Trend Watch - Edition #1

I love trends - I want to write about them more often.

I sometimes hate being “the semiconductor guy.” I worked as a generalist for a few years, and I would like to think my investing skills are more than just a deep understanding of the most complicated and important manufactured goods in the world (doped silicon!).

I love semiconductors, but I love investing too, ya know? It’s a passion I started in high school, and I think anyone in public markets can relate to the passion and fun of working in public equities. Anyone who doesn’t love the craft probably works in Private Equity. Good riddance.

But before I was the semiconductor guy, I covered many companies, read many books, and thought long and hard about good investments and the craft of investing itself. As a guy who has read a lot of investing books, at some point, you realize that the real game in the market is mastering yourself. Everyone has a different hand to play, but you’ll have to master your psychology to play your best game. Some guys are absolute freaks at buying fear with conviction (thinking of my old PM), and some guys have a beautiful mind for numbers, but everyone is slightly different and has a different “thing.” Knowing and mastering yourself in public markets is how to be the best investor you can be.

In my journey of “knowing thyself,” I have learned a few things I am good at. Something I have always resonated with is a good trend, and I think I can spot good trends, small and large, and ride them well. Maybe that’s hubris, but I’m obsessed. To my close friends who know me - this is zero surprise. I wear Hokas, I was an early adopter of TikTok, and I constantly talk and think about trends in the world, big and small. I love and know that about myself.

However, If you don’t practice, you’re not going to improve or lose the muscle altogether. I don’t want to do that, and I want to commit to writing up a few trends I think are investable or interesting as I see them coming. This won’t be a regular series, but I’ll at least write once a quarter. We can laugh or celebrate my hit rate in the future. Without further adieu, here are a few of my favorite partially investable trends I see in public markets.

Trend #1 - Fragrances are on Fire

I couldn’t put my finger on it when I first noticed this trend. In the summer, I kept getting served fragrance TikTok content, and the legendary Jeremy Fragrance became a meme. But at some point, I had to admit, this was for real, and it had legs. My history of following the cosmetics market made me doubt, but I am here to say that Fragrances are in and will grow faster than the cosmetics market for the next few years.

For someone who has followed the luxury cosmetics industry for a long time, fragrances have been a bit of a dog compared to makeup, especially skincare. For some reason, that changed meaningfully in 2021, and now fragrances are the strongest part of cosmetic spending in the US and possibly globally. My favorite indication is a graph of the subreddit for r/fragrances. Somewhere in 2021, the chart took off.

Subreddit stats of R/Fragrances

The wild part is that 2021 was still in the COVID era, and going outside your house was novel. Maybe that’s where the desire to buy fragrance starts, but the real accelerant was Christmas when the Google trends truly broke out. Search almost any Let’s look at the meme fragrance, aka Dior Sauvage’s Google trends.

2021 was a real breakout year, but 2022 has been seasonally stronger than normal. I think 2022 will put a new high in the Google trends chart, and I don’t think this trend is close to stopping. For the most part, I believe this is a long-term trend reversion. Let me explain.

The pendulum for fragrance has been out of favor for a long time, with tepid organic growth and share losses the entire decade. This is the global cosmetic industry in 2021 by type. At ~10.7% of the €228 billion market, that’s ~€24.3 billion in 2021.

Compare this to 2014 - when fragrances comprised ~12.8% of the market. That means fragrances grew from ~€23 billion in 2014 to ~€24.3 billion in 2021, a pathetic CAGR of 1% over eight years! Fragrances have been growing slower than GDP and losing share within beauty spending.

I now think that pendulum has swung far enough, and fragrances are now cool again for whatever reason. If you look at recent results, fragrances are the fastest-growing segment in almost every major cosmetic company. Estee Lauder EL 0.00%↑ recent horrible organic results (-5% growth) were not caused by fragrances, which was their fastest-growing segment.

Fragrance sales rose an outstanding 18% organically and expanded in every region. Tom Ford Beauty, Jo Malone London, Le Labo, KILIAN PARIS and Editions de Parfums Frédéric Malle all contributed, driven by sought-after innovation and heroes as our luxury and artisanal portfolio evolves from strength to strength.

L’Oreal estimates the entire market grew ~16% YTD, and L’Oreal is ahead of the market by growing at 28%! That’s quite the divergence, and that growth rate is making skincare blush.

I'll start with fragrances. On fragrance, the market remains -- And we are, sorry, growing at plus 28% on a market that's plus 16%. I was quoting the number as 21%. So the market's at 16%, and we are plus 28%.

When the skincare “trend” started, it ended up being a huge source of sustained growth for almost half a decade, and I think that looking back, Fragrances could start that growth again. “Alpha” in beauty was buying the companies with the highest exposure to skin care. The ingredients for a repeat but for fragrances are there. It’s something that’s always existed but has only grown at a 1% CAGR for the last eight years and now has become important again. A catchup to the previous composition of fragrances would mean double-digit revenue growth for a few years.

Publically traded companies with strong exposure are IPAR 0.00%↑ (100% fragrance but mediocre brands) and COTY 0.00%↑ (~50% exposure but a mediocre stock). These are huge opportunities, in my view, and fragrance as an end-market exposure should be considered a desirable trait in a cosmetic company for the first time in a long time.

Trend #2 Smoking is Cool Again

This one is hard to substantiate in the data because consumption volume is still declining, but I swear that Gen-Z loves nicotine (something we already know). Still, now they are rejecting modernity (vaping) and embracing tradition (cigarettes).

I don’t know where to begin, but I love this headline. I think it’s true.

Source

There’s a confluence of events here. First, in 2021 tobacco sales rose. But second, I think cigarettes are another throwback trend. If we bring back the 1990s, people need to smoke a lot more per capita.

The problem is I do agree with the “it’s not hot to be addicted” energy. Currently, cigarettes are mostly an aesthetic choice, and it remains to be seen if Gen Z becomes power tobacco users like in the 1990s or just poseurs. For every GenZ user smoking a pack a month, a Gen X heavy user is quitting a pack-a-day habit. This trend might not have enough legs to make a difference in volume consumption. But it’s interesting to see the wind shift ever so slightly for the first time in decades.

I think the perception of smoking being cool again is so interesting. If there’s something that Trend Watch™ comes back to over and over, it’s that the pendulum of history always comes back. Smoking being cool again is something I never thought I’d see, but given how far the pendulum has swung against it, it makes sense.

A reminder for investors, MO 0.00%↑ and BTI 0.00%↑ are the big cigarette companies. I still doubt if this can improve volumes for either.

Before I go, I want to part on a more zeitgeisty note. Another aspect other than the throwback trend, Gen Z has adopted nihilism in droves. Growing up with the internet, climate anxiety, and a global pandemic has driven home the point that nothing matters. Cigarettes are just another form of this nihilism.

I think the perfect rendition of smoking and nihilism is from the Chainsaw man manga, where one of the characters is convincing another character to smoke because their life expectancies are short anyways.

“It’s not like the smoking’s gonna kill you.”

Trend #3 - Andrew Huberman Podcast and Thorne

I want to leave my first Trend Watch™ on a much smaller trend but with a much stronger potential idea. The stock in question is a microcap, so it’s pretty hard to invest in it from any professional context.

The trend has two parts: the rise of the Huberman podcast to the top of the podcast game. Second, a supplement brand Huberman frequently mentions, Thorne. For those who don’t know, the Andrew Huberman podcast is run by Andrew Huberman, a tenured professor at Stanford. His podcast is excellent and often at the top of the charts globally for fitness and health.

Chartable: https://chartable.com/podcasts/huberman-lab

I think the interesting thing is not just the podcast’s stratospheric rise to the top but a company and product he mentions frequently; Thorne. Thorne THRN 0.00%↑ is a supplement brand and is often considered the gold quality standard by many (including Huberman himself).

Andrew Huberman will likely continue to dominate the top of the charts, and as more people are introduced to him, they will consider supplements. And wouldn’t you know it - Thorne is the brand he usually partners with. At the end of episodes, he mentions specific supplements and says you can buy them on Thorne at my referral link.

This has been a great thing for Thorne, whose sales have exploded in recent years from ~100 million in 2019 to 230m in 2021. The entire supplement market is much bigger (billions), and Thorne competes on the very high end of the market. But Thorne has been an interesting rise of a branded “Apple-like” supplement company in a world of brandless supplement companies. Reminder for professional investors, THRN 0.00%↑ has a market cap of ~$230 million and is illiquid, so personal accounts only, folks.

The company has near-term problems, mostly scaling back sales and marketing for more profitable growth. It also only recently came out into public markets and is massively down year to date and since listing. All new issues and SPACs are this way year to date anyways.

But if you look closer, the numbers don’t look that bad. In fact, they look pretty solid. Revenue is growing ~25% this year. However, EBIT will shrink slightly because of higher sales and marketing. EPS is growing meaningfully, with a 2x over last year’s earnings, and likely continued meaningful growth in the future.

The company trades at ~13x 2022 earnings and 7x 2023 earnings (if you believe forward estimates), and Thorne has a 50% gross margin and positive net income. I believe the Huberman cycle still has legs, and Thorne’s premium positioning in a completely discretionary market is key. If the economy improves, they likely can accelerate revenue again. It’s an interesting company because it’s a luxury product in a purely discretionary market.

Anyways - I don’t know what a supplement brand should trade at. Probably a low multiple of earnings. But Thorne is a trend that I think has legs, as it’s perceived as a higher-quality product and is tied to the best health podcast in the game. The company has net cash, is growing, and has real unit economics but has missed near-term profit guides. That sounds like a long-term opportunity given to you by the market because of near-term problems. I like the stock.

---

I hope you enjoyed trend watch #1! These are hopefully some real investable ideas, and I love watching these trends over time. It’s something I’m good at, and I want to practice a bit more. Happy Holiday folks! The normal semiconductor content will be back soon.

Disclosures: The author has positions in IPAR 0.00%↑ and THRN 0.00%↑