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Forget bot stocks – buy these two high-yielding stocks instead

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Where did all the workers go?

That’s the question everyone’s been asking over the past year or two as people emerged from the pandemic to find more “help wanted” signs in store and restaurant windows.

But the labor shortage goes beyond retail and restaurants and into manufacturing, health care, logistics, truck driving and many other aspects of the economy.

Why hasn’t the labor shortage been settled now? And if the shortage is permanent, as more experts seem to be concluding, should investors allocate investment money to the obvious solution to labor-saving technologies like robotics, automation, and artificial intelligence?

In the first section below, we identify a major cause of labor shortages. In the second section, we explain why investing in robotics and automation isn’t necessarily a good idea. In the third section, we explain our approach to this new characteristic of economics.

Labor force participation rate by age group

To begin, let’s display a graph that clearly shows the ongoing labor shortage. While the consumer remained strong and continued to spend, the workers needed to meet consumer demand remained very low.

The overall labor force participation rate is about 125 basis points below the pre-pandemic level.

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data by YCharts

There are about 3 million fewer workers in the workforce today than in February 2020. Where have those workers gone?

To answer this question, we need to look into it Who is the These workers are the ones who left the workforce. Sure you can cube the data in multiple ways, but one of those ways is to divide it by age group.

Let’s start with the younger workers, ages 16 to 24. While there is already a lower percentage of this age group (many of whom live with their parents) in the workforce than there was in February 2020, the level isn’t much lower than where it was for most of 2019.

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data by YCharts

What about peak-age workers from ages 25 to 54? These workers represent the largest part of the workforce. While the recovery in LFPR in this age group was rapid from early 2021 to mid-2022, it has faltered in recent months.

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data by YCharts

However, it should be noted that the workers are of the age of majority as well especially Back to work, and LFPR for this group is almost back to where it was in early 2019.

This leaves out the older workers, which we’ll define in this case as those over the age of 55. And here we find a major cause of the persistent labor shortage.

The trend we’re finding is that the older they get, the more likely they are to retire in the wake of COVID-19. The 55-64 age group is within 50 bps of the pre-pandemic level, but the LFPR for the 65+ age group is down about 120-130 bps from the pre-pandemic level.

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data by YCharts

Meanwhile, the small minority of 75+ workers is getting smaller and smaller as the post-COVID trend shows a steady decline in LFPR for this group.

Much of this is due to early retirement. to me Richard AlanisIn 2020, among the 65+ age group, “there were 7% more retirements than expected in a given year.”

Airlines have offered purchases to many of their oldest and most experienced pilots as an incentive to retire early. Those pilots are not returning, and it will take years to replace their experience, hence the many flight cancellations and delays that have occurred this year as air travel has returned.

A similar story can be told in the healthcare sector, especially in hospitals. Amid the difficulty and danger of treating a flood of COVID patients, many older nurses and doctors have been burnt out and quit, throwing the workforce out entirely.

Similarly, trucking companies have had significant problems in recent years attracting younger drivers to replace their older driver base. At the start of the pandemic, when the economy froze and inventories shrank, many of the older drivers retired or made purchases rather than wait to see how this once-in-a-century pandemic played out.

And of course, the 65+ age group is most likely to be involuntarily removed from the workforce due to “long COVID” or other health complications.

The Solution: Robotics, AI, and Automation

For many, the obvious solution to the seemingly permanent labor shortage is greater adoption of robotics, automation, and artificial intelligence as a means of reducing the need for labour.

With this background, we find BlackRock’s (BLK) A recent report entitled “Investing in Robotics: Why Now Could Be the Time.”

Jeff Spiegel of BlackRock sees several catalysts driving the growth in demand for robots and automation machines in the future:

  • Labor shortage (inability to find willing workers)
  • Wage inflation (the inability to find the right worker at the right price)
  • Supply chain evolution (focus and modernization in home countries)
  • Endogenous industrialization (production moves from low-tech to high-tech countries)
  • Technological downturn (lower costs of automation products).

For that last catalyst, consider that the average cost of an industrial robot has halved in the past three decades. As labor costs rise and automation costs fall, value calculation must increasingly shift toward replacing workers with robots and automation.

Together, these four catalysts can quadruple the size of the global robotics market, according to Spiegel.

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BlackRock / Jeff Spiegel

Spiegel recommends investing in ETFs that focus specifically on bot developers and enablers. Examples include:

  • First Trust for Artificial Intelligence and Robotics (rob)
  • ARK Autonomous Technology & Robotics ETF (ARKQ)
  • Robo Global Robotics & Automation ETF (robo)
  • iShares Robotics and Artificial Intelligence Multisector Fund (IRBO)
  • Global X Foundation for Robotics and Artificial Intelligence (Butz).

Over the past 4.5 years, the performance of pure bots and automated exchange-traded (“ETFs”) has varied from over 27% to -3%, although their overall patterns have been highly correlated.

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data by YCharts

After rising 60-160% from mid-2018 to mid-2021, it’s down 40% or more year-to-date.

Does that make it a good buy today?

We’re not sure.

Even after the sharp downturn this year, there remains a great deal of optimism. For example, the price-to-earnings ratio weighted average IRBO ratio stays close 56 fold. For BOTZ, which has been its worst performer over the past 4.5 years, P/E ratio is flat 36 times.

We see a lot of overlap in the current optimism about bot stocks with the optimism about internet stocks during the early 2000s. Just as it was foolish and pardonable to be bearish on the Internet in general at the time, we think it is foolish to be pessimistic about automation and bots now.

However, after the peak in internet stocks in the early 2000s, at which time valuations were so high due to investor euphoria and FOMO, it took years for stock prices to bottom out. Even with the boom of the Internet itself.

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data by YCharts

Imagine buying the NASDAQ 100 (QQQ) in early 2001, after the index had already lost 50% of its value from the peak, only to see it halve again before finally hitting bottom.

Valuation matters, even after a big sale

We don’t invest in these bot ETFs because of the risk that, like QQQ after the Dot Com bubble burst, they will struggle to find a bottom for years until the valuation makes more sense.

And we generally stay away from individual bot stocks because of the extreme difficulty in determining which ones will end up being the biggest winners like Amazon.com (AMZN).

Here is an example. Just a few years ago, investors were beaming with optimism about Carvana (CVNA) and its innovative approach to selling cars with its highly automated vending machine-like glass towers.

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data by YCharts

Going into this pandemic, it looked like the Carvana might be able to revolutionize the car sales industry. Now survival is in question.

Our approach

At High Yield Investor, our approach is to invest in companies that we believe will be great not directly The beneficiaries of automation rather than the “developers and enablers” of automation, to use the words of the BlackRock report.

These indirect beneficiaries include both users And the facilitators from automation. We believe these indirect beneficiaries should see huge boosts to their operating performance from automation, but lack the overblown and flattering valuations associated with specific automation companies.

Let’s give one example of each.

Automation User: Leggett & Platt, Incorporated (a leg)

LEG is a diversified manufacturer of various products in the bedding, furniture, automotive and aircraft industries. The company has manufacturing plants spread across five continents with particularly high concentrations of production in the United States, Canada, Europe and Mexico. This makes its plants a major customer and beneficiary of automation today and in the years to come.

GoPal 400 bots

GoPal 400 robot at Leggett & Platt (Robotize)

This venerable and well-established company has huge economies and a global presence, as well as a first or second market position in most of its product categories.

Given the tailwinds from automation, LEG’s skilled and conservative management team must be able to continue the company’s long history of earnings and dividend growth. LEG is a Dividend Aristocrat with 51 consecutive years of earnings growth under its belt.

The dividend yield of 5.25% provides an attractive entry point for impatient investors.

Automation Facilitator: WP Carey Inc. (WPC)

WPC is a triple net rental real estate investment trust (“REIT”) that owns a variety of real estate types in both the United States and Europe. The REIT specializes in sale and leaseback deals with industrial companies, buying their properties while signing long-term leases at the same time.

WPC facilitates not only through ownership of manufacturing and logistics premises, but also at times in direct financing of robotics and automation upgrades to its existing properties.

Here is one example. Below, on the left, you’ll see a description of a recently completed renovation project at one of Henkel’s logistics facilities in Bowling Green, Kentucky, that WPC helped fund in exchange for certain lease terms such as higher rent.

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WPC Q3 2022 Presentation

What exactly are these renewals? In short, it was mostly automation upgrades to the facility.

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Henkel’s state-of-the-art Bowling Green Logistics facility (Henkel)

Here’s how Mark Fratamico, Vice President of Henkel, works. Describe This upgrade:

Increased automation allows us to deliver efficiencies and superior customer service, help our retailers meet consumer demand and increase operational speed so we can continue to respond to a rapidly changing business environment.

Essentially, the $70 million automation upgrade project, completed over three years, was funded by equity financing from WPC, and the owner will be repaid via higher rent and a longer lease term over time.

Since WPC owns a large group of industrial and logistics facilities (half of its portfolio by NOI), we expect to see more capital investment in automation upgrades like this in the future.

With an increased focus on industrial real estate where WPC will have more opportunities like this, we like REIT and its 5.4% yield.

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Labor shortages seem increasingly permanent, as older workers who retired early during and in the aftermath of the pandemic are unlikely to return to the workforce en masse. This makes the solution of increasing the use of bots and automation attractive.

But rather than investing in robotics stocks or overvalued ETFs, we at High Yield Investor choose to focus on indirect beneficiaries of the giant automation trend like LEG and WPC.

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