Bourbon and Oil; Supply and Demand
10 Revolutionary Stocks
Classical economics teaches that in a true free market, supply of any product or service will meet demand at a price of equilibrium.
Trouble is, there are few perfect free markets.
Running through a bunch of products in my head-bananas, milk, cars, gasoline, televisions, telephone service, iPhones, even socks-I concluded that in every case, there are regulations (often both federal and state) that constrain the buyer and seller. Sometimes these constraints are for the purpose of consumer protection (all the safety devices on cars) and sometimes they're for producer protection (price supports on milk), but the bottom line is that there are precious few perfect free markets.
Nevertheless, market forces do have a profound effect, as illustrated recently by the bourbon and oil markets-both of which have been in the news for opposite reasons.
There's not enough bourbon, but there's plenty of oil.
The bourbon imbalance came about because bourbon "suddenly" became popular. Chief factors behind this popularity are a growing global demand for American products, a growing demand for craft products, growing demand for cocktails and growing demand for luxury products.
As a result, demand for bourbon has been booming, with exports more than doubling over the past decade.
Trouble is, it takes at least two years to make a bottle that can earn the label of "Bourbon Whiskey" or "Tennessee Whiskey," a designation that's restricted by U.S. law. And it takes eight to 10 years (and more) to make a bottle of good bourbon.
And no one saw this surge of demand coming!
So now, with shortages a fact of life for most of the major brands, people are hoarding bourbon!
A Wall Street Journal story on December 8, in fact, interviewed "collectors" stockpiling bottles and cited men (they were all men) with collections of 500, 700, even 4,000 bottles!
Some manufacturers have tried reducing alcohol content to "stretch" the product further, a move that was not well received by the public.
And most manufacturers have been ramping up production; bourbon output is now the highest it's been since 1970.
But the simple fact is there's a shortage, and prices are climbing.
Now, where this trend leads I have no idea, but I do have a couple of rules of thumb about trends.
One, they tend to go further and last longer than most people expect.
Two, they tend to peak (end) when the number of people jumping on the trend reaches its zenith.
In the stock market, stocks peak when the last, and least well-informed person buys. And in the bourbon world, this uptrend will end when the last and least well-informed person buys a bottle of bourbon for the first time, simply because everyone else is doing it.
Having said that, if you want to explore investing in the bourbon market further, feel free to start your own stockpile.
Alternatively, you could look into investing in the few publicly traded companies in the industry. Trouble is, they're all huge conglomerates.
Gruppo Campari, which trades on the Milan, Italy stock exchange, makes Wild Turkey Bourbon and Russell's Reserve Whiskey (and many other non-bourbon alcoholic beverages).
Diageo, headquartered in the United Kingdom, makes Bulleit and IW Harper bourbons (and many more non-bourbon alcoholic beverages).
Jim Beam, which makes Jim Beam, Maker's Mark and Knob Creek (and many more non-bourbon alcoholic beverages), was bought by Suntory, the Japanese food and beverage conglomerate, in January, for $13.6 billion.
So here on American soil, the remaining public investment is Brown-Forman (BF-A and BF-B), which makes Woodford Reserve Bourbon, Jack Daniel's Tennessee Whiskey, Early Times Whisky and Old Forester Bourbon (as well as Southern Comfort, Chambord, Pepe Lopez Tequila, Korbel champagnes and more).
Revenues at Brown-Forman last year were $7.5 billion, up 4% from the previous year. Earnings were $3.06 per share, up 11% from the year before. The stock's PE ratio is currently 29.
And here's the long-term chart.
Technically, the stock is in a healthy uptrend, reflecting perceptions of the company's business, which tends to benefit as people all over the world grow increasingly able to afford premium alcoholic beverages. Also, it pays a dividend of 1.4%. It's not a stock that any Cabot analyst has recommended, but if I owned it, I'd stick with it, bourbon shortage or not.
As for oil, I was recently asked by a person who obviously doesn't follow markets, "Why are "they" letting gasoline prices fall so much? Why don't they keep them high and get more profit?"
The answer, of course, is two-fold. There's been a flood of new oil supply, thanks to shale gas and fracking-and there exists a fluid competitive market.
And just as in the bourbon world, no one saw this coming!
Furthermore, no one can say how long this trend will last, and how low the price of oil will go.
I'm not an expert, but once again, I think those guidelines mentioned above apply.
One, trends tend to go further and last longer than most people expect.
And two, they tend to peak (end) when the number of people jumping on the trend reaches its zenith.
It will be fun to watch both of these trends (bourbon and oil) evolve.
10 Revolutionary Stocks
Last week I introduced this reprise of my popular series on revolutionary stocks, saying revolutionary stocks are not just fun to think about-they can be extremely profitable for early investors.
To find revolutionary stocks, start with these rules.
Rule #1 is to ignore valuation. Wall Street likes to count things, and price/earnings ratios are one of their favorite measurements. But investors who focused on PE ratios missed the greatest growth years of Amazon, Google, Microsoft and Qualcomm.
Rule #2 is to use your imagination. This is difficult for most investors. It's much easier to look back than look ahead. But ahead is where the big profits are. In the case of Amazon, having the imagination to see that the little company might actually put Barnes & Noble out of business was crucial.
Rule #3 is to pay attention to management. It's my contention that the best revolutionary stocks are those of companies led by visionaries. In fact, just off the top of my head, I listed these revolutionary stocks of my lifetime. Most-perhaps all-were led by exceptional managers: Apple, Blockbuster, eBay, Green Mountain Coffee Roasters, Home Depot, IBM, McDonalds, Netflix, Oracle, Research in Motion, Starbucks, Tesla Motors, Teva Pharmaceuticals, Walmart, Whole Foods, Yahoo! and Xerox.
Rule #4 is to invest only when there's potential for a major increase in perception. If you invested in Amazon (AMZN) when Jeff Bezos was on the cover of Time, you lost money. Similarly, if you bought Apple (AAPL) when it made headlines as being the most valuable company in the world, you lost money. To make big money, you've got to invest when skepticism is high (or at least when a stock is little-known).
To find the current crop of revolutionary stocks, I asked all the Cabot analysts to send me candidates. After studying them, all, I narrowed the list down to 10, and I'm going to present them over the next 10 weeks, in alphabetical order, starting with Alibaba.
Alibaba (BABA) Alibaba is the biggest online retailer in China, roughly a combination of Amazon and eBay and PayPal. More than that, because China has no national chains, Alibaba is also the biggest retailer of any kind in China!
The company made a big splash when it came public on September 19, raising $21.8 billion for the company and early investors. Today, with a market capitalization of $274 billion, Alibaba has roughly the same market cap as Wal-Mart, which has revenues of $484 billion (47 times as big as Alibaba's $10.3 billion)!
Trouble is, Wal-Mart is a mature company growing revenues at less than 3%, while Alibaba is still a spring chicken (though a huge one), which grew revenues at 53% in the third quarter.
Looking at my four criteria for revolutionary stocks, here's how Alibaba stacks up.
PE ratio. Alibaba's PE ratio is 53, roughly on a par with its revenue growth rate. It seems fair in the short term, but it doesn't matter. Criteria #1 says "Ignore PE."
Imagination. Using my imagination, I can see Alibaba expanding into virtually any business in the world. If it earns the trust of people in China as a vendor, anything is possible, from banking to housing to education. Furthermore, the story is not limited to China; Alibaba is already moving fast to diversity around the globe.
Management. The founder and stem-winder of Alibaba is Jack Ma, a visionary entrepreneur who not only started the company but continues to move it forward. He's selling the dream, to both employees and customers, that Alibaba can make life better for all of them.
Perception. While Alibaba is already the most valuable company in China, it's still not a household word (like McDonalds, Coca-Cola, Toyota, etc) in most of the world. Furthermore, it's still a very young stock, with many more potential buyers than sellers.
Thus, I think the odds are very good that a long-term investment in BABA-say 10 years-will work out very well.
Also, the stock's chart says it's at a decent buying point, sitting above its uptrending 50-day moving average.
So you could simply buy it here and put it away. But if you want a little guidance along the way-perhaps a shorter-term perspective-I suggest you consult Cabot's emerging markets expert, Paul Goodwin, who recommended BABA in Cabot China & Emerging Markets Report and updates his readers every week on the stock 's status and prospects.
Paul is the #1 guide to all emerging markets investing, and knows all the Chinese stocks cold.
Plus, he just returned from a conference on Frontier Investing (!). But that's a topic for another day.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory