A Horserace: SolarCity (SCTY) vs. Alstom
10 Stocks to Buy & Hold Forever
Cardiovascular Systems (CSII)
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Imagine a race between two horses.
There's a big old former champion that's only 100 feet from the finish line. But he's just fallen to his knees and the buzzards are circling.
Meanwhile, half a mile back, there's a skinny two-year-old coming on fast, and picking up speed as he nears.
Which horse would you bet on?
The first horse is Alstom, an 86-year-old French company with revenues of approximately $20 billion and 96,000 employees around the world. Like some U.S. companies that were deemed "too big to fail," Alstom received a government bailout of about $4 billion 10 years ago, and in the aftermath, sold off its electrical transmission and shipbuilding operations.
But the company is still troubled, a fact that is clearly reflected in its market capitalization of just $9 billion.
Back in April, General Electric offered to buy the bulk of Alstom-its sprawling energy interests-for $17 billion. But the French government, fearing the loss of jobs and citing "national interests," nixed the deal. In fact, the government gave itself the power to veto all deals involving power, transport, water, telecommunications and public health!
Then in June, Siemens and Mitsubishi Heavy Industries (MHI) joined the game with a joint offer, with Siemens bidding to acquire Alstom's gas turbine business for $5.3 billion, and Mitsubishi offering $4.2 billion for a joint venture in steam turbines.
And just last week, GE came back with a counteroffer.
For $13.5 billion, it would forego a straightforward takeover in favor of creating three joint ventures. The result would be an alliance, according to GE's Jeffrey Immelt, that "creates jobs, establishes headquarters decision-making in France and ensures that the Alstom name will endure."
Plus, conceding to a demand by the French government, GE would kick in its train-signaling business, which would complement Alstom's remaining large business nicely.
But the French government wasn't impressed, and on Friday Economic Minister Arnaud Montebourg said France would buy 20% of the company and work with GE on defining a new proposal.
Alstom, meanwhile, appears to be doing nothing-aside from continuing to pay its 96,000 employees and distribute an annual dividend that amounts to 2.2%.
The final details were worked out over the weekend, and the upshot is this:
Alstom will be carved up and merged with GE operations into joint ventures-each of which will be partially owned by the French government.
Alstom's not dead, but it's on life-support.
Meanwhile, half a mile back and closing fast is SolarCity (SCTY), which the market values at $6.2 billion, despite the fact that 2013 revenues were just $164 million.
SolarCity (SCTY), like Alstom, is in the energy business; in fact, its current goal is to be the largest electric utility in the U.S.
That's a big goal for a little solar power company, but I think it's quite possible, for three reasons.
1. SolarCity is the brainchild of CEO Elon Musk, who's also led Tesla Motors to great success so far. He's a big thinker.
2. SolarCity has taken top market share in the residential photovoltaic installation business with its leasing program, which not only minimizes the investment by the homeowner but also brings a very visible stream of recurring income and maximizes SolarCity's eventual earnings.
3. Last week, SolarCity announced it would buy Silevo, a nascent manufacturer of high-efficiency solar panels, for $350 million in stock. By expanding into the production business, SolarCity will not only benefit from vertical integration, it will also be able to offer installations with greater electrical output per square foot.
The market loved the news, sending the stock up 20% to close at 69.
(Note: I recommended SCTY in Cabot Wealth Advisory as a stock to buy and hold forever on June 2, when it was trading at 51.)
So which horse would you bet on?
Alstom is cheap, but when the French government has a hand in running your business, you can bet that the top concern won't be growing profits; it will be preserving jobs.
SolarCity is expensive, but if it can become the biggest electric utility in the U.S., how valuable might it get?
Equally relevant, what else might SolarCity do? I had no inkling of the Silevo deal when I recommended SCTY at 51 three weeks ago, and I have no idea what the company will do next. But I know that forward momentum in a company is a wonderful thing.
Or, as Thomas Phelps put it, "Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable."
When you invest in Alstom, you're not buying growth potential, you're buying the cheap assets of a company that cares more about protecting its turf than value creation.
But when you invest in SolarCity, you're investing in the future, in a company that's bent on changing the world by revolutionizing the electric utility industry. The company is off to a great start, and it's got a long way to go.
Which takes me to this week's installment of 10 Stocks to Buy & Hold Forever.
The goal, remember, is not to identify stocks that can give you a decent long-term return, like Johnson & Johnson (JNJ) and DuPont (DD). You can hold those forever, but they won't make you rich.
I want to identify the next Amazon (AMZN), the next Apple (AAPL), the next Google (GOOG) and the next Keurig Green Mountain (GMCR).
To recap, the key attributes I look for are these:
1. A product or service or business model that is revolutionary.
2. A mass market.
3. A company that's still small enough to grow rapidly.
4. A company that is not respected-perhaps not even known-by the majority.
5. And last but not least, a stock that's trending up, indicating that investors' perceptions of the company are improving. This is important because perceptions are always at least as important as reality.
Which brings me to today's stock, number six in the series, "10 Stocks to Buy and Hold Forever." (If you missed previously recommended stocks, let me know by responding to this email and I'll email you the list).
Cardiovascular Systems (CSII)
Excessive buildup of arterial plaque can inhibit the flow of blood in our bodies and cause serious health problems, which are frequently treated (at least partially) with the use of balloon angioplasty and stents.
The trouble with balloon angioplasty is that it doesn't get rid of plaque; it just compresses it into the artery wall.
Cardiovascular Systems has a better mousetrap.
Its Orbital Atherectomy System is essentially a Rotor-Rooter that "sands away" arterial calcium, enabling stent deployment in a clean, plaque-free artery.
The clever part of the system is that the abrasive part of the tool is offset from the radial axis, so that as the blood vessel is widened, and the speed of rotation of the tool is increased, centrifugal action causes the abrasive section to revolve in an increasingly wide orbit, effectively scraping plaque from the artery walls.
Plus, the "sanding" action results in very small diameter plaque debris (smaller than both white and red blood cells), which is not the case with some contenders that cut away plaque in big chunks, chunks that can cause trouble (blockage) elsewhere-like your brain. Not good.
Note: this isn't pie-in-the-sky. Cardiovascular Systems has an established and growing business in the peripheral artery disease (PAD) market today.
Revenues have been growing steadily since 2008; they hit $104 million last year, up 26% from the year before.
But the company is not profitable yet because it's been investing-and running studies-in the coronary vascular disease market. And now it's rolling out its solution, the Diamondback 360 Coronary Orbital Atherectomy Solution.
In the company's latest quarterly report, released in April, CEO David Martin said, "Our technology is the first and only device specifically approved to treat the complex, severe coronary calcium disease state. We have established our presence at some of the most prestigious institutions in the country, including Mt. Sinai, Columbia Presbyterian and Duke University Hospital, among others. Prominent physicians are achieving excellent procedural success and outcomes consistent with our ORBIT II results in this complicated patient population. This sets the stage for expanded adoption in the future."
So, the potential for growth is excellent. In fact, analysts increased their earnings estimates for the year ahead after hearing Mr. Martin's remarks.
But the stock remains in a consolidation phase today, trading above and below its uptrending 200-day moving average. It's not a leader. But once upon a time it was!
In fact, CSII was originally recommended by Tom Garrity, analyst of Cabot Small- Cap Confidential, at the end of 2012, when it was trading at 12.
And Tom held it all through 2013, as it climbed through the 20s and into the 30s. Finally, Tom and his followers were stopped out when the stock dipped to 25 last month.
A profit of more than 100% in 18 months is fine in my book.
But Tom still thinks highly of the company's long-term potential, which is why he nominated it for this list of 10 Stocks to Buy & Hold Forever.
The question is, do you just buy here and hold blindly?
Or do you subscribe to Tom's Cabot Small-Cap Confidential and get his latest thinking on all the high-potential, undiscovered stocks he's recommending?
If you know the value of diversification-and I believe you do-you'll consider the latter.
Get more details here.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory
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