1Q Newsletter – April 2024

Modern Times I:  Investing in a Changing World

Change can present opportunity for the enterprising investor, but new ideas do not always make the transition from an inventor’s dream into something tangible.  Certain countries, for various reasons, do not provide suitable growing conditions.  America seems a particularly favorable (though not the only) incubator, judging by the flood of innovation that appears every year in medicine, technology, finance, and other fields.  Forbes magazine regularly celebrates this enterprising spirit with success stories about people – many of them born overseas – who had a bright idea, developed a better way to do something, and made money doing it.

The difficult part for us is to separate the wheat from the chaff – the concepts that will last, versus passing fads soon to fizzle out.  Is it a crazy idea…or just early?  There are many strikeouts, few home runs.  Medical researchers looking for a cure must routinely abandon trial drugs that are unsuccessful.  Thomas Edison failed many times before he got the electric light bulb to work.  But hope springs eternal, and progress continues.

Here are a few recent developments that show possibilities, but have encountered hurdles that raise questions about their future.  If they succeed, they could change our lives.  No doubt you can think of others as well.

  • Electric vehicles (EVs) are not selling well at the moment, despite subsidies and a heavy push from government.  Batteries often don’t work well in very cold weather, and EV batteries are very heavy, causing tire wear and other problems.  Will hybrids win out and – someday – replace gasoline-powered cars?  Passions are high on this topic, and it is hard to find data not tainted by politics.  In the end, if a vehicle doesn’t promise dependable transportation, at an affordable price, consumers aren’t going to buy it.
  • Electric rental scooters for urban transport?  Recent Fort Wayne trials didn’t work out well, but in some other cities the scooters are still a big thing.
  • Wind and solar power – questions about reliability, effects on human health, hazard to birds, disposal of retired equipment, and costs.  Can they make business sense without depending on  perpetual government support?
  • Nuclear power – not a new idea at all, well established in France and other countries, but still struggling for acceptance in the USA.
  • Crypto technology (Bitcoin, Ether, etc.) as an alternative to cash-based banking?  We thought it would soon go away, but acceptance seems to be growing.  Meanwhile, there are other fast-growing electronic payments systems, such as the very popular PIX in Brazil, which is cheaper to use than a credit or debit card.  Will they become a threat to Visa and Mastercard?  The nature of money continues to evolve.
  • Ethanol as a gasoline additive:  Saving America from dependence on foreign oil?  Or an inefficient fuel foisted on us to subsidize farmers?  Opinions differ.
  • “Green” investing, using ESG (Environmental/Social/Governance) criteria.  Is ESG investing really more enlightened than just “investing”?  Does moral virtue, however one defines it, conflict with investment returns?
  • Hydrogen powered cars/trucks emit no exhaust, and leave no combustion residue except a little water.  Is hydrogen the fuel of the future?  It can be dangerously explosive if not handled properly – but so can gasoline.
  • AI (Artificial Intelligence), in its many forms, is avidly pursued by companies in many fields.  The potential of AI to replace human labor seems a little scary.  Will it lead to massive unemployment?  Or will it free people up for other jobs, as the excavator (steam shovel) did when it replaced human ditch diggers?  It will take time before we understand what AI can and can’t do.  European politicians are on the warpath to regulate it, and ours may not be far behind.
  • Driverless cars/trucks/ships/airplanes/drones, not yet safe for general public use, are already bringing major efficiencies to controlled areas like farms, freight yards, warehouses, etc.  Drones are great for scientific exploration because they can go places a human could not, such as deep in the sea, high in the trees, or into a hostile (radioactive, poisonous, extreme-temperature) environment.  In war, they are already being used with devastating effect.  The bad guys have them too.
  • Laboratory-grown meat, food made from insects, etc.  Nutritious maybe, but will people buy it?
  • Vaping, e-cigarettes:  Safer than tobacco?  Or not?  Will they be banned anyway?
  • Weight-loss drugs (Ozempic, Wegovy, Mounjaro etc.) and other popular but expensive new medical treatments:  What if insurance doesn’t cover the costs?  And if it does, how high will our premiums have to be?
  • Virtual/Augmented Reality headsets/goggles/smart glasses: Pretty expensive.  Can Apple and other makers convince us that we need them?

There are more questions than answers.  Some of these ideas will gain acceptance, after they work out their problems; others will fade away.  It’s not easy to tell how many of them will still be around in 10 or 20 years…or 50 years.  As investors, rapid change can work for us or against us.

Modern Times II:  Investing in What’s NOT Changing

Some years ago Dewar’s whisky ran a pleasant series of print ads showing tranquil scenes of rivers and glens in Scotland, always ending with the comforting slogan:  “The Good Things in Life Stay That Way”.  Well, we wish they would, but in the business world you can never relax for long.  New ideas and aggressive competitors are always beating on the door.

Even in our noisy chaotic times there do exist fine things (in addition to Scotch whisky) that endure, if not forever, then for a good long time – multiples of a human lifetime.  If an investor can find a few businesses like that, and climb aboard, that’s about all the luck he/she needs.  Look for companies that can “Stay That Way”, evolving gradually as conditions change, while keeping intact the competitive advantages that make them winners.  Those may be the ones able to compound and grow our money over many decades.  Trying to look forward into the future is really hard, and it’s not at all obvious which ones will age well.  But in retrospect, most of our successful stocks fall into this category.  They don’t change all that much from one decade to another.  In a mixed portfolio, time works in our favor as the winners gradually grow and dominate the overall result.

Let’s look at an example of a company that might fit this description.  Air Products and Chemicals, founded in 1940 and headquartered in Allentown, Pennsylvania, is an example of a steady, un-flashy company that has treated its investors well.  It is not a hot growth stock that promises to double every two years.  But looking at some financial history (25-year chart below) we see patterns that attract us, notably a rising trend of profits and annual dividend increases.  Not every single year shows higher earnings – business ups and downs are a fact of life – but there is a definite upward drift that brings peace of mind and helps us hold on to our shares.

Air Products sells industrial gases to over 250,000 customers in 50 countries.  Sales in 2023 were $12.6 billion, nicely balanced with 45% to North America, 26% to Europe, 16% China, 10% Asia excluding China, 3% Latin America.  In each region, there is ample room to grow.  Of course, there are able competitors – notably L’Air Liquide, a French company, and Linde (recently merged with Praxair).

When you step outside and take a deep, slow breath of clean fresh air, the gas that fills your lungs is about 78% nitrogen, 21% oxygen, and less than 1% argon.  Those three make up over 99.9% of the air we breathe, with everything else, mainly carbon dioxide, mere traces amounting in total to less than 0.1% – a one-thousandth part.  In natural air, there is also a small, variable amount of water vapor (humidity).  The other gases don’t hurt us, but it is mainly the oxygen that our bodies need.  We cannot live without it, not even for a few minutes.

When the Air Products company started out, the only item they sold was oxygen, which is obtained by extreme chilling of air until the oxygen liquefies (-297o F.) and can be separated from the other gases.  You might at first think they should have infinite profit margins, since the raw material – air – is available for free.  But the intense refrigeration requires large amounts of electric power, and electricity isn’t free.  It is a major cost in their operations.

As the company grew, gradually their menu of products expanded, until today they offer all the common gases plus some less common ones:

Argon                                       Hydrogen

Carbon Dioxide                           (Liquid) Natural Gas                              

Carbon Monoxide                        Nitrogen

Helium                                      Oxygen

Rare Gases (Krypton, Neon, Xenon)

These gases are indispensable to an amazing variety of industries, including aerospace, agriculture, electronics/semiconductor manufacturing, food (refrigeration, preservation, controlled ripening, packaging, fermentation, freeze drying, beverage carbonation, etc.), glass manufacturing, hydrogen for energy, helium for lifting, medical oxygen, oil and gas production, pharmaceuticals, pulp and paper production, rubber and plastics, welding, etc.  The company’s website, airproducts.com, is educational and really interesting, showing the many industrial uses of gases.  They are essential to U.S. commerce and the world economy.

A curious person might wonder who is going to buy carbon dioxide, since we read so much about how CO2 is a terrible menace to our planet, and we must act urgently to reduce it.  In fact, we absolutely need carbon dioxide.  It is essential to our survival, for without it we would have nothing to eat.  Plants require it in order to grow, as it is a key factor in photosynthesis (carbon dioxide + water + sunlight becomes glucose + oxygen).  Commercial greenhouses add carbon dioxide to enrich their air, because it makes the plants grow and produce much better.  CO2 also has other beneficial uses, such as making drinks fizzy, rapid chilling of food, and fire suppression.

Air Products and Chemicals, like most of the other companies we invest in, is well established, consistently profitable, and growing.  If they should try to introduce a foolish new item to their offerings – maybe nitrogen in tropical fruit flavors?? – and it doesn’t sell, that failure won’t rock the boat much, because they still have a steady flow of sales and earnings from their main business.  That is a big advantage over a tiny new company just starting out with one product, which would be a much riskier investment. 

–Written by George Donner