The Ultimate Contrarian Investment
When it comes to looking for a long-term investment opportunity, sometimes it pays to look at a market sector that might not initially seem bullish. While I have pointed out several structural impediments to economic growth in America, there are a few areas that do provide a long-term investment opportunity.
One of the strengths in America is the growth in resurgence of the energy market sector. This is clearly not the result of any government initiative; rather it is due to private enterprises realizing the long-term investment opportunity in the energy market sector by creating revolutionary technologies in extracting natural gas.
New techniques for hydraulic fracturing have enabled the American energy market sector to become a global leader. This has sent prices plummeting when compared to not only domestic but also global history.
The investment opportunity for many firms is to use this abundance and cheap input for production, attracting numerous firms to set up facilities in America. While the U.S. economy is still sluggish, many might seem surprised to find such a strong investment opportunity that’s attracting firms worldwide to our shores.
There are copious areas of the economy that benefit from low natural gas prices, including the chemical market sector, the steel market sector, and the fertilizer market sector, just to name a few.
Companies see a long-term investment opportunity in building multi-million-dollar facilities to benefit from the comparative advantage of a low-priced input. As an example, Nucor Corporation (NYSE/NUE), a U.S.-based steelmaker, is about to construct a $750-million facility in America. Voestalpine AG, a steelmaker based in Austria, stated that it is looking at building a $661-million factory in the U.S. (Source: “Shale-Gas Revolution Spurs Wave of New U.S. Steel Plants,” Bloomberg Businessweek, December 31, 2012.)
According to Nucor, new technology called direct-reduced iron (DRI), which is used in new plants, uses natural gas to produce iron that’s approximately 20% cheaper than the standard blast furnace.
Clearly, these firms believe in the long-term investment opportunity within America, as a variety of firms in a market sector have evaluated that the low-cost natural gas use as an input is manifestly bullish on the cost side.
The important point to note is that the technological revolution was built not from government spending, but from private enterprises looking to capture profits. This profit-seeking motive is now benefiting various firms in a market sector by lowering costs, creating a long-term investment opportunity, which will ultimately benefit consumers.
While the global economy is still sluggish, one should be cautious being bullish about steel as a market sector, other than the savings in costs available to American-based facilities. The Chinese steel market sector is one in which there is still a large amount of oversupply, which will keep a lid on prices globally.
If the economy was stronger globally, I would then be far more bullish on this market sector. Regardless, it is noteworthy that there are parts of the economy that do provide a long-term investment opportunity.
America can remain attractive to international companies, as long as private enterprises are allowed to innovate.