A MoneyWeek SpeciAl inveStMent RepoRt

MONEYWEEK
The best shares
to watch in
2016

MONEYWEEK
RESEARCH

A MoneyWeek SpeciAl inveStMent RepoRt

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The Best Shares to watch 2016

In this MoneyWeek report, based on the work that appeared in MoneyWeek
magazine throughout 2015, youll find a preview of what could be some the
best shares for 2016. Please keep in mind the shares previewed below are not
recommendations. And predicting the future in the fast-moving world of technology
is a fools errand. That said, please enjoy this free report from the editors of Money
Week. Make sure to check your mailbox for updates on these trends in Money
Morning and your weekly magazine.

Drones

If 2016 is anything like 2015, youll be hearing a lot more about drones. 2015 was a
breakthrough year for drones entering the public consciousnessand public airspace!
In February, Paris was gripped by the mysterious appearance of several drones hovering
over key landmarks. Meanwhile, over in the US, a small drone caused a major scare when
it crashed inside the grounds of the White House at 3am on an early May morning. The
Secret Service only learned of the drone when the pilot of it, a man in a nearby park, told
them. And in September, a 26-year old New York school teacher was arrested for crashing
a drone into the stands of Louis Armstrong Stadium during a US Open tennis match.
At the moment, such incidents are rare enough that they lead to headlines. However,
these sights could become a lot more common. The industry is aggressively lobbying the
authorities to relax restrictions on commercial drone flights.
Eventually, we could see drones used for everything from routine law enforcement
to parcel deliveries. Drones could use your smartphone do identify your location and
deliver parcels to you, according to a patent filed with the US Patent Office last year by
Amazon. Amazon is in a race with Google to see who can commercialise autonomous,
self-flying drones first.
In August of 2014 it was revealed that Googles famous research and development branch,
the X-Lab, was testing a drone delivery system in Queensland, Australia. It was dubbed
Project Wing. Googles prototype drone delivered a chocolate bar, dog treats, a first aid
kit and a chocolate bar up to distances of one kilometre.
Drones arent going to replace lorries anytime soon. But the pieces are falling into place
for their use in everyday life. Smart investors could profit by getting in now. Lets take a
look at some of the barriers. And then, some of the opportunities.

The new rules on drones arent as restrictive as they look

In February 2014, Americas Federal Aviation Authority (FAA) published a list of proposed
changes to the rules governing the use of drones in the US. While its far from the freefor-all some may have wanted, it will expand the range of tasks they can carry out.
At the moment, any non-military use is effectively banned. While companies can be
given special permission, its not automatic only a small number of requests have been
granted so far.

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However, the new rules would replace this blanket ban and allow daytime flights at
heights of up to 500ft. Of course, drones would still be banned from flying near airports
or directly over people, and would have to remain in the sight of the operator at all times.
While these restrictions arent trivial, they will allow a legal drone industry to emerge for
the first time.
The new rules are only provisional. But theyve still prompted a firestorm of criticism
from the industry. The biggest complaint as you might imagine is the need for
constant visual contact between the operator and the drone. Companies argue that this is
unnecessary, as drones can be remotely monitored. And, if the technology evolves, drones
will be able to talk to each other and manage their own flight-paths in the same way that
driverless cars do not need constant human supervision. Industry representatives also
question the need for restrictions around airports, arguing that the chances of a planedrone collision are remote.
The drone industry that spends nearly $190m a year on lobbying. It has the ear of
politicians eager to boost an emerging sector, and a potential source of high-quality
jobs. Its safe to say that further change in the favour of drone operators is likely. Like
any new disruptive technology, it will take time for people to get used to the innovation.
Eventually, it will seem routine. .
But arent people opposed to this? Never mind the risk of crashes, what about privacy?
Could an ex-lover spy on you with a drone? Could drones be weaponised and used as
weapons for terrorism, assassination, or murder? Shouldnt we be cautious and worried?
You might be surprised. The public (in the US at least) is pretty open to the idea. A recent
survey by Ipsos found that two-thirds of people think the police should be allowed to use
drones to fight crime. And nearly half are happy for parents to use them to spy on their
children.
Once drones become more common, you can expect these numbers to shift further in
favour of wider use particularly if theres a clear benefit in terms of convenience, or
reduced crime. After all, were prepared to post large amount of detail about our private
lives on the Internet in ways that would have been unimaginable in the past.
And only five years ago there were concerns that Googles Street View mapping
technology was breaching privacy laws by taking photos of people in the street, capturing
their car licence plates and even views of their gardens. Yet despite a lot of complaints,
almost every country around the world now allows it.

A 4.2 billion market and growing

Even without any changes to the current rules, drones are increasingly big business.
Market research firm Teal Group thinks that current global spending on unmanned aerial
vehicles is around $6.4bn. This could rise to $11.5bn within a decade.
Most of this is currently related to the armed forces. However, there is growing demand
from agriculture. More and more farmers around the world are using drones to monitor
their fields more efficiently. This precision agriculture allows them to alter irrigation
and fertiliser use to boost yields and operate more efficiently.

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Meanwhile, many enthusiasts and small companies are ignoring the law and building
their own systems, or buying off-the-shelf kits. The Consumers Electronics Association
estimates that sales of commercial drones in the US alone will increase from $130m this
year to $1bn by 2018.
As mentioned at the start of this report, Amazon has hinted at plans to start a drone
delivery service that could deliver parcels from warehouses to a customers door within
minutes. And Google is creating a fleet of drones that could provide internet connections
to African countries that lack the infrastructure. Drones wont simply replace traditional
methods of delivering goods and services. Theyll allow goods and services to be
delivered to places where it wasnt previously possible. Thats a major positive.
The drones themselvesthe technology and the software that run themare also rapidly
evolving. For instance, several companies are developing small-scale drones that would
reduce safety concerns. Others are focusing on computer-run systems that could guide
themselves with minimal human input.

How to invest in drones

At the moment the drone market is broadly split into large companies that cater to the
military side of the business, and smaller firms that have a large role in the civilian
side. So if you own any defence stocks, you probably already have some exposure to the
theme. If not, here are five to keep your eye on for 2016:
1. Invensense (NYSE:INVN). Invensense isnt exactly a drone manufacturer. But if
drones take off, it will be a key part of the commercial growth of drone fleets. Why?
Something called a microelectromechanical gyroscope. Without getting too technical,
this is the technology that allows for motion detection in electronic devices. Youll find
it in the iPhone 6, the Samsung Galaxy, the Nintendo Wii, and if you play games, Oculus
Rift. The technology allows for things like image stabilisation (when youre taking a
photo). But more importantly, devices with the technology can know where they are
in space and time and communicate this information with other devices. Properly
networked, with a common communication protocol, autonomous drones could talk to
each other and avoid crashes.
2. Google (NASDAQ:GOOG). This is another indirect play on drones. Google needs no
introduction. But what does it have to do with drones? In addition to project wing, Google
has an even more ambitious project called Project Loon. The goal of that project is to
bring the Internet to every corner of the globe. It would be achieved with a drone the size
of a jet liner, powered by the sun, flying at an altitude of 65,000 feet. Talk about thinking
big!
3. GoPro (NASDAQ:GPRO). You probably already know about GoPro as the company
that made action cameras an everyday reality. But last year, the companys 39-year old
billionaire Chairman announced the company would build its own quadcopter. But
rather delivering products, the drone promises to change the way people see and record
their lives. Camera drones are already staples and major sporting events. But think of
weddings, movies, music videos, or really anything where a person wants to record their
life from above and show the world. GoPro created a new category of product for sports
enthusiasts. If it can marry its camera technology with drone technology, it may very well
create another new category, and make investors quite happy.

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4. Da Jiang Innovations (DJI). This is one to watch for 2016 because you cant buy it
yet! DJI is the worlds leading seller of drones. Industry sources say the company was
on track to sell over 500,000 drones for a $1 billion in sales in 2015. Its come a long way
since being founded in Hong Kong in 2006 by Frank Wang, then a student at the Hong
Kong University of Science and Technology. The companys flagship model is the Phantom
drone, although it began rolling out higher end models last year. Its based in Shenzhen
on the Chinese mainland now. Its latest offering integrates software that, among other
things, allows you to program a flight path for the drone, or, have the drone follow you
from a distance discretely using the GPS tracking information in your mobile device.
Watch MoneyWeek for news of an impending initial public offering (IPO) for DJI. Its been
described as the Boeing of the drone industry.
5. 3D Robotics (3DR). Founded by former Wired magazine editor Chris Anderson,
3DR is also a private company you cant buy as of now. But that may change in 2016.
The company is hot on the heels of DJI with its Solo drone. And a bit like Apple, the
companys marketing message appeals to the end users sense of empowerment through
technology. A slick presentation on the companys website begins with the phrase from
science fiction writer Arthrur C. Clarke that Any sufficiently advanced technology is
indistinguishable from magic. Anderson tells 3DRs customers that with the Solo (which
also integrates GoPros camera technology), You can be the subject of your lifes story, not
just the director.
As you can see, the drone industry seems to be on the verge of a massive commercial
explosion. Its not just a hobby anymore. Its a business. And for investors in 2016, thats
great news. Now, lets move on to something a bit more ominous.

Cybersecurity
At 11:32 am on July 8th, 2015 the New York Stock Exchange halted trading on all
securities. The halt lasted for three and a half hours, as the exchange sought to track
down the problem. When trading resumed, the exchange released a statement in which
it said that the root causes of the outage were determined to be a data configuration
issue. All open orders were cancelled and trading resumed normally the next day.
On that same day, while the NYSE frantically sought the cause of its trading problem,
United Airlines grounded all of its flights in North America. The company cited a
computer glitch. It elaborated later, saying it was a network connectivity issue. Without
further comments, flights resumed later in the day.
Were these deliberate attacks? Did someonea foreign government, a lone wolf, or
a teenager in his basement with mischievous mindexpose critical flaws in the key
systems that run our financial markets and transportation system? Thats the question
cyber security firms are trying to answer. Investors should take note in 2016. Why?
When trading resumed on the NYSE, a handful of cybersecurity stocks were the first
to rise. For example, one such company was Imperva (NYSE:IMPV). It provides data
and application security for companies in the energy and finance sectors as well as
government agencies. Antivirus company AVG Technologies (NYSE:AVG) also rallied when
trading resumed.

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A matter of life and death

Hacking isnt just potentially expensive it could be deadly.
You might have seen a video doing the rounds on the internet which illustrates this quite
terrifyingly.
Two hobbyists, Charlie Miller and Chris Valise, made headlines in the US when they
hacked into a Jeep Cherokee that was driving along a highway. They started with the
radio and the temperature.
Then they hit the brakes, bringing the car to a standstill.
Of course, this was a controlled experiment, so no one was hurt. They did it to highlight
potential security issues. But its easy to imagine a terrorist, a generic misanthrope, or just
a bored prankster causing chaos by doing the same during the rush hour.
This problem will only get worse the more we rely on technology. Two years ago, when
Miller and Valise did a similar experiment, they had to physically connect their laptop to
their victims car. Now they can take advantage of the wireless technology that comes as
standard. (Ironically this wireless connection is designed to make it easier to diagnose
faults.)
When cars become driverless which is more than possible in the foreseeable future
you run the risk of being completely at the mercy of the machines operated by malicious
hackers.
And you dont have to be paranoid to see this happening to other essential infrastructure,
especially as we move from hard drives to cloud storage. The number of devices
connected to the internet is expected to grow tenfold, from 2 billion to 25 billion, between
2010 and 2020.
Both cases tie in with another major trend online crime is rising fast. Banking fraud
in the UK rose by nearly 50% last year. Fraud related to credit cards now totals nearly
500m.
A similar thing is happening in the US. A study by LexisNexis suggests the total value of
fraudulent payments to businesses rose by 38% to $32bn in 2014.
Payment fraud isnt the only type of online crime. Theft of intellectual property and
records and the draining of bank accounts are also big problems.
The total cost of cybercrime is hard to estimate. It depends on how you measure it,
and whether you take direct and indirect impacts into account. And its always worth
remembering that most of the people who measure this stuff have a vested interest in
making the figures look as shocking as possible.
That said, its pretty obvious that as more and more of our information goes online and
more of our transactions take place there, then more crime is going to migrate online too.
So whether the total cost to the global economy is $375bn or $575bn (both estimates youll
find online), one thing is clear defending against cybercrime is going to be an ever more

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important issue.

The market in cybersecurity is huge and getting bigger fast

As a result, governments are increasing their spending on online security, even as they
cut back other aspects of public spending. For example, the US government will spend a
record $14bn this year to meet security threats across the country.
At the same time, firms are also increasing spending. They need to protect themselves
from reputation-destroying security breaches. But its also a response to new regulations.
The Jeep stunt has prompted American politicians to propose legislation to force car firms
to upgrade security on their cars networks. Last year, in an effort to get firms to spend
more, the White House issued guidelines urging them to do more to protect their data.
And this goes far beyond car manufacturers. A recent Accenture survey suggested that
90% of financial institutions plan to significantly increase spending on cybersecurity,
with two-third rankings cybersecurity as the most pressing operational issue, even above
credit risk.
In any case the global market is now large and growing rapidly. Estimates put the size of
the market at between $75bn and $85bn, with infrastructure firms accounting for $45bn
alone, and on course to reach $120bn within a few years. Here are the three largest
cyber-security stocks you can buy today:
1. Check Point Software Technologies (NASDAQ:CHKP). Firewalls, virtual private
networks (VPNS), intrusion prevention systems (IPS), Checkpoint has an entire suite of
software solutions for companies looking for network protection. At the time of writing,
it has a market capitalisation of $US14.2 billion on revenues of nearly $1.5 billion in fiscal
year 2014.
2. Fortinet Incorporated (NASDAQ:FTNT). Fortinets product offerings focus as much
on data protection as network protection. Its one thing to close the windows and lock the
doors. But you want to put your valuables in a secure location just in case. In modern day
business, the data your business generates is both indispensable and valuable. Fortinet
had a market capitalisation of US$7.2 billion at the time of writing.
3. Palo Alto Networks (NYSE:PANW). Palo Altos products defend your organisation
from cyber-attacks and control the number of applications running on your networks.
It offers both hardware and software solutions for cyber-security. It had a market
capitalisation of US$13.56 billion at the time of writing.
Bigger doesnt always mean better for investors. But if youre just getting started with
cyber security stocks in 2016, start with the large firms and work your way down to the
innovators. This will be an area to watch in MoneyWeek for the future. Stay tuned.

Online entertainment
Theres probably no trio in entertainment more controversial than Jeremy Clarkson,
Richard Hammond and James May.

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But you cant deny that their BBC show Top Gear has a lot of fans. Even after Clarkson
punched a producer, a million people signed a petition for him to be kept on.
If youre like most people, you would have assumed that after the trio left the BBC, they
would be signed up by Sky or ITV to do a similar show under a slightly different name
(the rights to the original title are owned by the BBC).
As expected, they have agreed to do a Top Gear clone. But the way theyve decided to go
about it is quite unexpected and its proof of a dramatic shift in the media industry that
smart investors should be taking advantage of...

The old TV business model is breaking down

Clarkson and co havent moved to another channel, or even a cable TV service. Instead,
theyve cut a deal with Amazon.
Thats partly for legal reasons a clause in their contract made it tricky to go and
work for another British TV channel so soon. But it also shows just how rapidly the TV
landscape has changed.
Once upon a time, you only had terrestrial TV. Then you had satellite and cable for those
who were willing to shell out big bucks for premium services like football or the latest
films. Then Freeview came along for those who werent.
But now all of these services are facing challenges from broadcasters who deliver TV
content over the internet. These change the market in two ways: they make it easy for
new firms to compete with established providers, and they allow users far greater control
over what they watch.
In effect these companies are betting that customers will prefer a more tailored product,
rather than a more general service filled with stuff they dont want.
The market is cottoning on to this quickly. If you go shopping for a new TV these days,
youll almost all of them are branded as smart devices internet enabled, so that you
can stream content even the budget models.
Viewers are also changing their habits. One thing keeping US TV executives up at night,
for example, is the phenomenon of cable-cutting, where people cancel their cable
services entirely in favour of streaming what they want, whenever they want.
Even those keeping their services are watching less normal TV viewership in the US is
falling by around 10%-15% each year.

An epic clash for content

This fight between traditional TV and streaming services is hotting up with Amazon
entering the market, which is selling streaming services as part of its Amazon Prime
package. Unlike its rival, Netflix, which took a long time to become established, Amazon
has huge brand recognition and a large user base, which should help it gain market
share.
Amazon is also making its own shows. It recognises that one of the best ways to get

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customers in this new world of media is to produce content that people want to watch.
The classic example of this is Netflixs remake of the BBC mini-series House of Cards. The
new version, starring Kevin Spacey, has helped to make Netflix a household name.
So Amazon would like a hit like that and the new show by Clarkson and team is
definitely part of that. Theyll also be looking at buying rights to stream shows that have
already proved to be hits.
Of course, the networks and cable TV firms arent taking this threat lying down. Some
are trying to follow the classic strategy of squashing the competition by merging into
ever larger firms. In May of 2015, for example, Charter Communications agreed a $75bn
merger with Time Warner Cable. But this hardly solves the underlying problem that
customers want and can get more choice elsewhere.
So other networks have taken a different approach, bidding more and more for top
shows and events in the hope that this will help them to retain viewers.

Studios are king (for now, at least)

So how should you play this?
The obvious decision is to invest on one of the companies involved in streaming. The
problem is that they are very expensive, with Amazon (Nasdaq: AMZN) and Netflix
(Nasdaq: NFLX) trading at 30 times and 50 times 2018 earnings respectively. Theres also
a chance that they will lose out to a new upstart, or their profits take a battering amid the
competition to grab viewers.
Instead, the power and the profitability in this business has shifted in favour of
studios and TV production companies, as platforms (which is ultimately what the
streamers, cable companies and networks are) compete to buy their content.
There are many companies in the sector that are worth investigating. One option is
Lionsgate Entertainment (NYSE: LGF). This very successful TV and movie studio has
a strong exclusive deal with Netflix, which includes the hit TV series Orange is the New
Black. Lionsgate trades at a much more reasonable 18 times 2017 earnings.

Research your investments for 2016

There are many non-technology shares that could do well in 2016 as well. Youll read
about those shares in the pages of Money Week. From hard-rock mining to retail to
emerging markets, you dont want to confine yourself to just one sector.
And when it comes to technology and the future, it doesnt hurt to have an expert
who specialises in the field, someone with years of experience analyse breakthrough
technologies and companies. At Money Week research, thats Dr Mike Tubbs.
Dr Tubbs has his own fortnightly publication called Research Investments. He analyses
research and development (R&D) spending trends at firms to generate a large portfolio
of world-wide, world-class tech firms. Look for his work regularly in the pages of Money
Week to see how you can benefit in 2016.

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