you know, investors are gonna benefit here because believe it or not, roughly about 40% of the index is heavily tethered towards value and to industrial automation. And we're still in the earlys of that cycle. These are cycles that don't just go on for a few cores, but tend to go on, you know, for a few years. And because of this, you know, we have a much different sort of valuation profile than a lot of other, if you wanna call 'em technology exposures, you know, have

Well, there's, there's quite a few as just to kind of touch on the supply chain. I mean we think there is a vast investible universe. You know, some of the companies in our index, you know, I think provide unique exposure here and they're names that are not owned by most investors and just to make the reference less than 3% of companies in the S and P are in our index. So again, these are companies, investors don't own. So take, for example, you know, companies like DY, which is an undisputed leader in industrial automation, they have, you know, over 3 billion in revenues and you know, 5,000 employees worldwide. And they're a top provider of collaborative robotic solutions for the manufacturing industry. They bought a company a few years ago called universal robots, which is a Danish provider that really helped accelerate their growth. They also have automated guided vehicles as another industry, so that they've purchased.

So they offer a really broad range of automated solutions, you know, for inventory management, there's other companies that some of your, uh, listeners may know like zebra technologies has been at the forefront of supply chain innovation, you know, with providing mobile computing and RFID scanners. If you've bought something through Amazon, you're gonna see that zebra pretty much tracks the, the product from when it, uh, leaves a, a distribution center to when it arrives your house. And Zebra's also made extensive investments in computer vision technologies, and they're working with the leading sort of retailers out there and logistic providers to drive and improve flexibility in their supply chain process. There's also companies like Manhattan associates, a N H as a ticker, that's a leader in warehouse management solutions. So they have cloud enabled solutions that help integrate data from really multiple inventory management systems. And what does that do? It helps you boost productivity, improve utilization and they use machine learning and big data to integrate and manage warehouse automation so that, you know, those technologies can work seamlessly. So there really are a lot of companies, to be honest with you, that a lot of people might not pay attention to that play a vital role

Well, I mean, I guess we'll have to see as companies are, are gonna begin to report this this quarter. I mean, clearly, you know, there are potential risks out there to the earnings, you know, sort of outlooks for these companies we'll have to watch, but I mean, if anyone's expecting a recession this year, I think the probability is extremely low, if not impossible as we headed next year, you know, it's probable. But if you, as I've observed are sort of, you know, consensus, earnings expectations for the index, they are basically more or less flat year to date. That doesn't mean that there might not be a modest change, but I don't think that we're gonna see, you know, dramatic changes. So I mean, back to Fook had just reported and they put up relatively positive guidance. They did talk about margins being a little bit weaker than expected, and that had to do with supply chain, you know, issues and procurement and not related to demand. And so that's a little bit more important to me as a characteristic to follow

Well, I mean, I think, you know, in our case, so we're doing is that we're focused again on companies with real revenues that have, you know, dominant market shares and leading technologies. And there is, and there has been a lot of hype, you know, in the industry and in technology in general. I mean, I think we got to a point where the framework of value in companies became very unreasonable. And if you looked at, for example, our index, the median market cap is around about 24 times earnings. And so if you were to look at, you know, our index and sort of a bell shaped distribution of earnings, you'd find a, a handful of companies that may have a higher valuation because the earnings are sickly pressed. And if you look at the outside, maybe a handful of names would have higher valuations because they have higher, higher multiples and have growth.

But the bulk of our index, you know, is, you know, sitting, you know, probably around, you know, 20 times earnings. And this is for technology. And I, we think what's really exciting about robotics and AI is that this is the future where we're going there, isn't an industry, you know, or a, or a geography. That's not gonna benefit by the utilization of the technologies to guess what improve productivity and generate, you know, growth. And as we come out of this, there's no question that these are the companies as we came out of the pandemic that helped us, you know, drive productivity. If you look at the, at the us GDP, we came out of the pandemic with 1% higher GDP with six and a half million, fewer workers. I mean, that's the definition of productivity. And we think that as we look at every sub sector of the economy, we're scratching the surface where penetration rates are. So we are very bullish on the industry as we look out and we think, you know, these pullbacks, like this are an excellent opportunity for investors to begin to have some exposure,

We think so. I mean, again, these it's pretty scary in the market right now. I think that the barest level is obviously very high and you know, who knows where we go in the short term, I think a lot of these risks begin to get priced in the market and there will be, you know, a bottom put in exactly where, you know, we'll find out, but importantly, you know, we are exposed to areas that are not overly owned by the market and as the dust settles, I mean, again, we think these are the technologies that are going to, you know, drive the, uh, the disruptions going forward.

Yeah. But great. Well, please feel free to go to robo global.com. We offer a significant amount of content for investors to read and get exposure to on our index, we give market updates, we provide a quarterly updates, a lot of white papers. Our team participates in a lot of media events like this and others. And so there's a lot of opportunity for investors to learn.

Sounds good. Thank you very much.