10 Revolutionary Stocks
A Top Contender in 3D Printing
Way back in the early 1980s, before I joined my father to work full-time at Cabot, I spent five years working at a company that developed and manufactured vacuum furnaces, and got my name on a patent. You can read about it here.
In short, I know a bit about hot metal.
And that knowledge came in handy when, as part of a local program in which CEOs help each other, I recently visited a local foundry, where workers melt ingots of either bronze or aluminum and pour the molten metal into sand-filled molds to produce castings.
Here’s a photo I took.
The foundry specializes in short-run, high-quality castings for customers in a wide variety of industries, including defense, marine, packaging, electronics, medical, recreation and transportation. As such, it’s insulated from weakness in any one sector.
Also, the company has modernized under its current owner, improving production efficiency by 25% and reducing energy use 70%.
Nevertheless, as the photo shows, it’s still a dirty business, and the core process is not dissimilar to that used when men began casting in the Bronze Age, roughly 5,000 years ago.
Also, it’s a competitive business, not so much because of foreign competition—overall output in the industry is still growing—but because of consolidation. In 2007, there were 2,300 metal casting facilities in the U.S.; there are now fewer than 1,900.
As a group, we CEOs had some good suggestions for the owner, and I think he’ll do fine, especially if he can grow by acquisition.
However, there’s a major force coming over the horizon, a revolutionary technology that already starting to nibble at the edges of the casting industry. It’s 3D printing, the subject of my current Revolutionary Stock, and you can read the details below.
10 Revolutionary Stocks
If you look in the rear-view mirror, finding revolutionary stocks that turn into big winners is easy. Amazon.com, Apple, eBay, Google, GoPro, Green Mountain Coffee Roasters, Home Depot, Netflix, Oracle, Starbucks, Tesla Motors, Teva Pharmaceuticals, Walmart, Whole Foods and Yahoo! have all changed the world dramatically, and made billions in profits for far-sighted, risk-tolerant investors.
But in real-time, investing in revolutionary stocks is difficult, not least because the stocks are often very expensive, they can be quite volatile, and the future of the company behind the stock is far from assured.
Over the past six weeks, as I’ve presented Revolutionary Stocks (nominated by the Cabot analysts and finalized by me), I’ve repeated the four cardinal rules of investing in Revolutionary stocks.
Rule #1 Ignore Valuation
Rule #2 Use Your Imagination
Rule #3 Pay Attention to Management
Rule #4 Invest Only When There’s Potential for a Major Increase in Perception
Today we’ll look at how those, and other considerations, apply to candidate #8, which is one of the two top contenders in the 3D printing industry.
Stratasys and Three D Systems Corp (DDD) are the two contenders. Both are very similar in both size and valuation, so either one could fill this slot. After researching both, I chose Stratasys because the stock, which is a bit older, acts a little more maturely. But if you get serious, feel free to examine and monitor both.
Stratasys, based in Eden Prairie, Minnesota, makes 3D printers that use three different technologies.
FDM stands for Fused Deposition Modeling. Invented by company founder Scott Crump more than 20 years ago, it involves laying down successive layers of extruded thermoplastic filament from the bottom up. It’s clean, simple and office-friendly, using the same thermoplastics used in industrial processes all over the world. You can make almost anything with an FDM machine, from heart valves and automotive parts to coffee mugs and toys.
Note: the wrench printed on board the International Space Station recently used FDM technology, but the printer was not made by Stratasys or Three D Systems. It was made by a small private California company named Made In Space that designed it to survive blast-off, to work in a zero gravity environment and to not pollute the atmosphere that astronauts breathe.
You can’t buy a Made In Space printer. But you can buy a Stratasys FBM printer on Amazon.com for just $6,000.
PolyJet is similar to inkjet printing but instead of jetting drops of ink onto paper, PolyJet Printers shoot out layers of curable liquid photopolymer onto a tray. End products can be extremely detailed, with smooth surfaces, and composed of diverse materials with a variety of colors and physical characteristics. That makes PolyJet is the ideal solution for prototyping.
WDM stands for Wax Deposition Modeling, and it’s most useful for dentists, who use it to create wax-ups, with a resolution of 5,000 to 8,000 dpi, which they then use to build crowns, bridges and dentures.
Computer design software files drive all these printers, in just the same way that your home or office printer is driven by files.
Now, unless you’re very young, you remember how 2D printing, once too expensive for the home, eventually became commonplace, as prices came down and down and down. Today, of course, the real profits in 2D printing are in the ink, not the printers—and the same will prove true for Stratasys over time.
Over the years, Stratasys has made several acquisitions, most notable Solidscape in 2011 and MakerBot in 2013, both of which still function as standalone subsidiaries. Also, Stratasys maintains Thingaverse, a design-sharing community to support MakerBot, and operates RedEye On Demand, a digital manufacturing service.
In short, it’s covered all the bases from a business point of view, building the foundation for a business that in time will see great recurring revenue stream from consumables.
Looking at the financials, I see that Stratasys has grown every year since 2007, with the exception of 2009 (the economy). It’s made a profit every year of the past decade. And going forward, analysts are looking for earnings growth of 22% for 2014 (the report is due roughly March 3) and 30% for 2015.
And looking at the chart, you probably remember when 3D printing stocks were hot—mainly 2012 through 2013. That run (which we call the Romance Phase) took SSYS from 18 to a high of 138, for a gain of more than 650%.
But after the Romance Phase comes the Transition Phase, where a stock pulls back, even though the company keeps growing both sales and earnings. Transition is natural; it happens because the Romance Phase simply takes a stock too high, and when all the Romance buyers have bought, the stock then settles back to earth, often over may months or even a couple of years.
For SSYS, the Transition Phase, settling back to earth, brought the stock from 138 down to 85 in May, and then down to 70, less than three weeks ago—for a correction of 49%.
That might be the bottom, and it might not, but eventually, SSYS is going to move into the Reality Phase, where the stock advances roughly in line with the company’s fundamental progress. So long-term, I think an investment in the stock is likely to work out very well over time. The ideal way to play it is probably to wait for more signs of strength in the stock, so you truly know the bottom is behind us.
In the end, it’s up to you. And if you’re not comfortable with that responsibility, I suggest you take a look at my Cabot Stock of the Month, where I recommend one great stock to readers every month, and tell then exactly how to play it.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory