In 2012, gold, dividends, and oil were quite popular. I felt there may have been something of a "value" bubble. Thus, I made the case for "futuristic picks" in science and technology. Any one of these companies by themselves would be extremely risky, however as a category these growth companies were relatively de-risked by said value bubble. The picks were Tesla Motors (NASDAQ:TSLA) (+457.58%), Digital Domain Media (OTCPK:DDMGQ) (-99.98%), Lightbridge Corp (NASDAQ:LTBR) (-78.76%), Pluristem Therapeutics (NASDAQ:PSTI) (-60.92%), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) (+140.87%) for an average gain of 71.76%.
At first glance, Futuristic Picks was wildly successful, surpassing NASDAQ's gain by 40.1% relatively. You could argue this was luck, that Futuristic Picks had more "beta", and that in a down market, these picks would lose more money. However, had we entered a down market, the best comparable environment would be 1930's deflation; nobody remembers the 30s so it's tough to model the hypothetical, particularly with niche technology players. In any case, there are positive and negative lessons to be learned from the picks' performance.
Digital Domain Media
Digital Domain had severe debt/cash flow problems, which would have been obvious had I done due diligence. The company "went to zero". This taught me that the market is far from efficient. Just because a company is in the news, one cannot assume its financials have been thoroughly vetted. Rookie mistake!
There are dozens of points which could be argued regarding the company, stock, and CEO since 2012. However, perhaps the most under-appreciated point is the prevalence of electric cars over hydrogen. Among academics, it has been popular to assert the potential of hydrogen fuel cells. Musk has vehemently disagreed with these dreamers. "[A hydrogen car] makes no sense [...] incredibly dumb [...] it doesn't make sense [...] it will be super-obvious as time goes by [...]"
We can't all reason from first principles like Musk, so we can't all prove to ourselves that hydrogen is a sucker's bet. And perhaps Ashlee Vance's book has not convinced you to suspend all disbelief in the absoluteness of Musk's brainpower and self-disinterest. Musk does have a glaring conflict of interest: for electric cars to reach their full potential, they must benefit from economies of scale and network effects, which could be threatened by a competing network of hydrogen. So it's comforting to see Musk's electric-hydrogen thesis validated externally by the activity of General Motors (NYSE:GM). It's unclear who will come in first place mass-marketing electric cars for the next five years, but it's clear the race is on.
As Pam Fletcher, GM's Executive Chief Engineer for electric vehicles, recently put it to me with a confident grin: "Who wants to be second?".
Hilariously, Tesla bears have framed GM's entry into the electric space as a substantial impediment to Tesla's future value. But the global car market is measured with 13 figures, not 11, so those who believe an 11-figure Tesla valuation should require absolute monopoly have overstated their pessimism by two orders of magnitude. The real signal that should be taken from the Bolt is that electric vehicles are at an inflection point in public acceptance. The inflection point is: the case for hydrogen fuel cells has silently and unceremoniously died. For Tesla to fail in its mission of mass adoption, the risk was never that Tesla would fail to lead somewhere near the front in its category; the risk was more that Tesla's category would fail to lead. The fact that few feel the need to debate hydrogen anymore should be interpreted as an extremely positive signal. Tesla currently trades at an enterprise value of $26 billion, which is less than half the valuation of Uber. I don't think they're particularly comparable, but I mention Uber simply to point out that startup valuations can be much higher than Tesla's.
I'm not particularly worried about artificially intelligent terminator robots taking over. I'm more concerned by the service workers who could lose their jobs to robots; the robots may be marginally less intelligent than humans in some ways, but through reverse-engineered systems 50-IQ robots can conceivably displace wide swaths of laborers in fields like retail banking. Before computers, the most common job in the United States was "Secretary" ... now it's "Truck Driver." What happens when the computers learn to drive trucks? Google has already shown that computers are safer than human drivers; even Musk, who is considered AI-phobic, agrees on this point. So in terms of artificial intelligence, I'm not worried about an apocalyptic drone scenario...I'm worried that our fast food workers, our grocery baggers, and our math lecturers will be out of jobs.
From this perspective, Google is not just a growth investment: Google is an unemployment/deflation defense strategy. I have argued that Google should be valued as more than a search company since 2011. Google is an AI company, and its investment structure (Alphabet Inc.) extends from this core competency. It is this future-oriented vision which will ultimately justify Google's current status as the most valuable company in the world.
GOOG PE Ratio (TTM) data by YCharts
Lightbridge and Pluristem
These two stocks have depreciated since their inclusion in the portfolio. They are relatively small "startups" operating in nuclear design and stem cell research respectively. I believe that arbitrary factors have limited the perceived value of these stocks.
Lightbridge has traded in close correlation with uranium miners despite the fact that Lightbridge offers an alternative to the uranium status quo.
Technology Review puts it thusly:
"We've never seen this combination of things come together," says Sean McDeavitt, an associate professor of nuclear engineering at Texas A&M University, who has no financial ties to [Lightbridge]. For any new nuclear design, "it takes a marathon endurance process to run through the testing and regulatory process," McDeavitt adds.
The historical sample size for what Lightbridge is attempting is basically zero, but that doesn't mean its chances of success are so small. Still, it's not an easily modeled bet, so our metric heavy financial sector has largely passed on it. The company operates on a lean strategy, funding its research with a combination of consulting revenues and non-long-term debt; there is not an urgency in terms of promoting the stock. The important thing to keep in mind is the scalability of Lightbridge's technology: it can command licensing fees on billions of dollars in electricity. As David Talbot of Technology Review puts it, "if Lightbridge's fuel works, it would be like adding 10 new plants in the United States - or 40 more in the world - without even having to build one." So the upside with an IP licensing model is on the order of magnitude of a power plant - without the initial capital outlay.
Lightbridge would argue that its technology is less risky than a biotech company. For example, drug trials become less likely to succeed as they go from safety stage to efficacy stage (and of course animal stage to human stage). In contrast, by the time a government is willing to test Lightbridge fuel assemblies in its reactor, one could say it has been substantially de-risked. Despite sector differences, I think of Pluristem the biotech alongside Lightbridge because it has performed similarly in stock price.
Pluristem has suffered credibility issues in the financial news space. I think this may be due to aesthetics more than substance.
I don't know whom Pluristem pays to promote its stock, but I know that many small companies like Pluristem and Lightbridge partner with marketing companies to get their messages out there. Some of these companies may have some flair on their edges which could be a red flag. This signal alone should not be read into too deeply, but it's fair to take note of it. Despite the fact that Lightbridge has partnered with reputable big nuclear companies, and Pluristem has for years received millions of dollars in grants from the Israeli government, I encourage investors to do their due diligence before investing in any company - particularly one valued at less than a hundred million dollars.
Pluristem's first product is PLX-PAD. For the first time, PLX-PAD was shown to exert a system-wide effect. Seeking Alpha's Sharon di Stefano has an extensive write up of this recent development. The therapy and the company have been significantly de-risked through this reputable human trial. However, statistical anomalies can occur and a larger sample size will grant a clearer picture of the therapy's prospects.
Here is a snapshot of their financials from Yahoo (NASDAQ:YHOO)
In four years, five futuristic picks varied widely in their performance. Two stocks did outstandingly well: Tesla quadrupled/quintupled while Google became the most valuable company in the world. Digital Domain went bankrupt which was predictable by their financial situation prior to IPO - which admittedly was overlooked by the author. Small R&D plays Lightbridge and Pluristem underperformed however, continue to make progress in their respective fields.
Although Tesla was by far the most profitable stock, the level of success its company has reached remains under-appreciated. GM's strong move into mass-market electric vehicles shows the primacy of electric over hydrogen. Tesla will benefit from network effects and economies of scale in this space and does not need a complete monopoly. Validation of electric transportation over hydrogen fuel cells in today's commercial marketplace and public perception may not have the resounding completeness of a mathematical proof, but the fact that people have stopped debating it is a deafening silence you should not ignore. The decline of hydrogen is one of the great untold financial stories of this decade.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author previously contributed to a Seeking Alpha account "Modernist" from which an article was reprinted by Lightbridge through a standard Seeking Alpha process including a nominal reprint fee. A close cohort of the author participated gainfully in a competition hosted by a company with ties to TSLA. The author's enthusiasm for these companies existed prior to these circumstantial events and in no way have they influenced his writing.