The Year Ahead
Best Disruptive Stocks
It’s customary at this time of year for investing pundits to give market forecasts.
In the year ahead, there will be surprises.
In the year ahead, the things we’re most worried about will not be the things that hurt us.
In the year ahead, investors who follow proven investing systems will be winners once again.
This forecasting stuff is easy!
Moving on, here’s a letter I received last week.
Hello Mr. Lutts,
I am a new subscriber. I started with a subscription to the "Stock of the Month" newsletter and I plan on subscribing to more of your offerings in the future. I'm not at all confident in my own ability or understanding when it comes to picking stocks, so the advice and explanations I get from your team is giving me the confidence I need to make trades without falling into emotion or foolish gambling.
I have recently been doing some research into the exciting new developments around graphene, the new wonder material. It started as a scientific interest but after a few days it seems like nobody I talk to knows anything about it yet and that's when it turned into an investment interest. The lack of widespread knowledge makes me think I might have discovered something before it has been overbought by eager investors. However, I don’t really know any investors who could tell me whether or not this is old news in the investment world. So I thought I may as well ask you. Is graphene something that you would qualify as a disruptive development? Are there any companies related to it that you have had your eye on? I'm sure there are many opportunities considering the absolutely massive potential of this new material but as far as I can tell there isn't really anyone who can produce this stuff on a large scale yet. Is it perhaps still too early or too risky for an experienced investor? How do I weed through the hype and find something solid?
Your advice would be greatly appreciated.
Kevin T. Kelowna, BC, Canada
Thanks for asking. Here’s my two cents. My style is to look at strong stocks, and from them choose the companies that have good growth prospects and then invest in the best (regardless of industry—even though we all have biases). The fact that a stock is strong tells you that OTHER investors are buying, and that's a great sign. The alternative, looking for promising technologies, and then finding companies that might benefit from it, and then WAITING for other investors to discover the company and buy the stock, can require a lot of patience and the result can be that for a large portion of that time, your money is not working for you.
I've read about graphene with mild interest over the years but can't recall a single company succeeding with it or a single stock that’s moving because of it. Also, the odds are very good that someone like Dow Corning or DuPont will lead the way and graphene will make up less than 1% of their business. So as an investment play, it will be nearly useless.
But I could be wrong! You could find the one young company that will thrive in the industry and make a pile of money!
Last week, I presented the first of my 10 “Best Disruptive Stocks."
Ideally, these are companies that address a mass market, and thus have the potential to impact our lives for the better.
Ideally, these are companies that are young and not yet well known or well respected. Thus they have the potential for increased perception by investors as time goes by.
Ideally, these stocks are young and not widely owned. Thus they have the potential to be bought by more investors—especially institutions—and thus see their stocks soar over time.
All the Cabot analysts have made contributions to this list of 10, and the stocks are being presented in no particular order, though I am trying to feature them when they’re at good entry points. I hope you enjoy them.
Disruptive Stock Number Two
Align Technology (ALGN)
For more than a century, orthodontists have been correcting malocclusions (poorly aligned teeth) with braces, retainers and other hardware, collectively called appliances.
Functionally, these appliances work by using wires and rubber bands to push or pull teeth in the desired directions. I’ve never worn them, but I paid for two of my kids to go through the treatment and it worked—though it was sometimes painful.
No doubt many of you have had experiences, too. And no doubt some of you are orthodontists. It’s an $8 billion industry.
But disruption is slowly taking hold, thanks to Invisalign, which replaces the hardware of braces with custom-made sets of clear polyurethane aligners.
They work like braces, and the costs are similar, but the big differences are these:
While metal braces are typically updated every six weeks, Invisalign’s aligners are replaced every two weeks. The aligners put less force on the teeth thus create less pain. Also, there are no rough edges to abrade tongues and cheeks.
While metal braces require a skilled orthodontist at most stages of treatment, the Invisalign system needs a dentist mainly at the start of the process when an impression is taken.
That impression is scanned and converted to a 3D model. And Invisalign’s software then develops a plan for moving each individual tooth from its current position to its target location, over time, and creates a set of 20 aligners to do the job.
The aligners are nearly invisible. In fact, most people don’t notice you’re wearing them. They are worn roughly 22 hours a day, and removed when brushing your teeth, flossing and eating. As a result, the tooth decay associated with braces that trap food is minimized. And as to food, you can eat anything you want!
The company has treated more than 1.5 million patients in 45 countries. Most notable of these is China, which Invisalign entered in 2011 and where business is booming.
Of course, many of these Chinese never had the opportunity for traditional wire braces, so we can’t say the Invisalign is disruptive for them. But in developed countries, Invisalign is slowly usurping the role of the old wire braces. I believe most of the firm’s customers are thrilled about that, and I believe Invisalign will continue to grow for many more years as uncomfortable wire braces steadily fall out of favor.
Financially, the firm is well managed. Revenues have grown in each year of the past decade (17% in 2012.) and earnings growth has been good, too, though not quite as linear. The last loss was in 2006.
After-tax profit margins have tended to run in the teens—and never below 11% in the last the years, but the latest profit margin was a record-high 21%. I like that trend a lot. Also, the company has no debt.
As to the chart, ALGN came public in 2001, and its general trend in recent years has been up.
Back in October, there was a big, high-volume spike higher in response to the superb third-quarter earnings report (revenues up 21% and earnings up 62%), and since then the stock has been trading in a comfortable range between 52 and 60, slowly fading out of the limelight. In the meantime, the stock’s 50-day moving average has arrived at 56 to offer support. I think it’s a decent buy right here, and that ALGN will eventually break out to new highs.
So, you could simply invest in Invisalign right here. Alternatively, you could delay buying until the stock breaks out to new highs—ideally on big volume.
Or even better, you could become a regular reader of Cabot Top Ten Trader, which was the most recent Cabot publication to feature the stock, and where you’ll get 10 similar high-quality recommendations to act on every Monday.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory
P.S. Take advantage of the January bounce and pad your portfolio for the New Year. Cabot Top Ten Trader, which always features the best trades you’ll make this week, will name the trades you should make right now to start your year off profitably. Our optimum technical momentum indicators (OptiMo) are telling us that there’s more bullishness left in this market, but you need to act now.