Theme Investing & Valuation

  • Peter Lynch

In a management presentation not too long ago I was made aware of an investment theme completely unknown to me previously: ballast water treatment. Ballast water is used by shipping vessels, such as bulk carriers or tankers, to maintain stability in transit. Larger ships can carry millions of gallons of water in their ballast tanks, which is brought on board and discharged between ports as needed. Coincidentally, a colleague of mine recently e-mailed me a copy of Janney Capital Markets Infrastructure Quarterly Newsletter, which had some data on the subject I thought was worth sharing:

Global regulatory authorities such as the International Maritime Organization (“IMO”) and individual countries such as the United States have set standards to mandate that ships’ ballast water be treated to eliminate the spread of invasive aquatic species. On a worldwide basis, this is expected to impact both newly built ships (~1,500 per year) and the installed base of existing ships. One of the largest segments of the existing ship market comprises solutions for large bulk carriers and tankers, which must treat extremely high volumes of ballast water (1,500 to over 6,000 cubic meters per hour). Today, there are approximately 50,000 vessels with ballast tanks in excess of 1,500 cubic meters.

In anticipation of this emerging world market, a variety of analysts have developed studies to clarify the opportunity. One of the most comprehensive was recently issued by a prominent market research firm which has estimated that ship owners will spend over $40 billion between 2013 and 2023 to comply with emerging regulations on discharging ballast water.

The report referenced in the article, suggests that “Annual BWT Equipment Spend” will grow at a rate of 21% from 2013 – 2023.

On the flight back from the management presentation, I read an article in Barron’s outlining a different theme (water scarcity), and found one quote in the article particularly relevant to the topic of theme investing:

“ The problem with theme investing, however, is that some key factors that drive stock returns have nothing to do with the themes. Chief among these is valuation; the price an investor pays is easily as important to long-term returns as what he buys. The S&P Global Water index recently traded at 23 times trailing earnings, versus 18 times for the S&P 500. Investors with a thirst for water exposure must be careful not to pay too much.”

I wanted to couple these two passages because I am consistently surprised by the variety of niche industries revealed in the quest to uncover value. It is truly fascinating to me. And once an attractive sector has been identified, one of the greatest challenges for an investor is to wait patiently for the right buying opportunity. As the legendary investor Joel Greenblatt puts it, “This is one of the hardest things to master for professional investors: coming in each day for work and doing nothing.”