What's Next for Oil?
10 Revolutionary Stocks
Best Revolutionary Stock # 5
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As everyone knows, the price of oil has plunged dramatically in recent months.
The reasons include:
Increased domestic U.S. production, thanks mainly to fracking
Continuing high production from OPEC countries
Decreased demand from China as economic growth slows
Decreased demand as alternative energy sources slowly gain market share
... plus, (this is very important) the perception that these trends will continue.
The major upside impact of cheap oil is that consumers all over the world can use money that previously would have gone to oil and gasoline to buy something else-and that's great for a raft of growth sectors like electronics and entertainment and even housing.
The major downside impact of cheap oil is that overextended companies in the oil industries-and there will turn out to be many of them-will go bankrupt, laying off people, defaulting on debts and-perhaps-starting a chain reaction that echoes what happened when the mortgage industry imploded.
But I'm not predicting that. It's too easy to find similarities with recent history and such facile similarities are seldom useful for investors.
Still, I do think the downtrend in oil, like most trends, will go further and last longer than most people expect. Furthermore, I see this as part of a broad decline in commodity prices, thanks to the forces of globalization, anemic growth in Europe, slowing growth in China and the digital revolution.
If you've been an investor in oil, it's probably been painful, and I have no advice for you other than to find a better system.
And if you haven't been in oil, and you're now looking at picking up some bargains, I suggest you first consult an expert (Roy Ward of Cabot Benjamin Graham Value Investor has some good recommendations.)
But for my purposes, the main value of this oil price slide is that it means the Fed is once more reluctant to raise interest rates! Which means that if you want your money to work for you, and earn more than 1%, the best game in town remains the stock market!
So what do you buy? Well, with commodity stocks weak, your best bet without question is the stocks of companies working to change the world-companies whose products and services are so compelling that their revenues and earnings grow regardless of what the economy and the stock market are doing.
My series of 10 Revolutionary Stocks has been spotlighting one of these stocks every week, and now it's time for Number Five.
10 Revolutionary Stocks
Rule #1 when hunting for revolutionary stocks 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 P/E 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 Borders out of business was key.
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've been presenting them in alphabetical order.
So here's Number Five!
Illumina is the world's leading developer and manufacturer of machines that do large-scale analysis of DNA. Customers include genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies.
Last year, the company had 70% of the market for gene sequencing machines, and its machines accounted for 90% off all DNA data produced!
The U.S. accounts for 50% of revenues, while 25% comes from Europe and 20% from Asia-Pacific.
This is a very young industry, yet Illumina has fairly quickly locked in the leading market share, and in this business, once you've made an investment in a platform, you're unlikely to switch.
In fact, because every sample analyzed uses consumables, customers pay Illumina a fairly steady stream of income; in 2014, 62% of revenues came from consumables.
Yes, the P/E ratio is 81, but that's not crazy, considering the recurring income and the company's growth rate. (And remember rule #1-Ignore P/E)
In 2014, revenues will near $1.9 billion while Wall Street analysts expect earnings to total $2.64 per share, and to grow to $3.17 next year. That's good growth!
And then there's the chart, which is quite exciting!
ILMN was a hot stock in 2012-2013, running from a low of 28 to a high of 183 in February 2014. For the past year, however, it's been stuck in neutral, consolidating that gain, trading in a range between 130 early last year and 190 more recently. And now it looks like it's breaking out to new highs, getting ready to resume its long advance.
So, you could simply buy here and hold for the long term, and I think that will work out if you're a very patient investor.
But if you want regular updates on the stock, you'll find them in Cabot Top Ten Trader, where Mike Cintolo originally recommended ILMN back in October as the first signs of this nascent breakout took shape.
His readers are already counting their profits, while every Monday reading about 10 stocks that have similarly attractive set-ups.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory