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3 Stocks for the Next Decade

We think these companies are poised to experience meaningful economic benefits in the future.

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Although there were certainly bumps along the way, overall the 2010s was a terrific decade for stock investors: The S&P 500 returned about 13% annually during those 10 years. Notably, some of the index's heaviest-weighted components are up far more than that. For instance, Apple (AAPL) has returned about 27% annually--and Amazon.com (AMZN), 30% per year.

Such stock market successes are often well deserved. During the past 10 years, many of the market's best performers (including those mentioned above) have carved out economic moats, thanks to their innovation, brand, scale or network effect, and investors have rewarded them for it.

Though we don't expect these total-return juggernauts to lose their competitive advantages overnight, we suspect that many investors pouring money into these stocks are using the rearview mirror, investing based on past successes rather than on future expectations.

Invest for the next decade, not the past one. The trick is, of course, identifying which companies have the best prospects over that time frame.

One way to do so is by looking at companies included in the Morningstar Exponential Technologies Index. The Morningstar Exponential Technologies Index is designed to identify companies across sectors in the early stages of developing or using transformative technologies. It features 200 companies identified by Morningstar's equity research team as being positioned to experience meaningful economic benefits as a user or producer of promising technologies.

Morningstar has identified nine technology themes.

Big Data and Analytics: Capabilities with data sets too large and complex to manipulate or interrogate with standard methods or tools. Related subthemes include the "Internet of Things," machine learning, and artificial intelligence.

Networks and Computer Systems: Technology leaps ranging from hyperconnectivity and integrated systems to service continuity and new software-defined architectures will have a massive impact on the way people think of connecting applications and software with hardware.

Nanotechnology: The branch of technology that deals with dimensions and tolerances of less than 100 nanometers, especially the manipulation of individual atoms and molecules. We see a range of potential applications spanning medicine, computing, manufacturing, and travel.

Medicine and Neuroscience: Sciences, such as neurochemistry and experimental psychology, that deal with the nervous system and brain. Key advancements in unlocking the human genome have created an infrastructure of biomarkers, while paradigm shifts in biotechnology that can alter the immune system are radically changing the way we treat diseases.

Energy and Environmental Systems: This involves the exploration of renewable energy sources--including solar, wind, water, and batteries. As organizations set processes to help reduce environmental impacts and increase operating efficiency, new avenues for technological advancement across sectors will open up.

Robotics: The branch of technology that deals with the design, construction, operation, and application of robots. Advances in robotics, specifically when combined with other exponential technologies, have seemingly infinite potential applications, spanning technology, industrial, medical and consumer-facing channels.

3D Printing: A process for making a physical object from a three-dimensional digital model. The emerging trend is ready for mainstream consumption and has ample potential to disrupt several industries, from industrial manufacturing and medicine to consumer products and retail.

Bioinformatics: The science of collecting and analyzing complex biological data. The "quantified sell" trend of acquiring data to quantify aspects of an individual's daily life has exponential potential to positively impact both the duration and quality of life.

Financial-Services Innovation: The search for and acknowledgement of emerging funding sources, platforms, currencies, and stored and transferred value. We not only think about opportunities to efficiently expand production but also the underlying currencies used (including cryptocurrencies), as well as structural shifts in technology and payment delivery methods.

Analysts score companies within those themes on a scale of 0 (no or little exposure to the theme) to 2 (significant exposure), relying on models to project growth over five, 10, and 20 years. Managers review the scores of 2 and collectively select "leaders" within each theme. Leaders are often beneficiaries of the network effect, boast cost advantages, and maintain powerful brands that block competition. They're also usually gatekeepers with extraordinary influence because of how they define processes and/or control resources. Leaders are expected to have significantly more exposure to a given theme and, as a result, should capture disproportionate economic benefits compared with other firms. Companies can be leaders in more than one theme.

We've isolated the companies in the index that are leaders in more than one theme and are currently under analyst coverage. Three companies made the cut.

Here's a little bit about each company from our analysts.

Illumina (ILMN)
Leader in these themes: Nanotechnology, Bioinformatics

“Illumina aims to transform human health practices through its leadership of genomic sequencing. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. We believe Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions.

“Over the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling one genome from nearly $3 billion in the 13-year Human Genome Project completed in 2003 to $1,000 after Illumina introduced HighSeq X in early 2014. Further innovation, like the recently launched NovaSeq, continue to push down these costs, and Illumina expects NovaSeq to eventually enable the $100 genome, which could greatly increase the accessibility of genomic sequencing. At a lower cost, genome sequencing could have wide appeal in clinical diagnostic applications, especially in oncology and reproductive health.

“From a technology perspective, Illumina beats the current competition by nearly every measure--such as run costs, turnaround time, read lengths, throughput, and error rates--and we expect its dominance to continue for many years. Threats from disruptive technologies may never fully disappear, though. For example, we think new sequencing techniques, including nanopore sequencing, hold promise. However, given the difficulties of commercializing new sequencing tools, especially compared with Illumina's tested and large installed system base, we remain unconvinced that emerging systems will dethrone Illumina in the near future. In the meantime, Illumina continues to pursue its own internal innovation of existing and new sequencing methods. We also believe Illumina will remain an astute buyer of competing technologies, which should help it remain relevant even if its in-house efforts are eventually eclipsed.”
Julie Utterback, senior analyst

Alphabet (GOOG) (GOOGL)
Leader in these themes: Big Data and Analytics, Networks and Computer Systems

"Alphabet dominates the online search market with Google's global share above 80%, via which it generates strong revenue growth and cash flow. We expect continuing growth in the firm's cash flow, as we remain confident that Google will maintain its leadership in the search market. We foresee YouTube gradually contributing more to the firm's top and bottom lines, and we view investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside.

"Google's ecosystem strengthens as its products are adopted by more users, making its online advertising services more attractive to advertisers and publishers and resulting in increased online ad revenue. The firm utilizes technological innovation to improve the user experience in nearly all its Google offerings, while making the sale and purchase of ads efficient for publishers and advertisers. Adoption of mobile devices has been increasing, as has usage time on these devices. The online advertising market has taken notice and is following its target audience onto the mobile platform. We have seen Google partake in this on the back of its Android mobile operating system's growing market share, helping it drive revenue growth and maintain its leadership in the space.

"Among the firm's investment areas, we particularly applaud the efforts to gain a stronger foothold in the public cloud market, which is expected to grow more than 25% annually through 2021. Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth, creating more operating leverage, and expanding its operating margin, which we expect will continue. Regarding Alphabet's more futuristic projects, although most are not yet generating revenue, the upside is attractive if they succeed, as the firm is targeting newer markets. Alphabet's autonomous car technology business, Waymo, is a good example: Based on various studies, it may tap into a market valued in the tens of billions of dollars within the next 10-15 years."
Ali Mogharabi, senior analyst

Bristol-Myers Squibb (BMY)
Leader in these themes: Medicine and Neuroscience, Bioinformatics

"Adept at partnerships and acquisitions, Bristol-Myers Squibb has built a strong portfolio of drugs and a robust pipeline. This strategy is seen with its recent large acquisition of Celgene, which netted the firm an excellent pipeline and a strong entrenchment in blood cancer. We believe the strong overall pipeline helps support its wide moat and steady growth potential.

“Bristol has created a strong pipeline and brought in partners to share the development costs and diversify the risks of clinical and regulatory failure. We believe the cardiovascular partnership with Pfizer represents one of the most important partnerships, managing the blockbuster potential of Eliquis in atrial fibrillation. While Bristol discovered the drug internally, we like its strategic partnering decisions, as the moves reduce risks and lower development and marketing costs.

“Within the pipeline, Bristol's astute acquisition of Medarex helps secure Bristol's strong first-mover advantage in cancer immunotherapy, which should yield several major blockbuster compounds. Bristol's PD-1 cancer drug Opdivo holds the potential to revolutionize cancer treatment and should drive multi-billion-dollar sales annually based on solid efficacy, combination potential with other drugs and strong pricing power. However, competition from Merck's Keytruda will likely limit Bristol's Opdivo in some segments of the market, including lung cancer.

Bristol is aggressively repositioning itself to expand through challenging patent losses. The company has shed its diabetes business, medical imaging group, wound-care division, and nutritional business in an effort to focus on the high-margin specialty drug group. The recent move to acquire Celgene moves Bristol significantly further into the specialty pharmaceutical segment of the market. Celgene's drugs largely target cancer, which tends to be an area with strong drug pricing power, which should help Bristol maintain its drug pricing ability in a time when both governments and private payers are pushing back on drug costs."
Damien Conover, sector director


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Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.