The Next Stage of Disruptors: Part 2

As we explained in “The Next Stage of Disruptors: Part 1,” we discussed the start of “the Age of the New Disruptor,” innovative disruptive industries’ historical economic dominance, and the microeconomics of innovation. We also highlighted tier 1 disruptors, innovations or technological advancements that have started to gain mainstream adoption, creating some of the most coveted growth investment opportunities to date. 

 

Questions continue to arise regarding growth and innovative technologies as we are in the midst of an equity market rotation and revaluation. However, though valuations for some companies became exaggerated throughout COVID-19, we believe that the current market rotation to value stocks are a partial overreaction from the investor amid the expectations for an immediate COVID economic recovery from the vaccine. However, generously optimistic human opinions on consumer behaviors and market adoptions artificially illustrate that a quick shift back to pre-set standards can happen overnight. Rather, it will remain a longer process to regain pre-COVID normalcy, but it will also create a great buying opportunity for disruptive innovation investors. As the market overreaction persists, technology integration, blockchain, alternative clean energy, telehealth, automation, etc., all continue to be unfairly oversold. As we have seen throughout history, growth and, more specifically, innovation have sustained outperformance. Without innovation or industry disruptors, equity valuations would remain stagnant, and the returns muddled. Therefore, investors should not think of the equity market pullback as a bearish indicator but as a bullish buying opportunity.

 

With our stance on growth, innovation, and disruptive industries remaining steadfast, let’s discuss the tier 2 disruptors or the earlier-stage technological advancements that have boundless positive potential to impact society and the economic matrix. 

 

As seen below, tier 2 disruptors consist of telehealth, property technology, DNA sequencing/cancer research, artificial intelligence (AI)/deep learning/augmented reality, and robotics/automation. 

It is essential to keep in mind that the tier 2 disruptors have enormous potential to impact society but also need a longer developmental stage, additional technological advancements, and a longer path until mainstream adoption. However, that does not mean that the opportunity for exponential growth and outperformance is not there; it just means that the growth potential increases as the risk profile marginally increases. In short, tier 2 disruptors are a slightly riskier growth investment as the disruptor’s mainstream adoption is slightly farther dated than tier 1. 

 

Even with the risk increasing, there are ample opportunities currently where investors can capture alpha within tier 2 disruptors. However, investors and portfolio managers must understand the relativity of the recent technological advancements. Whether it is a new property technology application or a new development in protein folding, investors must realize that the opportunities within tier 2 lie within the small victories or innovations and not the overall segments’ advancements. The smaller-scale technological achievements create arbitrage opportunities for investors. These technical achievements snowball into the segment’s innovation disruption and mainstream adoption. Therefore, investors have to take a gradational and piecemeal approach to invest in tier 2 disruptors to capture alpha scattered throughout the segment. It remains too early to benefit from a general investment in the space (for now).

 

For additional context, let us discuss the tier 2 disruptors in a little more detail:

 

Telehealth

 

The coronavirus pandemic, though an atrocity, did shed like on the necessity for the modernization and digitization of our healthcare system. This takeaway gave birth to the quick realization and adoption of telehealth alternatives to traditional in-person healthcare. Telehealth addressed both the patient’s convenience factor and the biological safety precautions necessary during times of an unprecedented health hazard. Much cross-sectional analysis was conducted to determine the adoption and emergence of telehealth. The results are profound. As the internet-savvy individuals mature and the new age of a young “internet society” grows, telehealth alternatives will likely grow in tandem. However, this space remains in early-stage adoption as policy, increased unnecessary care, and scientific quality standards remain significant questions. Since telehealth grew so fast from COVID-19 uncertainty, adoption and additional behavioral syntaxes need to catch up. Therefore, telehealth remains a long-term growth investment as the post-COVID market adoption dynamic slowly shifts to digitization. 

 

Property Technology

 

Property Technology (PropTech) uses innovative information technology to help individuals and companies research, buy, sell and manage real estate. PropTech has many parallels to the influence FinTech has had on the financial industry. Proptech is a small part of the broader digitization of the economy. It remains one of the fastest-growing venture capital investment segments since 2012, growing from $221 million in 2012 to over $23 Billion in 2020. 

As did fintech in the mid-2010s, property technology has immense growth potential to make real estate investing, management, and research scalable for all individuals. The best part about PropTech is that it remains non-cyclical unlike the overall real estate markets. Companies like Zillow, Redfin, etc., benefited from the coronavirus initially despite the housing market volatility. As the housing market began to recover and provided investors increasing opportunities, these PropTech firms continued to beat in line with the technology boom. Therefore, PropTech is the sweet spot between real estate and technology but is not too closely correlated to either to feel outsized systemic events. Though the adoption remains slow for influential property technology, the segment’s growth opportunities continue to compound.

DNA Sequencing/Cancer Research

Historically, short-read sequencing has been the most widespread form of DNA sequencing as it remained cost-efficient and within the bounds of current technological advancements. However, long-read sequencing is becoming increasingly popular as accuracy increases, variant detection increases, and costs decrease. Additionally, the benefits of long-read sequencing outweigh short read sequencing as short read sequencing does not detect structural variants or mutations. Further, technological advancements in synthetic long reads or de novo assembly and genome finishing applications, ability to sequence traditionally challenging genomes, etc., collectively add to the segment’s growth potential. Due to the medical, health, and societal impact, DNA sequencing and, more specifically, long-read sequencing can be one of the fastest-growing revenue generators through 2025.

With these genome developments currently unfolding, cancer research continues to make exponential medical achievements. Though COVID-19 and the race for a vaccine have halted many cancer developments, oncology research is poised to resume at an accelerated rate post-COVID. The oncology market size exceeded $241.9 billion in 2019 and is poised to grow at over 10.1% between 2020 and 2026. Recently technological advancements for medical algorithms supporting DNA methylation and the lowering of multi-screen-testing costs have increased some cancers’ early detection. With similar technological advancements likely to continue, the cancer multi-screening requirements should continue, lowering the overall cancer death rate over the next ten years.

Furthermore, DNA sequencing achievements have also helped cancer research. Specific DNA sequencing has enabled liquid biopsies and advancements in synthetic biology to detect hard-to-diagnose bloodstream cancers. Additionally, liquid-based cytology (LBC) tests have been developed to combat difficulties in the conventional pap test for cervical cancer screening. LBC application also reduces inadequacies for chlamydia, HPV, and gonorrhea testing. Alternatively, computer systems like Omnyx Precision Solutions and other automations have helped pathologists more accurately detect tumors. As described above, though a cure for cancer is unlikely, small medical achievements remain the value creators in this space. As the technological advancements and medical research developments continue to hit milestones, this space has the potential to continue to experience growth and return outperformance.

Artificial Intelligence (AI), Deep Learning, Augmented Reality

AI, deep learning, augmented reality, robotics, and automation have all been Sci-Fi myths of the future. However, recent technological advancements continue to make strides to gradational usages of AI and deep machine learning. The widespread availability of low-cost computing power and increasingly powerful software programs means that AI’s benefits will continue to become interwoven in everyday society. Reality game interaction and conversational AI (like GPT-3) to predicting protein folding for drug creation have all added to increased achievements/applications in narrow-AI (or AI for specific tasks). However, general-AI or a computer code that can incept human consciousness remains a Sci-Fi abstract. However, that does not mean that innovations to adapt AI to mimic neural networks without copying the brain complexities are impossible. Instead, AI, Deep Learning, and augmented realities show growth potential as the technological advancements can interpret complex and subtle data patterns, sift through and pinpoint desired data points in huge data pools, better pattern spotting feedback, and identify functional patterns in real-time. Current narrow innovations and the general -AI aspirations will likely continue to add market capitalization globally.

Robotics and Automation

One of the many uses for artificial intelligence and similar technological achievements is robotics and automation. Fears that align with the industrialization period flow like veins through the heart of this disruptive industry. Fear of job attrition, lower employment numbers, over sophistication, etc., continue to overshadow robotics and automation’s authentic optimism. The goal of robotic involvement and process automation is to increase productivity. Though automation may eliminate low-paying and trivial task jobs, it will likely create higher-paying jobs down the supply chain. Similar to the Industrial Revolution, wages, productivity, wealth generation, social mobility, and living standards will probably increase. Looking forward, while the rollout of traditional robotic solutions recovers its momentum following the COVID-19 induced recession, self-driving vessels, supply chain automation, the integration of internet solutions for trivial tasks, etc., are poised to see growth over the long-term. The “Automation Revolution” will likely take decades to become a fully developed movement; however, opportunities supporting the trend will remain robust post-COVID headwinds.

Conclusion

As previously explained, disruptive innovation has been a historical staple within our society. Sometimes these innovations may mimic past events as described above with the similarities between the Industrial Revolution and the novel “Automation Revolution”. Other contemporary and unique developments can better human longevity and livelihood as defined by cancer research, DNA sequencing, and artificial intelligence. However, it is essential to separate tier 1 and tier 2 distinctly. Tier 1 disruptors are at the later stages of their growing pains as an innovation and the tier 2 disruptors are at the forefront of their growing pains as an innovation. Therefore, investors in tier 2 disruptors must invest in the small technological victories and advancements rather than the mainstream/institutional adoption of the disruption. As explained in “The Next Stage of Disruptors: Part 1,” though it may seem that tier 2 disruptors are longer-dated technological advancements that have less “curb appeal” than tier 1 disruptors, the markets underreaction to tier 2 disruptors and the non-arbitrage events create unwarranted illegitimacy discounts. Minimal analyst coverage and market information establish an environment that investors are uncomfortable assuming risk within. This creates investing opportunities as valuations of these tier 2 disruptors seem undervalued as expectations for performance remain muddled.

Latest

How Strong or Weak is the Consumer Halfway Through 2024?

Mean reversion is one of the most powerful and predictable phenomena inside markets.

Trading Zone: Hit the Brakes, Transports flash major Warning signal

Watch Joe Tigay and Brian Stutland, co- portfolio managers...

Market Matters: Eye-Opening Inflation & Looking at Volatility

Joe Tigay and Brian Stutland, co- portfolio managers of a hedged-equity strategy for Catalyst Funds, discuss the latest inflation expectations, volatility, Nvidia, and much more in the latest edition of Market Matters. 

The Largest Wealth Transfer in History Has Begun – Brands Benefit Most

The opportunity in front of investors is unlike anything we have ever seen because the size of the current wealth transfer is unprecedented in world history.

Newsletter

Don't miss

How Strong or Weak is the Consumer Halfway Through 2024?

Mean reversion is one of the most powerful and predictable phenomena inside markets.

Trading Zone: Hit the Brakes, Transports flash major Warning signal

Watch Joe Tigay and Brian Stutland, co- portfolio managers...

Market Matters: Eye-Opening Inflation & Looking at Volatility

Joe Tigay and Brian Stutland, co- portfolio managers of a hedged-equity strategy for Catalyst Funds, discuss the latest inflation expectations, volatility, Nvidia, and much more in the latest edition of Market Matters. 

The Largest Wealth Transfer in History Has Begun – Brands Benefit Most

The opportunity in front of investors is unlike anything we have ever seen because the size of the current wealth transfer is unprecedented in world history.

A Showery Spring: April 2024 HANDLS Monthly Report

While March signaled gains, April proved challenging, culminating in widespread losses.
Hunter Frey, Analyst
Hunter Frey, Analyst
Hunter Frey is an Analyst at Catalyst Capital Advisors, LLC and Rational Advisors Inc. covering all in-house equity strategies and an insider buying income-oriented strategy at Catalyst Funds. Mr. Frey received a Bachelor of Science degree in International Business with a focus in Spanish from Gardner-Webb University, Godbold School of Business, and is in pursuit of a Master of Business Administration in Economics and Finance from New York University, Stern School of Business.

How Strong or Weak is the Consumer Halfway Through 2024?

Mean reversion is one of the most powerful and predictable phenomena inside markets.

Trading Zone: Hit the Brakes, Transports flash major Warning signal

Watch Joe Tigay and Brian Stutland, co- portfolio managers of a hedged-equity strategy for Catalyst Funds, discuss May's CPI report & FOMC meeting, volatility,...

Market Matters: Eye-Opening Inflation & Looking at Volatility

Joe Tigay and Brian Stutland, co- portfolio managers of a hedged-equity strategy for Catalyst Funds, discuss the latest inflation expectations, volatility, Nvidia, and much more in the latest edition of Market Matters.