Tesla Motors and Morgan Stanley
Best Disruptive Stocks
31 years ago this June, my father gave me a book titled, 100 to 1 in the Stock Market by Thomas Phelps.
The main idea of the book was that you should buy companies with excellent prospects for growth, companies that had the potential to change the world in a big way, and to grow earnings immensely in the process. And you should hold those stocks forever.
The results of following this method, detailed in Mr. Phelps’ studies, were superb. And the phrase that sums up his method more than any other is this:
“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.”
That phrase, “the unforeseeable and the incalculable,” has proven invaluable to us over years, guiding investment in great growth companies like Amazon, Apple, Green Mountain Coffee Roasters, Home Depot and more.
And it’s helping now, too.
In fact, I last mentioned Mr. Phelps and his powerful phrase last April 16, when I told you about Tesla Motors (TSLA), which was trading at 46 at the time.
I wrote, “I think TSLA … is one of those stocks that has the potential to be a huge winner, if you just give it time, so that you can profit from the unforeseeable and the incalculable. … I recommend that you get on board on the next normal pullback.”
Six weeks later, the stock had gone bonkers—doubling to hit 100—which seemed crazy to many people. In fact, I appeared on a TV program opposite one of them—Antony Currie from Reuters. Currie’s main concern was that Tesla was a niche manufacturer that had not yet proven it could scale up to the big time, and that as the stock was then trading at an astounding one-fifth of the market cap of giant GM, Currie believed the only way TSLA could go was down.
Well, Currie’s math was good, but he had no imagination.
So now, here we are with Tesla having hit 265 last week, up 165% from last June.
And GM? It’s up two bucks since last June, about 5%.
For me, this reinforces the lessons I learned about imagination and the value of investing in possibility, even though there are few numbers to support your conclusion.
Of course now there are more numbers than there were last June, and some of them are very good!
And what’s interesting now is that it was an analyst at Morgan Stanley, one of those big old number-loving institutions, who used numbers to argue last week that TSLA will go to 320!
And he didn’t do this simply by arguing that Tesla would sell more cars—although he did calculate that Tesla would have a million cars on the road in 2027.
He did it by arguing (in a 53-page report!) that Tesla has the potential to be disruptive in two places beyond the electric car industry—which are synergistic with it.
The first is autonomous (self-driving) cars.
The analyst calculated that “completely autonomous capability” will be achieved somewhere between 2018 and 2022 and 100% autonomous penetration “Utopian Society” (yes, that’s his phrase) will be achieved around 2025. I wouldn’t exactly call it utopian to give up the pleasure of driving my Tesla, but I would appreciate the huge drop in the accident rate.
The second is the electric utility industry. This is cool, and almost nobody sees it coming.
In essence, the analyst argued that the battery in a Tesla is actually an energy storage device that can be integrated into your household electric system. That Tesla can also produce stationary energy storage devices for homes and businesses. And that when integrated with local (building-specific) power producing systems, from solar power to wind to natural gas-powered Stirling engines, these systems could in many places replace electric grid power!
And the result will be that, just as many of us (me, included) have disconnected our telephone landlines because our mobile phones do the job, many of us will next disconnect our electric lines!
Yes, that’s creative thinking, but it’s not pie-in-the-sky. In fact, by quantifying market penetration rates and making a lot of assumptions, the analyst determined a value for TSLA using a 15-year discounted cash flow model, and came up with a price of 320 per share.
The very next day, by the way, Merrill Lynch reiterated its price target of 65. Merrill Lynch, clearly, is not buying the Morgan Stanley case—and that’s what makes a market!
My investing system uses just as much forward thinking as the Morgan Stanley analyst, but far fewer numbers than the analysts at both big companies. Instead, my system depends on the study of stock charts and big-picture fundamentals—and that’s worked out very well in the case of TSLA.
For the record, readers who followed my original recommendation to buy TSLA (Cabot Stock of the Month Report, December 2011) based on both its growth potential and the behavior of the chart are now looking at profits of more than 800%.
If you’d like to join them and read about my latest recommendation (a hot little Internet security stock), I’d love to have you on board. Click here.
In the meantime, I suggest you remember the phrase, “the unforeseeable and the incalculable.” In my opinion, it can lead you to more great growth stocks than numbers alone.
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1. It’s up 98% in three months.
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4. It doesn’t have a single U.S. competitor and never will.
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6. It’s set to double again in 2014.
“My project was retarded by the laws of nature. The world was not prepared for it. It was too far ahead of time. But the same laws will prevail in the end and make it a triumphal success.”—Nikola Tesla, June 1919
Which brings me to the ninth installment of “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 Nine: HomeAway.com (AWAY)
More than a decade ago, Travelocity and Expedia were great investments, as consumers found that booking travel on the Internet was cheaper and more efficient than dealing with travel agents and making telephone calls.
Now HomeAway.com is the leading player in the next phase of empowering people to book vacations online—it enables people looking for vacation rentals to connect directly with people who have properties to rent. The company’s inventory encompasses over 545,000 properties in the U.S. and 345,000 in another 189 countries, and it’s still growing at a good clip.
In addition to its main site, the company also operates VRBO.com and VacationRentals.com in the United States; HomeAway.co.uk and OwnersDirect.co.uk in the United Kingdom; HomeAway.de in Germany; Abritel.fr and Homelidays.com in France; HomeAway.es and Toprural.es in Spain; AlugueTemporada.com.br in Brazil; HomeAway.com.au and Stayz.com.au in Australia; and Bookabach.co.nz in New Zealand and BedandBreakfast.com.
The company’s main strategy has been to charge property owners for listings, and the “renewal rate” for listing is currently 75%. But there’s a new pay-per-booking option that allows owners to pay only when their property is rented (about 10% of the rental fee), and this is opening up new sources of revenues.
AWAY was first recommended back in November in Cabot Top Ten Trader, after an excellent third-quarter earnings report sent the stock soaring. At the time, the stock was trading at 38, and readers who bought in our “recommended buy range” easily picked it up at 36 in the days following.
And last week, the company issued an excellent fourth-quarter earnings report—which sparked another gap higher!
Today, Cabot Top Ten Trader subscribers are sitting on profits of 30%.
So, you could simply jump in right here; after all, the main trend is up. But if you did, you’d be on your own, and I’d rather you get some consistent guidance. So what I really recommend is that you become a regular reader of Cabot Top Ten Trader, so you can get Chief Analyst Mike Cintolo’s latest thoughts on all of today’s greatest stocks—including when to sell and take profits in AWAY.
Every week, Mike presents 10 stocks that have great profit potential, and every week, he gives you follow-ups on all stocks that are still being watched. For active growth investors, there’s no better resource.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory
P.S. Meet the Cabot Analysts and Get Their Best Stock Picks – Live!
Don’t miss the Second Annual Cabot Investors’ Conference—a unique opportunity to hear from the Cabot analysts in person. Listen to panel discussions, participate in breakout sessions, and ask all the questions you want. Plus, each analyst will give you his or her favorite stock pick of the moment.
The Cabot Investors’ Conference will be held August 13 – 15 in historic Salem, Massachusetts. It is a day and a half of investment advice, stock recommendations, market insights and education. We’ll also throw in a little fun.
The Conference will make you a better, more confident and more comfortable investor. For more information on the Second Annual Cabot Investors’ Conference, click here.