Technology has been disrupting firms in many industry sectors in recent days. Could financials be next?
First came rental cars, and then Uber rode into town.
Biologic medicines seemed revolutionary, but now face a challenge from cheaper “biosimilars.”
The “big three” U.S. automobile companies might have to fend off competition from electric cars made by Tesla (TSLA).
In any industry, a new and unexpected technology or idea can take hold and knock existing competitors out of complacency or even out of business. When you research stocks or sectors, it may help to understand whether the company or industry faces a challenge that can change common wisdom and perhaps eat into future cash flow.
“Look at how Tesla upended the auto industry,” said JJ Kinahan, chief market strategist for TD Ameritrade. “The traditional automakers are investing in electric technology, but it’s taking them a while to get started, and as a result, TSLA has a bigger market cap than Ford [F] or General Motors [GM]. Look at the companies you’re invested in. Are there disruptive technologies that could affect them, and are they a leader or a follower that could be left behind?”
Although disruption comes in many shapes, it's often caused by the combination of new ideas and new technology. And such change isn’t always bad news for the companies in the affected sectors—as long as their management is ahead of the curve and ready to take advantage before other competitors get their feet firmly in the door.
Some analysts say the financial sector is ripe for process improvement, in that clearing, payment, and settlement systems have been slow to adapt to the digital age, and new technologies such as distributed ledger technology (DLT) may pave the way.
DLT, also known as blockchain, is the technology that underpins bitcoin and other virtual currencies. It was developed as a way to ensure the integrity of a payment system by sharing a ledger across its users that is updated in real time. Banks, stock and futures exchanges, credit card companies, and other financial players are investing in DLT in hopes of making global payment systems faster, more accurate and efficient, and much less costly to operate. In fact, a 2015 research study by banking giant Santander and the Oliver Wyman consultancy estimates blockchain could reduce banks' infrastructure costs by $15 to $20 billion annually by 2022.
If you’re investing in financials, then, it might be a good idea to check whether the company you’re looking at understands blockchain and how it might benefit, because blockchain has the potential to be one of those upending new technologies. Companies that don’t take advantage could find themselves falling behind those that do.
“We all want to believe that the companies we invest in are looking to the future, and blockchain might be the future way to do payments,” Kinahan said. “Many big banks are involved in trying to find answers.”
How can you determine if the company you’re looking at is a leader or a follower in transforming technology? Kinahan suggests TD Ameritrade clients use tools that are available to them.
Select a stock on the thinkorswim® platform from TD Ameritrade, go to the Analyze tab, and select Fundamentals. Scroll down your screen to check the company’s balance sheets and income statements, and check what the company has to say about what it’s investing in and what sort of challenges it sees. Spend some time and put some sweat equity into your research, and you’ll likely get a better sense of the company’s plans to either deliver or react to any transforming technology in its industry.
It doesn’t hurt, either, to log on and listen to the company’s latest earnings call, because sometimes analysts can tease out details from executives. Big industry conferences, sometimes available for the public to listen to over the Internet, are another potential resource.
“Be out front,” Kinahan concluded.
FIGURE 1: COMPANY CHECK.
You can use the Analyze and Fundamentals tabs on the thinkorswim® platform from TD Ameritrade to study key new technological or other challenges a given stock might face. Shown here is the fundamentals tab for the S&P 500 (SPX) index, but there’s a lot more information if you type in an individual company name. Data source: TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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