By Timothy Lutts
Earlier this week, I wrote the November issue of Cabot Stock of the Month, highlighting a company whose main business is making cardboard and containerboard. It's a very logical investment thanks to its low valuation and its high prospects for earnings expansion-in part thanks to price hikes. But at the end of the day, it's still a cardboard company, so while I'm enthusiastic about the investment, it's hard to get excited about the company as a business.
Similarly, this week we published a recommendation for a major soup company in Cabot Top Ten Trader. As an investment it looks great, not least because it yields 3.3%, which beats cash in the bank hands-down. But the soup business, like the cardboard business, leaves me yawning.
What gets me excited are businesses that have a revolutionary factor with the potential to make the world a better place - because that's where we find some of our greatest investments.
Amazon.com (AMZN), for example, revolutionized the shopping business. We did very well with that as an investment, notching gains of over 1,000%.
Green Mountain Coffee Roasters (GMCR), similarly, revolutionized the coffee business with its Keurig brewers and K-cups. We did very well with that as well.
Crocs (CROX) revolutionized the footwear industry with its plastic (but oh so comfortable) shoes. Here, too, Cabot made nice profits.
And the revolutionary ideas never stop coming!
All you've got to do is keep your eyes open, and remember that even though these companies are often ridiculed at first, that's actually a sign of revolutionary potential. The "experts" said Amazon would be killed by Barnes & Noble (BKS) and Borders. And the experts said adults would never buy plastic shoes. But they did.
So today I want to run three more revolutionary investment ideas past you. Some you can invest in now; some are not quite ready. But all three excite me because, brought to fruition, they will make the world a better place.
Interestingly, all three are related to automobiles, which tend to excite me a lot more than cardboard and soup!
#1: Dealer-less Auto Sales
The first idea is the concept of bypassing your local auto dealer when you purchase a new car. Amazon.com found a way to bypass your local, inventory-heavy merchant - first for books and then for everything else - so why can't you bypass the franchised dealer (and avoid his markup) when you buy a new car?
A lot of people, obviously, will laugh at this idea. They'll claim they need to test-drive cars, or they'll claim they need those franchisees for warrantee service down the road. (Remember, skepticism is a good sign.)
But the dealer-less auto sale is already a reality for Tesla (TSLA). The company has no franchised dealers; it sells all its electric cars through outlets that look more like Apple stores than Chevrolet franchises. Every car sells for list price; there's no haggling. Right now, it has reservations for more cars than it can make.
Now, Tesla is not a big deal yet; it's sold fewer than 4,000 cars. Yet auto dealers are beginning to notice. And in the grand tradition of American business, dealers in New York and Massachusetts are suing, claiming Tesla is violating state laws. Interestingly, Tesla founder Elon Musk did not get into the car business with the idea of revolutionizing the automobile sales model, but it looks like a great side effect to me.
#2: Internet-Powered Taxi Industry
The second idea involves replacing the ridiculously outmoded taxicab industry with a new Internet-powered paradigm. Why do we need a central dispatcher on a telephone when the Internet means customers can communicate directly with potential drivers? And why should we limit the number of potential drivers via an expensive medallion system when the market is perfectly capable of doing that itself, just as it does with restaurants and shoe stores and nail salons?
Skeptics will claim that the current structure is safest - that the vehicles and drivers are vetted regularly. But most of us have had cab drivers whose behavior argues otherwise. And it's clear that a fully informed Internet-centric business would enable even more intelligent allocation of drivers to riders than the current outmoded system.
Now, you can't invest in this new decentralized (peer-to-peer, some call it) ride-sharing idea yet, but there a number of businesses in operation already, refining the concept while working around the current regulations. Interestingly, all are based in San Francisco, and all make use of apps on smartphones.
Uber offers service in a dozen North American cities, as well as in Paris, France.
Zimride has been in business five years, and branched out from its car-pooling roots to a service named Lyft, which is similar to Uber's, but is notable for big pink mustaches on its drivers' cars.
Sidecar is younger, but just last month announced it had received $10 million in funding (Google Ventures was a lead investor), and is looking to expand across the U.S.
Tickengo was started last year, and says 10,000 drivers have already signed up!
I wish them all well as this young industry evolves.
Interestingly, there is a company named Medallion Financial (TAXI) whose main business involves financing taxi businesses, the biggest expense of which is typically the medallion purchase. Medallion came public in 1996, and the stock has made no progress over the long term, though it's had some big swings. Revenues at the company have shrunk in each of the past three years. But intermediate-term, its stock is clearly in an uptrend, and that plus the impressive 6.7% dividend means it might be worth looking at. Just note that it's lightly traded, which is a major reason no Cabot publications have recommended it.
#3: Driverless Automobiles
The third revolutionary idea involves replacing the driver totally, and letting the car drive itself, which is a good idea because it would reduce accidents, it would enable more efficient traffic flows and it would allow ex-drivers to be more productive.
As a guy who likes driving, I don't relish the thought of giving up the wheel, but I can see the writing on the wall. And so can legislators in California, Florida and Nevada, which have already made driverless cars legal.
Google (GOOG) is the lead dog in this race. Its self-driving cars have already logged more than 300,000 miles, and it's stated clearly that it doesn't want to make cars; it wants to make the software that runs the cars. I wish them luck.
Sticking with the vehicle theme, my investment idea today is an all-American company that began life as a maker of snowmobiles, but has expanded to become a major force in off-road vehicles of all sorts, and is slowly moving into on-road vehicles as well.
It's Polaris Industries (PII), based in Minnesota, and here's what editor Mike Cintolo wrote about it in a recent edition of Cabot Top Ten Trader.
"Polaris began life in 1954 as a developer and manufacturer of snowmobiles, but that segment of the business accounts for just 11% of revenues today. The bulk of the business (69%) comes from four-wheel and six-wheel ATVs marketed to hunters, farmers, ranchers and outdoorsmen of all stripes, as well as the military, and Polaris is dominant in this industry. But the company is not sitting still; it has a great track record of adapting to the market. Polaris got out of the personal watercraft business in 2004. It created an on-road division in 2009; now 5% of revenues come from its American-made motorcycle brands Indian and Victory. And in 2011 it began moving into the electric vehicle market, buying Global Electric Vehicles (GEM), a maker of neighborhood electric vehicles, from Chrysler, and investing in Brammo, a manufacturer of electric motorcycles. Revenue trends have been steadily positive for years, with the exception of a big dip in 2009-the economy, you know. And last week's earnings report brought more good news, beating analysts' estimates for both revenues and earnings. Particularly impressive to us were the fat 10.7% after-tax profit margin (high single-digits are more typical) and the fact that revenues from motorcycles (mainly Indian and Victory) soared 78%."
Here's a photo of the Polaris Sportsman 400, which they call "the best value ATV on the market." You can get a new one for less than $6,000.
As for the stock's technical action, the long-term trend is up, and that earnings report brought a high-volume buying spike that is bullish for the intermediate-term. Even better, the stock has pulled back normally since that spike (like the broad market), and I think that presents a decent buying opportunity. Finally, the annual yield is 1.8%, which is nothing to sneeze at today.