how to profit in the winner take all market
TRANSCRIPT
How to Profit in the Winner Take All Market
1
U.S. Dividend Stock Investing for Canadian Investors
How to Profit in the Winner Take All Market
The Industrial Singularity:
How to Invest in the Winner Take
All Market
The past few decades have seen the digital revolution change many aspects
of our lives. What you and I need to take heed of as investors is that the
pace of change is accelerating.
This concept was first brought to the fore by futurist Ray Kurzweil in his
book, The Singularity Is Near. He's a guy you and I should pay attention to.
Of his 147 predictions since the 1990s, he has an astounding 86% accuracy
rate.
No, he's not psychic. He just looks at the world a bit differently than most
people.
In the book, Kurzweil proposed the law of accelerating returns where
technological progress moves ahead at exponential rate. But our human
brains tend to extrapolate the future in a linear sense instead of
exponentially.
Translation: new and more powerful technologies will be with us sooner
than most expect.
In fact, Kurzweil thinks the Singularity – when machines with artificial
intelligence (AI) will pass a valid Turing test and therefore achieve human
intelligence – will occur in 2029. Others like the visionary leader of
Softbank (OTC: SFTBY), Masayoshi Son, think this will happen by 2047.
How to Profit in the Winner Take All Market
I don't know if Kurzweil's cybernetic future (humans and machines joining)
will ever come to pass. But one thing is certain: exponential progress is
being made in technology and the rate of advancement is accelerating.
That's why the Pentagon and some very forward companies have hired
science fiction writers to envision for them possible future scenarios. These
scenarios range from the grim for the military - “smart” gun being hacked,
killing civilians – to the mundane, showing how companies may have to
market to artificial intelligences in the future instead of to people directly.
Industrial Singularity
That is the whole idea behind my research project called the Industrial
Singularity. There are industries poised to make investors like you
accumulate wealth in an exponential fashion. But as with many things in
life you have to be in the right places at the right times.
Finding those 'right places at right times' is my task in the effort to grow
your wealth.
Think about what financial history teaches us. . . . .
There were many breakthrough technologies in the past – electricity,
automobiles, airplanes, radio, television. The list could go on and on. The
point I want to emphasize is that with all these technologies there were
initially a lot of companies involved, making cars or flying passengers, etc.
Here's just one example – the “Tronics boom”, which went 1959 to 1962.
It was the dawn of the space age and excitement was everywhere,
including among investors. Every stock even remotely connected to
electronics took off, pardon the pun, like a rocket. The companies had
names like Astron, Dutron, Vulcatron, Transitron, Circuitronics,
Videotronics and Powertron Ultrasonics.
How to Profit in the Winner Take All Market
And one stock was particularly dear to me was Supronics – my parents
owned it. But only a precious few electronics companies survived such as
RCA (Radio Corporation of America). It too eventually succumbed and was
bought by GE in 1986.
Even today, think about how many makers of smartphones have already
disappeared. It's my job to “separate the wheat from the chaff” in the new
technologies and make you money. And that's exactly what I plan to do,
using my decades of experience in the investment industry.
Here are just three of those “right places”.
Right Place #1 – Robotics and AI
I believe the first place investors need to be is robotics powered by artificial
intelligence.
When many of us think of robots, we still think of Star Wars friendly pair of
R2-D2 and C-3PO. Or more darkly, of the dangerous androids from the
Terminator movie series.
Well, the future is here and the robots are already among us. Think
driverless cars and drones, speech and image recognition software,
Amazon's Alexa and IBM's Watson.
There are also numerous collaborative robots, known as cobots, that work
alongside humans every day in modern manufacturing facilities.
Researchers at MIT found that robot-human teams were about 85% more
than productive than either humans or robots alone. The robot technology
manager at the Danish Technology Institute, Søren Peter Johansen, says
that automating the simplest 80% of a production process is significantly
cheaper than a fully automated solution. The remaining 20% of the work
How to Profit in the Winner Take All Market
will be done by human co-workers.
This teaming up of humans and robots is why forecasts for this niche part
of the robot industry call for growth of more than 40% annually over the
next five years.
Overall, the consultancy PwC forecasts that AI will add $15.7 trillion to the
global economy by 2030.
That's where you and I want to be as investors – in the best companies
involved in a growing sector, reaping exponent gains over that time.
Right Place #2 – Internet of Things
Another 'right' place we need to be is the Internet of Things or more
specifically, the Industrial Internet of Things.
The Internet of Things describes a network of soon-to-be many billions of
“smart” connected physical objects that in the future will encompass every
aspect of our lives. These things will be embedded with sensors, software
and connectivity that will allow these machines to collect and exchange
data not only about themselves, but other machines, objects, infrastructure
and the environment.
By 2025, it is forecast that more 75 billion devices will be connected.
The goal for this huge amount of data generated is to process it into useful
actions that can “command and control” objects to improve the quality of
our everyday lives. Again, we are already see some of this with how 'smart'
our homes, appliances and cars have become.
But the Industrial Internet of Things will be more lucrative than consumer
IoT.
How to Profit in the Winner Take All Market
Of course, robotics will be a big part of the IIoT, but there is whole lot more
involved. The falling cost of sensor technology and the ability to use and
analyze previously unknown data (big data) promises to transform the
manufacturing of everything from bottles to cars to just about everything.
That will benefit companies in the semiconductor industry and the
companies that enable communications from all these connected devices.
Major industrial companies all over the world are calling it the Fourth
Industrial Revolution. General Electric (NYSE: GE) says that, by 2020,
revenues generated from the industrial IoT market globally will be about
$225 billion. In comparison, GE forecasts the consumer IoT market will only
generate about $170 billion by then.
Right Place #3 – Nanotechnologies
Another area of interest has to be nanotechnologies. Nanotechnology is
already being used in fields such as:
Medicine – drug delivery as well as diagnostic and therapy techniques.
Electronics – increasing the capabilities of items from circuits to sensors to
lasers.
Energy – the battery that will be in your electric car will likely have
nanomaterials in it. Solar energy is also benefiting from advances in
nanotech solar cells.
Other sectors that could soon benefit from nanotechnologies include: food,
pollution control, clothing and leisure goods such as golf clubs.
And don't be surprised that if tiny 3D-printed batteries, DNA-based
computing and cancer-killing nanoparticles are soon reality. Already on the
horizon are 'smart' contact lenses. Novartis and Google are involved in a
joint effort at the moment. And Samsung is also working on it currently.
There are a myriad of other technologies approaching at Kurzweil's
How to Profit in the Winner Take All Market
accelerating, exponential rate. I believe you are as excited by all of these
new technologies as I am. That's why I hope you will stick with me on this
journey into the future as a Growth Stock Advisor reader.
And now for the fun part. This next section I go in detail on my “Top 3
Stocks to Profit from the Winner Take All Market.”
Singularity Recommendation #1: Hyper-Connected Industry
So instead of GE, I wanted a company with a long track record and a
superb, forward-looking management that isn't trying to play catch-up.
I also wanted my recommendation to add to the Growth Stock Advisor
portfolio to be a pure-play Industrial Internet of Things company.
The perfect candidate is Rockwell Automation (NYSE: ROK).
The $21 billion market cap firm is the world's largest company dedicated to
industrial automation and information.
The 113-year old company has operations in over 80 countries and had
fiscal 2016 sales of $5.9 billion.
Industry-wise, Rockwell Automation gets about 50% of its sales from so-
called heavy industry. These include energy, mining, paper, chemicals,
semiconductors, water and wastewater. Another 30% comes from
consumer industries including food and beverage, home and personal care,
and life sciences. Another 15% comes from the transportation industry and
the final 5% is from a scattering of industries.
The slightly larger Control Products & Solutions division accounted for 55%
of sales in 2016. It provides a comprehensive portfolio of intelligent motor
control products and other industrial control products. Most of these
products are marketed under the Allen Bradley brand to customers in the
aforementioned heavy industries.
How to Profit in the Winner Take All Market
The Architecture & Software division accounted for the remaining 45% of
sales in 2016. This division has all the elements of Rockwell Automation's
control and information architecture capable of connecting a customer's
entire fabrication operations.
The Integrated Architecture and Logix controllers can perform a vast
number of control and monitoring applications.
Rockwell touts Logix as the only scalable, multi-discipline, information-
enabled control platform in the sector. It helps to solve the very common
problem of a lack of integration between automation control systems and
enterprise resource planning systems (ERPs).
Rockwell reports that 70% of overall sales to its customer base does include
some sort of software. That makes the company more of an industrial
software company than just a provider of hardware.
Rockwell Automation: Why I Like It
There a number of boxes that Rockwell Automation ticked off to have me
recommend the stock to you.
First – the company in the fiscal 2017 first quarter finally saw a return to
positive to real organic growth in its biggest market – the United States.
After four consecutive quarters of decline, organic growth came in at 1.8%.
And not surprising to me, the company experienced double-digit growth in
emerging markets – led by China and India.
The momentum continued into the second quarter, which the company
reported on April 26. Company management cited an improving outlook for
industrial production growth.
Its CEO Blake Moret said, “The macro environment continues to improve,
with projections of industrial production growth rates higher than a quarter
How to Profit in the Winner Take All Market
ago.”
Rockwell now expects full-year sales growth of 4.5% to 7.5%, which
compares to last quarter's estimate of a range of 1% to 5%. Its earnings per
share guidance also rose to a range of $6.45 to $6.75 a share, up from the
range of $5.95 to $6.35 a share guidance given last quarter.
Importantly, growth in the company's architecture and software business
soared by 14.2% in the second quarter to $719 million.
I also like the fact that the company's management is not standing still and
continues to keep Rockwell a leader in Industry 4.0.
In fiscal 2016, Rockwell Automation made three acquisitions that further
strengthened its leadership position in the sector.
• The purchase of MAVERICK Technologies added expertise in the
energy, chemical, consumer and life sciences sectors.
• Buying MagneMotion added to its portfolio of innovative motion
control solutions in both the transportation and consumer sectors.
• Acquiring Automation Control Products fit right in with
management's strategy of helping enterprises increase their
competitiveness through connection from the 'smart' factory floor to the
rest of the business. The acquisition will be a part of its Connected
Enterprise (CE) supply chain management system.
The latter – Connected Enterprise – is becoming a true growth driver for
Rockwell. Revenues were only about $200 million in fiscal 2016, but grew
at a double-digit rate. And the latest earnings report shows this growth
may be accelerating.
The company is moving ahead too by forming key partnerships with other
How to Profit in the Winner Take All Market
companies. Here are just two examples of that:
Rockwell has teamed up with Microsoft (Nasdaq: MSFT) and integrated
with its business intelligence software and the Azure cloud to provide an
end-to-end system for a 'smart' factory.
In addition, the company has a global collaboration agreement with the
world leader in industrial robots – Japan's Fanuc (OTC: FANUY) to create
integrated manufacturing solutions.
The Future and What Price to Buy
So what does Rockwell Automation's future path look like?
Management's long-term revenue target of 6% to 8% annual growth looks
very doable. And so do the other goals of double-digit earnings per share
growth and return on capital of over 20% long-term.
The why behind my belief is the rapid growth in its software division, which
I expect to surpass the hardware side in revenues in the not-to-distant
future.
I would also not be surprised to see the firm to make a move into the
robotics space, perhaps in a more extensive collaboration with Fanuc.
The company's stock is up nearly 40% over the past year to a new 52-week
high of $165 a share, with most of the gains occurring after the election of
Donald Trump as President.
Its price-to-earnings ratio of around 27 isn't dirt-cheap. But it is more than
reasonable for a company in the forefront of the Industrial Internet of
Things.
I will always tell you to buy a recommended stock, including Rockwell
Automation, on any price weakness (I'd love to buy it at $150). But I would
How to Profit in the Winner Take All Market
not be uncomfortable buying the stock all the way up to close to $200 a
share.
Recommendation: Buy ROK up to $200 per share.
The Growth of Cobots: My #2 Top Singularity Stock
I believe cobots represent a huge investment opportunity.
That's because sales of cobots are still a very small part of global industrial
robot sales, perhaps five percent or so.
A recent study from Research and Markets forecast that the global market
for cobots will grow by more than 40% annually over the next five years.
That's the type of growth I like to see when looking for opportunities as
editor of the Growth Stock Advisor.
The study went on to say that leading the way in this cobot revolution will
be the automotive industry.
Annual shipments and sales revenue there for both hardware and software
will grow at a 43% clip through 2022.
So how can you invest into this rapidly growing industry?
One good choice for the most adventurous among is the aforementioned
Japanese robotics company, Yaskawa Electric.
But if you want focus on investing in U.S.-based companies, I narrowed the
choice down to two companies: Teradyne (NYSE: TER) and Cognex
(Nasdaq: CGNX).
My recommendation for Growth Stock Advisor is Cognex, but I did want to
How to Profit in the Winner Take All Market
talk a bit about Teradyne and its Universal Robotics division.
Terradyne's Universal Robotics
Universal Robotics is a Danish robotics firm that was purchased by
Teradyne in 2015 for $285 million.
It was the first mover in the cobot space and is the leading collaborative
robots business at the moment.
The company itself believes its technology is two or three years ahead of its
nearest competition. Goldman Sachs estimates Universal Robotics' cobots
have a payback period of only six months, which is ahead of the payback
period for most other competitive cobots currently.
But I suspect its 2-3-year lead has narrowed a bit thanks to recent strides
made by competitors like Yaskawa Electric and ABB (NYSE: ABB).
Its cobots are used in industries ranging from automotive to electronics to
pharmaceuticals and metals. Companies using its cobot technology include
Lear (NYSE: LEA), Johnson & Johnson (NYSE: JNJ) and BMW (OTC:
BMWYY).
The company experienced a growth rate of 62% from 2015 to 2016. And
Universal Robotics' President, Jürgen von Hollen, expects revenue growth
of 50% or greater in 2017.
With this rapid growth at Universal Robotics, you may be wondering why
Teradyne isn't my recommendation choice for the robotics space.
Teradyne is mainly a supplier of automation equipment for test (largely
semiconductors) and industrial applications. Its robotics revenues are just
too small.
How to Profit in the Winner Take All Market
Let me use Terradyne’s numbers from the first quarter of 2017 as an
example. Overall sales were $457 million. Of that total, $356 million came
from semiconductor testing. Only $36 million came from the company's
entire industrial automation division.
In other words, Teradyne is much more of a semiconductor-related
company than a robotics one. But nevertheless, it's still a well-run
company.
For my recommendation, I'm looking for a much purer play on robotics.
Cognex and Machine Vision
That's what lead me to Cognex.
For all those cobots to work in conjunction with humans, they need to 'see'
what they're doing and where they're going to avoid hurting their human
co-workers.
Cognex, founded in 1981, is the world's leading supplier of machine vision
products for both manufacturing and industrial identification.
Thanks to the growth of robotics and cobots, machine vision is a $2+ billion
global market.
Cognex offers a wide range of vision products that meet customer needs
across a variety of industries.
Its vision systems combine and seamlessly integrate sensors, cameras,
processors and its proprietary software. Products range from low-cost
presence and measurement sensors to hardware-independent vision
software.
Cognex also offers a range of ID code readers that deliver fast and accurate
How to Profit in the Winner Take All Market
reading of both 1-D and 2-D barcodes. These systems are more accurate
than laser-based ones and are easier for people to work with.
This part of Cognex does offer growth opportunities too as more and more
factories and warehouses become automated. They are using bar code
systems to keep track of products flowing through their entire
manufacturing/supply and distribution chain.
About two-thirds of the company's revenue base comes from its vision
products. These include systems, sensors and newer 3D vision products.
Cognex sells its vision systems to most of the big players in the industrial
robotics industry including ABB, Yaskawa Electric and Germany's Kuka AG.
The only exception is Fanuc, which makes its own vision systems.
This translates to Cognex having a 30% share of the vision systems market.
Not surprising then that the company believes the core long-term growth
opportunity for Cognex machine vision is in manufacturing, where its
technology is widely recognized as an essential component of automated
production and quality assurance.
Typical applications for machine vision include detecting defects,
monitoring production lines, guiding assembly robots, and tracking, sorting
and identifying parts such as engine parts and semiconductor wafers.
Outside of manufacturing, customers are also increasingly turning to
machine vision to improve warehousing and distribution efficiency, such as
using ID products in logistics automation for package sorting and
distribution.
Other applications include ensuring that safety seals are present on
pharmaceutical packaging, verifying the fill level on beverage containers,
and high-speed reading of 1-D barcodes on parcels.
I would be remiss if I did not mention that Cognex generates a nice chunk
How to Profit in the Winner Take All Market
of its revenue (nearly 30%) from the consumer electronics market, with
Apple (Nasdaq: AAPL) as a key customer.
As companies re-tool for the new iPhone, Cognex should benefit.
Cognex, by the Numbers
Cognex racked up some impressive numbers in 2016:
• Record revenue of $521 million, up 16% from 2015.
• Record net income of $150 million, a jump of 39% over 2015.
• Record earnings per share of $1.72 versus $1.22 in 2015.
Keep in mind that these results occurred in a year that Cognex CEO Robert
Willett described as a “sluggish” year for spending in the industrial sector.
The results were largely due to three industries contributing to the
company's total factory automation revenues – automotive, logistics and
How to Profit in the Winner Take All Market
consumer electronics – all growing by double-digits.
Solid gains were also reported in the consumer products and
pharmaceutical sector.
Another factor was rapid growth in Asia. Cognex's factory automation
revenue grew in 2016 by 23%, thanks to the growth in China and South
Korea. And the company is beginning to talk about India as a huge potential
market for them.
As with Rockwell, I like to see companies with a global footprint. For
Cognex, 45% of its 2016 revenues came from Europe. Another 30% came
from the Americas and 25% from Asia. The Greater China region alone
accounted for 12%.
The good news is that the already rapid growth in its factory automation
unit seems to be accelerating. In the fourth quarter of 2016, revenues
jumped by 34% and, in the first quarter of 2017, revenues grew by 42%
year-on-year.
The Future and What Price to Buy
I really like Cognex – and its roughly 80% gross margins.
And I love the fact that it has something that differentiates it from
competitors – its software.
Adding to that are the major macro tailwinds of what I believe to be an
unstoppable move toward automation of many processes using robots and
cobots.
Looking toward the future, I especially like the fact that Cognex snapped up
three companies that specialize in 3D vision. It is these 3D vision products
that will be the enabling technology for cobots.
How to Profit in the Winner Take All Market
The three companies acquired were: Germany's EnShape, Spain's AQSense
and Colorado-headquartered Chiaro Technologies.
More such deals may be in Cognex's future too. CEO Willett said earlier this
year, “Our 3D products are gaining a lot of traction. We grew well in excess
of 100% in that business last year.”
And with nearly $750 million in cash and equivalents on its balance sheet,
and only a 10% market share in the sector, deals that bring in more
expertise in 3D vision seem likely.
At what price do I recommend you buy Cognex?
I have no problem buying the stock anywhere under $100 a share. I would
love to see a pullback to the $80 range. But for that to happen, I believe we
would need to see a market pullback.
But with a business this strong and growth prospects so great. I would
purchase CGNX up to $120 a share.
Recommendation: Buy Cognex up to $120 per share.
Singularity Recommendation #3: Harnessing Light
My last Singularity recommendation is a leader in the photonics sector, IPG
Photonics (Nasdaq: IPGP).
But before I delve into the specifics on the company, I think you may be
wondering – so what exactly is photonics?
Here's where my bachelor's degree in physics comes in handy. In simplest
terms, photonics is the science of light.
How to Profit in the Winner Take All Market
I want you to think about it for a moment – think about how, since almost
the birth of humankind, light and optics have been there. From primitive
people's fires to whale oil lamps to the electric light bulb to lasers –
humankind's progression has been marked by advancements in the
harnessing of light.
Fleshing out the definition a bit, photonics is the technology of generating
and harnessing light and other forms of radiant energy whose unit is the
photon. Photonics involves cutting edge uses of lasers, optics, fiber optics,
and electro-optical devices in a wide range of applications.
Photonics has taken its place alongside electronics as a critical and rapidly
growing technology of the 21st century. The global photonics market is
forecast to be a $720 billion market by 2020, growing at a compound
annual growth rate of 35%.
Welcome to the Photonics Century
Photonics-based applications are today used in a wide range of industries
from industrial automation to medical diagnostics to scientific research.
Lasers in particular are displacing conventional technologies because they
can do many jobs faster, better and more economically. Finding ways to
make products more efficiently is an absolute must for today's
manufacturers. That's why I strongly believe photonics and lasers are a
must own sector for you and all my other readers.
One sector where photonics has become crucial is communications.
Coherent light beams (lasers) have a high bandwidth and can carry far
more information than radio or microwave frequencies. Fiber optics allow
light carrying data to be piped through cables, replacing old copper cables:
an absolute necessity in today's world of big data, cloud computing and
video streaming.
How to Profit in the Winner Take All Market
Another way photonics has entered our everyday lives is solid state
lighting. Light-emitting diodes (LEDs) are a high performance, low-cost,
green alternative to incandescent light bulbs.
Then there is LiDAR (laser radar systems), which is used in the aerospace
industry and is crucial for the future success of autonomous vehicles, those
self-driving cars that are frequently in the news these days.
Other sectors now commonly using photonics include:
• Agriculture – satellite remote sensing and infrared imaging monitor
the progress of crops.
• Internet of Things – a crucial component of Internet of Things devices
are MEMS (micro-electromechanical systems). Via photolithography,
photonics is key in MEMS production.
• Environment – scientists monitor air quality using ultraviolet Doppler
optical absorption spectroscopy (UV-DOAS).
• Biotechnology – optical spectrometers and other optical devices are
used to verify biochemical compositions and monitor biotech processes.
Other applications are also quite common today including: optical data
storage, ultra-fast data switching, cosmetic surgery, gesture recognition,
finger navigation and a host of other sensing applications.
I hope I haven't gone too geek on you, but I just wanted to bring home the
point that photonics is fast becoming the centerpiece technology in the
world we live in today of “smart” systems. Photonics technology has
become ubiquitous.
Photonics has also become a key component in many manufacturing
processes. Think laser welding, drilling and cutting as well as all the
How to Profit in the Winner Take All Market
precision measurement applications needed by manufacturers that can be
provided by lasers.
Lasers Evolution
That leads directly to my recommendation - IPG Photonics, a leading
developer and manufacturer of high-performance fiber & diode lasers and
amplifiers for a vast range of industries and applications. Its products are
used in industries such as materials processing, communications, medical
and biotechnology, science and entertainment.
The evolution of lasers in manufacturing is a journey of over half a century.
Its ready adoption by manufacturers is largely due to the fact that lasers
convert common sources of energy into concentrated, directed beams of
energy.
To do this, a laser must have an energy source, a way of coupling that
energy into the laser cavity, and a method of delivering the resulting laser
beam to the workpiece.
The new fiber lasers developed by IPG are vastly superior to the old legacy
industrial lasers in every facet of the process:
• Energy Source: Instead of using energy sources like lamps or even
chemical reactions, fiber lasers use long-lived semiconductor diode lasers
that efficiently convert electricity into light. Not only is the energy
conversion efficiency raised, but frequent servicing and sometimes
environmentally-unfriendly consumables are eliminated.
• Energy Coupling: Conventional laser optical cavities have bulky air or
gas-filled spaces. Large cavities are necessary due to the inefficiency of gas
lasing or the need to insert bulk optical elements within the cavity. Fiber
lasers are very compact because they convert semiconductor diode energy
into useful laser beams within a fiber no thicker than a human hair.
How to Profit in the Winner Take All Market
• Laser Beam Delivery: Legacy lasers utilize complex optics to extract
the laser beam and deliver it to the workpiece. External steering optics are
often needed to deflect the laser output onto its target. In contrast, flexible
optical fiber provides a built-in, ideal beam delivery system.
• Mass Production Possible: Both key fiber laser elements –
semiconductor diodes and optical fiber – can easily be mass produced.
Quite a contrast from legacy lasers with their bulky hermetic laser cavities,
their need for precision optical alignments and ultra-flat optical surfaces.
The change is, as the company says, akin to the replacement of vacuum
tubes by transistors.
I believe IPG Photonics' lasers are superior to those of its competitors
because of their unique technology developed over the last 20 years by its
physicist founders – Dr. Valentin Gapontsev and Dr. Igor Samartsev. Their
lasers combine the advantages of semiconductor diodes with the high
amplification and precise beam qualities of specialty optical fibers.
IPG offers, I believe, the best-in-class laser-based systems for high-precision
welding, cutting, marking, drilling, cladding, and other processing of metal,
ceramic, semiconductor and thin films for customers in automotive,
aerospace, railway, energy, electronics, consumer and other industries.
Its range of laser products includes ytterbium, erbium, thulium as well as
Raman and hybrid fiber-crystal lasers. All wattage ranges are there too: low
(1 to 99 watts), medium (100 to 999 watts) and high (1,000+ watts) output
power lasers in wavelengths from 0.3 to 4.5 microns. The lasers can be
continuous wave (CW), quasi-continuous wave (QCW) or pulsed. The
pulsed lasers are available in nanosecond, picosecond and femtosecond
ranges.
Among the well-known companies using IPG products are: Boeing (NYSE:
How to Profit in the Winner Take All Market
BA), Lockheed Martin (NYSE: LMT), KLA-Tencor (Nasdaq: KLAC), Toyota
Motor (NYSE: TM), BMW AG (OTC: BMWYY) and Mitsubishi Electric (OTC:
MIELY).
Additionally, the company recently purchased Innovative Laser
Technologies (ILT). This firm has a proven track record producing leading-
edge systems for medical device manufacturers, one of the fastest growing
markets for fine welding and cutting applications. This will greatly aid IPG in
its effort to penetrate the market for medical device applications.
Last May, IPG bought Menara Networks, which is an innovator in optical
transmission modules and systems. This allows IPG to offer more
integrated solutions for the telecommunications industry. In the first
quarter of 2017, sales of its telecom products soared by 221% thanks to
Menara.
IPG Growing Rapidly
The quality of the company's fiber lasers can be seen in its just-reported
record quarterly results, which sent the stock soaring nearly 10%.
Second quarter revenues jumped 46% to $369.4 million, while earnings
came in at $1.91 a share. Wall Street analysts had expected about $1.64
per share in earnings. Leading the way were huge gains for its quasi-
continuous wave lasers and high-power lasers, which showed year-over-
year gains of 82% and 57% respectively.
The results also reflect the adoption of IPG's laser technology in the fastest
growing regions of the world...the emerging markets. Although both North
American and European sales grew 20% in the quarter year-over-year fully
64% of IPG Photonics revenues come from the Asia-Pacific region, with
another 25% coming from Europe, including Russia. Only 10.5% of its
revenues come from North America.
How to Profit in the Winner Take All Market
When one breaks down the revenues further, I found two items that stood
out to me. In the second quarter, year-on-year revenue from China almost
doubled, accounting for nearly 50% of the company's revenue. Even more
unusual was that Eastern Europe and Russia accounted for roughly another
18% of revenues. I guess the founders' connections there (the company
was founded in Russia in 1991) are paying off.
Management raised forward guidance for the third quarter revenues from
$350 million to $375 million, well above Wall Street estimates of $318
million. Earnings guidance was raised to $1.70 to $1.90 a share, again
above Wall Street estimates of $1.57 per share.
IPG's Laser-Bright Future
Thanks to innovative product portfolio – last month IPG unveiled the first
120-kilowatt industrial fiber laser – and large patent portfolio, I expect IPG
Photonics to continue to outpace the other companies in the laser systems
and components sector, which is up over 45% so far in 2017.
Another huge advantage over the competition is its vertically integrated
business model, which allows it to control each and every part of its
business from research and development to sales to after sales service. In
this type of business, I want the company to continue to innovate.
So, a purchase like that of OptiGrate, which help IPG develop new ultra-fast
pulsed lasers, is what I want to see. I like the fact that IPG is moving into
new end markets connected to 3D printing, defense electronics and micro-
materials processing in addition to the aforementioned communications
and medical sectors. This will only add to the momentum from trends such
as the miniaturization of electronics and the move of the global auto
industry toward the widespread adoption of fiber lasers.
As I mentioned the stock soared nearly 10% to $166 a share after the
How to Profit in the Winner Take All Market
earnings report. Any time a stock soars like that, a pullback is to be
expected. I recommend buying IPGP anywhere from $160 (or lower) up to
$180 a share as I expect its almost exponential growth to continue for the
foreseeable future.
Recommendation: Buy IPGP up to $200.
5 Critical Rules of Investing in the “Industrial Singularity”
I'm often asked how I decide in what sectors and individual companies to
invest into. Or what basic rules I've followed for investing success in my
career in the industry, which began in the 1980s.
To describe my style as simply as possible, much of it is based on the
approach used by the late Sir John Templeton. I urge all of you read the
report on Templeton and his 16 rules for investment success.
I don't have 16 rules for success. But here are five rules I use that I believe
will help you become a more successful investor.
Rule #1 – Look for Value in Quality Stocks
This rule is my version of Templeton's Rule number 5: When buying stocks,
search for bargains among quality stocks.
Often in the search for quality stocks, I turn to technology companies that I
think will be part of the exponential change occurring right now in the
world around us. People will me ask me then – how in the world can you be
a Templeton-style value investor and buy high-flying tech stocks?
The emphasis for me is on the word quality. Here is how Sir John described
quality:
“Quality is a company strongly entrenched as the sales leader in a growing
How to Profit in the Winner Take All Market
market. Quality is a company that's the technological leader in a field that
depends on technical innovation. Quality is a strong management team
with a proven track record. Quality is a well-capitalized company that is
among the first into a new market. Quality is a well-known trusted brand
for a high profit margin consumer product.”
As you can see from this quote, Templeton had no problem owning tech
stocks. As I related to you in the special report on John Templeton, as early
as 1959 he was telling clients about companies in Japan such as Panasonic.
But Sir John was also short some tech stocks as the dot-com bubble was
ready to burst.
The key is obviously finding the right tech companies to invest into at the
right price. After all, there are always hundreds of companies that emerge
from a new technology. And stock market history is littered with the
carcasses of the losers.
So to Templeton I add another famed value investor, Warren Buffett. A
quote from 1999 gives useful input when choosing to invest in quality
technology companies. He said, “The key to investing is not assessing how
much an industry is going to affect society, or how much it will grow, but
rather determining the competitive advantage of any given company and,
above all, the durability of that advantage.”
So in today's world, you have to look at more than the pure numbers.
Doing just that means you would have never bought Amazon.com (Nasdaq:
AMZN), which was always losing money in its early years.
You have to find companies that are both disruptive and with management
teams that have the ability to monetize their client base. That's what I have
always tried to do as an investor and editor.
Rule #2 – Stay Invested
This rule is partially taken from one of Templeton's rules: Rule number 11,
How to Profit in the Winner Take All Market
where he says “The only way to avoid mistakes is not to invest – which is
the biggest mistake of all.”
My entire career I have believed to always being in the stock market, to at
least some extent, and to always having global exposure. The very best
companies, including tech firms, always have huge worldwide businesses.
Evidence suggests the longer one is invested with global exposure, the
more likely a positive return will result. Research from Fidelity showed that,
over the period 1980-2012, investing in global equities for 12 years or more
produced no negative returns. In comparison, five-year periods produced a
16 per cent chance of a negative return.
Meanwhile, there is risk of jumping in and out of the markets. A few years
ago Fidelity showed that missing out on just the 10 best trading days of the
MSCI World Index over a 10-year period starting from the end of 2002
would have resulted in negative returns of -4.6 per cent. Had an investor
missed the best 20 trading days, then the negative return would have been
a whopping -32.1 per cent.
When I see that type of data, I reminded of Templeton advice to investors:
Invest, don't trade or speculate - “the stock market is not a casino.”
Rule #3 – Avoid Major Drawdowns
It is crucial to try and avoid massive drawdowns. A drawdown is the not-as-
harsh sounding industry term for a loss. If you started with investing
$10,000 and now have $8,000, your broker will say you had a 20%
drawdown.
The key to avoid major drawdowns is simple – don't panic (Templeton Rule
#10). The message is very simple and basic. Yet human nature makes it
hard to follow in practice.
I saw it first hand during the 1987 stock market crash when I was a trading
supervisor at Schwab. People either panicked and sold, locking in losses. Or
they froze in fear – one poor fellow was short S&P 500 puts and literally
How to Profit in the Winner Take All Market
lost a bundle before covering his short.
This rule is really pertinent for anyone investing into more volatile sectors,
such as technology or biotechnology.
Those wonderful words of Wall Street wisdom about the power of
compounding your money only work in a shorter time frame if you do not
lose money. Here's an example. . . . .
Let's say you just enjoyed three straight years of 10% gains. Great, right?
But just one year of a 10% loss cuts your compound growth rate by half.
You will then need a whopping 30% return the following year just to get
you back on track.
Here's another example: You've built up your portfolio to $50,000. But then
a year like 2008 hits – the average stock market loss during a recession is
33%. You will need to hit home runs like Babe Ruth just to get back to even
– a gain of 43%. And remember Babe Ruth struck out a lot.
The reality is that after the 2008/09 tumble, it took the average investor
nearly seven years, when adjusted for inflation, to break even.
One way to limit drawdowns is to cut your losses. I personally use a mental
stop of around 10%. If a stock I buy drops about 10%, or slightly more with
a tech stock, I simply tell myself I made a mistake and say goodbye to the
position. Holding on to losing positions for too long is unhealthy for your
financial wellbeing.
Rule #4 – Stay Diversified
Another way to avoid major drawdowns is to be diversified among various
asset classes – US stocks, foreign stocks, bonds, and commodities such as
gold.
This rule is really a combination of two of Templeton's rules: Rule #3 –
remain flexible and open-minded about types of investment; and Rule #7 –
How to Profit in the Winner Take All Market
Diversify. In stocks and bonds, as in much else, there is safety in numbers.
I am a firm believer that every investor should diversify, as John Templeton
said “by industry, by risk and by country.” Here is a graphic from Charles
Schwab and Morningstar that illustrates very vividly the point I'm trying to
make.
The best way to remind yourself about the value of diversification is to
keep in mind this Templeton quote: “See the investment world as an ocean
and buy where you get the most value for your money.”
Rule #5 – Use Bull Market Smarts
I found in my years in the markets that the toughest decision is not when to
How to Profit in the Winner Take All Market
buy, or when cut a loss, but what to do with a profitable position. Again,
this applies to most people that have been invested in the stock market
over the past several years.
What I have found to be most successful is to let your winners run… but to
always top-slice some of the profits.
Let me give you a simplified example that excludes costs like commissions:
Let's say you bought 100 shares of XYZ stock at $25 a share. A year later
that same stock is now trading at $100 a share. In other words, your $2,500
investment is now worth $10,000.
What I would do is top-slice and sell 25 of your shares, giving you back your
initial $2,500. Then I would just let the remaining 75 stay in your portfolio.
In effect, you are now 'playing with the house's money.” That way too, if
you happen to have bought the next Amazon, you will be able to profit on
the company's rise for years to come.
This lesson was one I learned from personal experience. I did own Amazon
back in 1999, had a tidy profit, and at the first sign of market turbulence
sold the whole position and never bought it back until many years later,
much to my regret.
I hope these five rules of investing that I use faithfully can be of small help
to you in your quest of investing successfully.
The One Thing You Need to Do When the Market Sells Off
It's a scenario that I have seen repeated again and again with every stock
market downturn. At the first sign of distress, mom and pop investors start
heading for the hills.
How to Profit in the Winner Take All Market
I've been in the investment business since the 1980s and have been
through every market selloff since 1987. For me a selloff is, as Yogi Berra
said, “It's like déjà vu all over again.”
Even though I'm no longer a professionally licensed advisor, I do have a few
thoughts on this behavior.
First of all, if you're in your 20s, 30s, or 40s, don't worry. The stock market's
long-term track record is undeniable.
But if you in your 50s or 60s, be aware that bear markets can possibly last a
decade or so. Although that is unlikely thanks to active central banks
support for markets. However, I recommended when I was an advisor and
in several articles for Investors Alley to lower your stock allocation in the 2-
3 years on both sides of your planned retirement date.
If a downturn does occur, there is one thing you should do… take a serious
look at your portfolio to see if it is allocated properly. Most likely, a
rebalancing is in order.
Rebalancing Works
Rebalancing a portfolio between stocks, bonds and cash is important and
actually can improve returns.
In 2012, there was a study conducted by Columbia Business School
professor Andrew Ang. He looked at returns from January 1926 through
December 1940. That's a period that included the Great Depression. Here’s
what he found:
a portfolio 100% in stocks returned 81% with dividends reinvested and a
portfolio 100% in government bonds returned 108%. But a portfolio,
rebalanced quarterly, with 60% stocks and 40% bonds returned 146%!
I do not think rebalancing quarterly is necessary – twice a year is sufficient.
How to Profit in the Winner Take All Market
This should have you in good shape for any market surprises. And please do
not rebalance in the midst of market volatility. Get your game plan in order
and then put it in place after the dust has settled.
One final point… if you do rebalance in a taxable account, there will be tax
consequences.
How to Reallocate
What exactly do I mean by reallocating or rebalancing your assets?
I use the words of legendary investor Sir John Templeton as a guide. He
said, “to buy when others are despondently selling and to sell when others
are greedily buying.”
This translates to a counter-intuitive action: sell a portion of your winners
and add those funds to lagging categories. But only do so if your
percentages are seriously out of whack.
Here's just a hypothetical simplified example:
A year ago in the stock portion of your portfolio, you had 20% in technology
and biotechnology stocks. And you had 20% in energy and emerging
market stocks.
But let's say tech and biotech got red-hot and they are now 30% of your
portfolio. Meanwhile let's say energy and emerging markets stocks were
ice-cold and down to 10% of your holdings.
You should sell where the greed is – where analysts are saying the “trees
will grow to the sky”- and buy where the panic is and investors are fleeing
en masse.
In other words, bring them back into balance at 20% each. This strategy will
still keep you exposed to the current winning sectors. But it will add to your
exposure to tomorrow's winners.
How to Profit in the Winner Take All Market
To summarize, I would like to quote legendary basketball coach, John
Wooden: “If you too engrossed and involved and concerned in regard to
things over which you have no control, it will adversely affect the things
over which you have control.”
A great philosophy for life. But it applies to investing too.
Don't worry about the stock market, you can't control it. But you can
control how you put your money to work for you.
Survival of the Fittest
Welcome to the exponential age, the age of revolutionary new
technologies.
As technologies advance, they often accelerate the progress made on
seemingly unrelated technologies. This makes our advancement into the
future of sectors including manufacturing, agriculture, medicine,
healthcare, education and finance occur at a pace that almost seems
impossible.
But just as the phrase “survival of the fittest” came from Darwin's theory of
human evolution, the same phrase should be applied to companies trying
to survive this new exponential age.
A Kodak Moment
Think about Kodak, which was founded by George Eastman in 1888. A
hundred years after its founding, Kodak was dominant, controlling 85% of
all photo paper worldwide. The future looked picture perfect.
After all, who would think that within three years their entire business
model would be blown up by the arrival of digital cameras, which
How to Profit in the Winner Take All Market
seemingly came out of nowhere.
But that's just it – the technology did not just come out of nowhere. Digital
cameras were invented in 1975, but their quality was poor (10,000 pixels).
However, the technology progressed in a linear fashion until it was superior
to film cameras.
Today, technological progress is occurring even faster - on an exponential
rather than linear basis. That should mean one thing to you as an investor –
companies have to be even more aware of new technologies as they are
developed and become extremely nimble in adapting to the new
technologies.
Industry 4.0 - Convergence
The 21 st century will be remembered as when the fourth Industrial
Revolution (also known as Industry 4.0) took place. If you take away
nothing else from me, please remember this one very important point –
the physical and digital worlds will converge over the next decade or so.
Boston Consulting Group says Industry 4.0 is the convergence of the
physical world with the application of nine digital industrial technologies:
advanced robotics, additive manufacturing, augmented reality, simulation,
the cloud, cybersecurity, big data/analytics and horizon/vertical
integration.
The winners will be the companies with managements capable of handling
the convergence of those two seemingly disparate worlds together. That's
a key trait I look for in a company I want to invest in.
But there's a lot more to it than just being aware that changes are
happening or making isolated efforts to transform the company. There
needs to be a comprehensive program of actually making the
transformation to Industry 4.0.
How to Profit in the Winner Take All Market
There is a forecast from market intelligence company IDC (International
Data Corporation) that, by 2018, only 30% of manufacturers investing in
digital transformation will be able to maximize the outcome; the rest will
be held back by outdated business models and technologies.” Obviously,
you want to be invested in some of the 30% of companies, not the 70%.
“Eating the World”
Because if companies don't adapt and quickly, they will go the way of the
dinosaur. Cyber-physical systems will be the bedrock of the future world I
see.
One prominent example of exponential change happening as we speak is
how AI is impacting software development. With AI, software is becoming a
system that, in the words of Google CEO Sundar Pichai “automatically
writes itself.”
Software is already disrupting so many global industries. As venture
capitalist Marc Andreessen said in a prescient 2011 essay, “software is
eating the world.”
Think about it. Uber is the biggest taxi company in the world, yet doesn't
own one taxi. Airbnb is now the largest hotel company in the world, yet
doesn't own any property. IT research firm Gartner says that, by 2020, 50%
of new business processes will contain devices connected to the Internet of
Things (IoT).
So I look for companies that are taking concrete actions. Here follows one
example of what I'm talking about.
Digital Twins
Many of today's jet engines use carbon-composite fan blades. That allows
How to Profit in the Winner Take All Market
for larger, lighter and more efficient engine. But initially, production yield
was lousy. Only about 20% of the blades came out as expected. No one
expected that carbon-fiber strands could behave in such a variety of ways.
But then engineers decided to attach sensors to the blades, gathering data.
Using this data, engineers were able to build a virtual manufacturing model
and test various scenarios virtually on a computer. These models are called
digital twins.
Already, digital twins are being used by companies to monitor not only jet
engines, but power plants and other important pieces of equipment. The
market potential for digital twins is enormous. For example, there are
265,000 wind turbines that have been installed since 2000.
Another area where these two worlds converge, perhaps the most, is in
additive manufacturing (3D printing). For example, one company is already
using 3D printing to make fuel nozzles for jet engines and gas turbines.
It is the same company using digital twins for jet engine blades (which now
have a production yield of 95%). That company is General Electric.
And despite strong doubts about its future from Wall Street, I believe it will
be a survivor in this exponential technological age. Management gets it. In
fact, GE was the company that coined the term Industrial Internet of Things
(also known as Industry 4.0) a few years ago.
Robot Aircraft Assembly
Another company that has embraced this new cyber-physical world is
Boeing, which has come a long way from its founding in 1916 by William
Boeing.
Think about this – there are a million-plus fasteners in every Boeing 777.
Much of that work today is done by automated drilling and fastening
How to Profit in the Winner Take All Market
machines that crawl along the fuselage. Robots have made this work more
efficient, while improving the safety of the aircraft. Keep in mind that
fastening is to the aerospace industry what welding is to the automotive
industry.
Tight software and hardware integration leads to the high degree of
precision and flexibility for this advanced aircraft assembly process called
Fuselage Automated Upright Build (FAUB). And yes, the fuselage remains
upright throughout the whole process since robots can work at any angle.
Boeing management gets it.
Investing for the Future
Of course, GE and Boeing aren't the only companies that understand what
needs to be done to remain competitive in the fourth Industrial Revolution.
But there will be definite winners and losers. Here is another key of what I
look for to find the firms that will be the winners.
If a company wants to be around in say 20 years, it must invest now. It
must build up its digital skills and technologies. That's why GE bought four
more companies last year to strengthen its digital business. And why it says
it will be one of the 10 largest software companies by the end of the
decade.
It's also why the Germany engineering company Siemens (OTC: SIEGY) has
spent $15 billion on U.S. software companies since 2007 and employs more
than 21,000 software engineers.
Using machine learning, Siemens looked to find ways to reduce emissions
from gas turbines by analyzing data from thousands of sensors recording
temperature, pressure, gas flows and other factors. The result was that
nitrogen oxide emissions of its turbines could be cut 15% to 20%.
How to Profit in the Winner Take All Market
That's the future. . . embrace it by owning the companies that are
embracing it.
What’s Next?
Now that you’ve read all of my analysis on how to profit from the Industrial
Singularity, what should you do next?
If this was the first report you’ve read, there’s still four more report packed
full of information that you can use to profit and avoid losses as our world
goes through radical digital changes.
Click here to read the rest of your Special Reports.
Also, make sure you watch out for your first monthly issue of Growth Stock
Advisor. It comes out at the beginning of each month.
And, if you ever have any questions for me about the service, don’t hesitate
to email us at [email protected]
© 2017 Investors Alley Corp. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is
prohibited without written permission from Investors Alley Corp., 41 Madison Avenue, 31 st Floor, New York, NY 10010 or
www.investorsalley.com.
For complete terms and conditions governing the use of this publication please visit www.investorsalley.com.