Featuring Lutts’ Logic:
The Future of the Auto and Oil Industries
Electricity from the Ocean
I was talking with my 17-year-old son recently, and he mentioned that Google must be one of the largest companies in the world. His reasoning, of course, stemmed from the fact that Google has all the answers on the Internet, and is now making a big splash in cell phones, too … and to teenagers, the Internet and cell phones are the center of the world.
So I pointed out that many people never use the Internet or cell phones, and I mentioned, off the top of my head, a number of mass-market companies that had been around far longer than Google and that were far larger.
ExxonMobil, Walmart, Johnson & Johnson, Kraft and CVS were the names that sprang to mind; as a consumer, he knows their names but he has no emotional connection to them.
And then I did the research … and shared it with him.
Ranked by 2008 revenues, Google was 213th among publicly traded companies.
At the top of the list was ExxonMobil, with revenues of $477 billion. It was followed by Royal Dutch, Walmart, BP (the old British Petroleum), Chevron, ConocoPhillips, Total (French oil company) and China Petroleum. Of these top eight companies, seven are in the oil business.
They’re followed by Toyota, General Electric, Volkswagen, Eni (Italian oil company), PetroChina, Motors Liquidation (the old General Motors), Daimler and Ford. Of these second eight, all but one are in the oil business or the automotive business.
In short, of the sixteen largest publicly traded companies in the world, all but two are in either the oil business or the automotive business, and I think this presents a profit opportunity to farsighted investors … which I’ll get to in a minute.
First, though, I want to quote something from Momentum 1000, the “bible” of momentum analysis that my father wrote several decades ago. It’s about change, and change, of course, is what investing is all about.
“All living things have life cycles. They grow, mature and then finally die. We see this all around us in many different forms: in flowers, animals, trees and people … but we also see it in organizations. Organizations are born, they grow and mature. They develop strengths and weaknesses for a variety of reasons. Some change so much it’s difficult to recognize them as the original organizations.
If you look at organizations in which you are active, you will recognize that some are growing vigorously, some less so, while others are contracting in various ways. The time cycles for these changes may differ greatly from one organization to another. Some, like political organizations, metamorphose slowly from year to year. Sports teams often evolve faster, their strengths and weaknesses dependent on key players. Even countries go through life cycles, and we now formally recognize emerging countries as a distinct category. But any organization, even a country, can die if it’s not managed properly!”
As originally written, these paragraphs were a prelude to the explanation of the use of momentum analysis as a technical tool for analyzing stocks, because stocks are the best indication of the health of companies. But as the paragraph above so clearly states, life cycles apply to all organizations, from companies to countries … and that certainly includes industrial sectors.
So my question today is this, “Recognizing that the biggest oil and automotive companies are outsized giants today, having achieved their status through a century of growth and consolidation, is it possible that they’ve peaked and entered into a long declining phase?”
Fresh in our minds, of course, are the bankruptcy of General Motors and the absorption of Chrysler by Fiat.
Also fresh is the memory of gasoline selling for $4 a gallon, in a price spike that hurt consumers but not oil companies.
Now, you can choose to view G.M.’s bankruptcy as just one more fallen domino in the great credit crunch of 2008. You can view it as the result of mismanagement. You can claim that the unions were to blame, for holding wages too high. You can say that the company was spread too thin, not just manufacturing but also sponsoring dealerships and running a finance arm. You can even tie G.M.’s bankruptcy into the national healthcare debate, reasoning that without gold-plated healthcare plans, the company’s costs would have been much more competitive.
There is no single reason for G.M.’s failure. Yet if you stand back, and view all these items as the RESULT of a century of growth, you might conclude that the growth of General Motors in that form had reached the point of unsustainability. You might even extrapolate that conclusion to reach similar conclusions about the other big automobile companies, Chrysler being the perfect second example. And you might conclude that the industry is ripe for big, big change.
I think it is, which is why I’ve recommended the stocks of several companies supplying components for the NEXT generation of vehicles, all of which use substantially less gasoline (sometimes none) and pollute less, too.
For the record, the top seven publicly traded auto companies had combined revenues of $994 billion last year, yet have a market capitalization of just $344 billion. By comparison, the four companies at the top of my list in the alternative transportation market have a combined market capitalization of $3.1 billion. That’s a ratio of a more than 100-to-1.
And that brings me to a Cabot saying that I haven’t used for a while, but that is perfectly appropriate here, “Money goes where it’s treated best.”
If you were a money manager (perhaps you are) who was required to keep a certain percentage of your assets in automotive stocks, don’t you think you’d start shifting some money out of those old giants and into those high-potential stocks that are just getting off the ground?
And if you were an investor with a long time horizon, wouldn’t you be putting money in the little companies that are poised to fill the needs of a fast-growing market that wants fuel-efficient vehicles?
We’re still in the very early stages of this shift, but I have no doubt that as the years go by, those new companies will thrive, and they’ll attract a lot more of investors’ assets. And the thing to understand about this situation is that just moving one percent of the money in the big old car pool into my tiny little “new automotive” pool would cause those stocks to more than double. Understanding money flow is important!
(For example, back on October 26, I wrote, “Last Friday brought an awesome 23% jump in Amazon.com (AMZN), the result of a crackerjack earnings report. In short, Amazon.com is selling an enormous (but secret) number of Kindle e-book readers, and they’re very profitable.
“What gets my attention is this number, $11 billion. That’s the amount of value that Amazon.com’s stock gained in the market on Friday, thanks to the buying of major investors. At the market close on Thursday, AMZN was judged to be worth $40 billion. Twenty-four hours later, the market said it was worth $51 billion!
“This big number tells me that some very serious investors, are projecting some terrific earnings power for Amazon.com, through both its main retail operation and its proprietary Kindle unit. Both are revolutionary. The Amazon.com Web site has already changed the world and is still increasing in its influence. And the era of the Kindle is just beginning. With newspapers and magazines shrinking and dying, Amazon.com has an enormous opportunity to become a preferred information/entertainment medium. …
“If you want to make money, I suggest you be aware of these trends. Get … into growth stocks like AMZN and NFLX.”
Since I wrote that, AMZN is up 7% while NFLX is up 9%. The big money is flowing in.)
Moving on to oil, and recognizing that giant oil companies sit at the top of the world today, I ask you to consider what will happen as four big trends unfold.
1.) Demand for gasoline in the developed world will decline, as we drive more fuel-efficient cars.
2.) Demand for gasoline will increase in developing countries, especially China, where auto sales, thanks in part to government stimulus, have grown more than 70% from the year before in each of the past three months.
3.) The global supply of oil will continue to diminish, as we pass the point of peak oil.
4.) The frictions between the Muslim countries that sit on much of the world’s oil and the non-Muslim countries that consume it will continue to increase.
How these trends play out in the long run remains to be seen, but it appears to me that those giant oil companies are at risk. And I know that the bigger they are, the harder they fall.
Furthermore, I know that when I can buy a car that meets my needs that can be charged by plugging into my garage at night, I’ll buy it … and I’ll stop patronizing my neighborhood gas station. And when enough people do this, those gas stations will close (not all at once, but one by one) … leaving a lot of contaminated vacant lots, not a desirable asset. There are a lot of dominos in the oil business, just as in the automotive business, and when they start to fall it might get ugly.
The top nine publicly traded oil companies had revenues of $2.6 trillion last year, and have a market capitalization of $1.2 trillion, and I have no doubt that as alternative energy investments become progressively more attractive, some of that money will move out of those big old energy companies and into the clean and nimble new ones.
Granted, those big old companies wield a ton of power in Washington, and if it ever gets to that point, ExxonMobil will be judged “too big to fail.” But the trends are in place.
(In fact, Warren Buffett’s recent purchase of Burlington Northern makes perfect sense in a world where fuel-efficiency matters; the only transportation mode more efficient than trains are ships, and they’re rather limited in where they can go.)
So, I’m not saying you should go out and short any of those big old oil and auto companies. (Shorting is difficult, and I would never recommend it in a bull market.) But I do think there’s a lot of profit potential in the young companies in the new energy sector, which includes solar panels, wind power, smart grids, battery powered vehicles (and the numerous new components in these cars) and much, much more, and I hope I can persuade you to invest in some of them.
Ten years from now, we’ll all be burning compact fluorescent light bulbs or light-emitting diodes–unless we’ve squirreled away incandescent bulbs or smuggled them in from a foreign country.
Ten years from now, you’ll see far fewer pickup trucks and SUVs on our highways and far more small crossover vehicles and fuel-efficient hybrid and battery powered vehicles.
Ten years from now, the U.S. will be getting substantially more power from non-polluting renewable energy sources, mainly solar and wind.
And 10 years from now, people who looked ahead to this future and invested in the companies on the leading edge of this change will be sitting on big profits.
One place to find them is Cabot Green Investor, our newsletter that ferrets out up-and-coming Green companies all over the world, and recommends the stocks with the highest profit potential to a dedicated group of far-sighted investors.
You can read more about it here.
One of the stocks recommended in the latest issue of Cabot Green Investor (which just came out last week) is in the business of developing technology that generates electricity from the movement of ocean waves, one of the most plentiful sources of energy on the planet.
The difficulties involve the fact that the environment is challenging. The positives involve the fact that the majority of people on the planet live close to oceans, so transporting the electricity would not be difficult.
In his report, editor Brendan Coffey writes, “Harnessing the power of the ocean sits as one of the great opportunities of the renewable energy industry. All of the power potentially developable from the ocean equates to more than 5,000 times current global demand, according to the World Energy Council. Of course, estimating the power and coming anywhere close to tapping it are two very different things.
“People have been trying to develop ocean power since the oil price shocks of the 1970s. Early efforts revolved around trying to transfer some of the ocean’s thermal heat to land … More recent efforts have focused on turning turbine blades against the tide or current with some modest success. Ocean-derived power is still largely in developmental stages. As entrepreneurs look for the right formula, they face technical challenges of capturing, converting and transmitting energy through a difficult salt water environment. They also face protests from environmentalists who worry that underwater turbines could kill fish and upset the delicate sensibilities of whales.
“Still, with ocean power having the advantage of being generated close to the vast majority of people (four-fifths of the world’s population live within an easy drive of the ocean) and being limitless, there are some exciting opportunities to be aware of.”
I look at the company and I see that the technology is promising, and that it actually has several development projects, including a big one in Australia. Best of all, I see that the stock is strong, telling me that investors are climbing on board and that this could grow into something big.
But what’s the name of the company?
I was tempted not to tell you, because this is a high-risk stock, and I want to encourage you to listen to Brendan’s advice. The stock is currently trading around 10. It could be 11 tomorrow, but it could also easily fall below 7, where its 50-day moving average is found, and I don’t want you to get hurt.
On the other hand you’re reading this precisely because you do want to know the stock’s name.
So I’ll compromise. And because I spent the past weekend playing 15 games of competitive Scrabble, I’ll give you the name of the company in the form of an alphagram … the letters in alphabetical order.
That’s not so hard, is it?
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor’s Note: Only one sector has the same potential that the Internet did in the 1990s … and it’s starting to take off right now. Smart investors are already taking positions … don’t miss this opportunity to profit from the next big thing. Cabot Green Investor Editor Brendan Coffey has just released his newest Special Report, “5 Stocks Wall Street Visionaries are Buying Now,” to help you start profiting from the enormous opportunities in the Green sector today! And the latest issue of Cabot Green Investor was published just last week and in it you’ll find Brendan’s full write-up on the stock mentioned above. Click now to get started today!