How to cash in on 7 billion humans

A larger world population means more demand in certain areas, providing simple and logical investment strategies.

By InvestorPlace Nov 2, 2011 11:05AM

By Tom Taulli, InvestorPlace


While investors try to anticipate next quarter's earnings results or even examine the big picture in Europe, it's really important to stand back and look at the even bigger picture. It might not be easy, but it's what top-notch investors like Berkshire Hathaway's (BRK.A) Warren Buffett do. It takes guts and patience, but the payoff can be big.

 

One thing to look for is secular trends, which can be powerful forces that propel growth. A big one to consider: population growth. On Halloween, the world population hit 7 billion. And according to estimates from the United Nations, it might reach 10 billion by the end of the century.


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This megatrend undoubtedly will have a variety of major impacts on investments. Here are some to focus on:


Food. One impact of global warming is the higher probability of extreme weather events. Examples include hurricanes, droughts, tornadoes and cyclones. Add to that the increasing demand for land for residential and commercial space, and it probably will become increasingly difficult to boost (or even maintain) agricultural productivity. To deal with this, farmers will look for things like next-generation fertilizers, which can work better in tough environments.

 

A top company in the industry is Mosaic (MOS). It ranks No. 1 for the production of phosphates and No. 3 for potash. More importantly, the company has tremendous barriers to entry because the number of deposits are concentrated in a few areas.


Water. When a doctor removes life support for a patient, he or she can live up to two weeks without food. But without water, death will come in a couple of days. Gruesome stuff, but humans' obvious need for water is something to consider as the world's population is putting enormous strain on the usable water supply.

There are some solutions, such as investment in irrigation, which reduces waste and helps provide cleaner water. A top company in the sector is LindsayCorp. (LNN). Founded in 1955, it manufactures equipment to help conserve water and lower energy and labor costs. Lindsay Corp. also has been pushing innovation through GPS systems and smartphone applications.


Energy. People cook food, heat their homes, drive cars and use computers increasingly more for both work and play. All that takes energy, plain and simple. And more people means a need for more energy. Obvious plays include companies like Exxon Mobil (XOM) and Chevron (CVX). Given the difficulties of finding new reserves, these companies should continue to see growth in revenues for years to come as prices of crude continue to rise.

 

But the fact is oil will run out, and to power the world, we need to find alternative sources of energy. One good prospect is natural gas. Over the past decade, energy companies have made great strides in using unconventional approaches -- like fracking and horizontal drilling -- to extract this resource from shale. Already, companies like Exxon have invested heavily in the category, such as with its $41 billion acquisition of XTO Energy in 2010.

To play the industry, consider companies like Chesapeake Energy (CHK) and Devon Energy (DVN), which hold substantial reserves — and also might be attractive buyout candidates.


Health care. A key part of the growth in the population has been an overall increase in life expectancy. But as people get older, to keep them older, they will require more health care.

 

Certainly, a variety of stocks will benefit from the trend. But when looking for a solid investment, it is a good idea to look at companies with strong barriers to entry. Charles River Laboratories (CRL) is an example. For decades, the company has built a solid customer base and infrastructure that helps drug makers speed up drug discovery and deployment through services such as research models and development support. As pharmaceutical operators look to replace the drugs that will come off patent over the next decade, Charles River should be a big beneficiary.

 

Tom Taulli runs the InvestorPlace blog IPOPlaybook. A site dedicated to the hottest news and rumors about initial public offerings. He is also the author of All About Short Selling andAll About Commodities.Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.

 

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