Featuring Lutts’ Logic:
The Rise and Fall of EMC Corporation
The Rise and Fall of Richard Egan
Today’s Leading Data Storage Stocks
---
I’m a great believer in the adage that although history doesn’t repeat, it often rhymes. So today I want to review the story of the rise and fall of EMC ... and see if we can learn something from it.
The story starts in 1936 when a boy named Richard Egan was born to an Irish family in Dorchester, a working-class Boston neighborhood.
He enlisted in the Marines at 17, just as the Korean War was winding down, and learned to fly helicopters.
He then returned to Boston, and graduated from Northeastern University in 1961 with a degree in electrical engineering.
A year later, he was on the team that helped develop Project Apollo memory systems for NASA. In the years that followed, he worked at Lockheed Martin, Honeywell and Intel.
In 1979, he joined with a colleague named Roger Marino to found EMC, using their initials for the first two letters and the all-purpose C to suggest a larger company.
EMC started as an office-furniture reseller, but that was mainly to get a foot in the door of the electronics distribution business, a fast-growing industry where it quickly found a niche. Soon enough, the company cut out some suppliers by becoming a manufacturer of memory boards. Prime Computer was a big early customer, and was soon joined by Apollo, Data General, Digital Equipment, Sun and Wang. (Today all are either gone or acquired.)
EMC continued to grow, by both innovation and acquisition, always working to provide the world’s biggest and fastest computers with newer and better data storage solutions. It had an aggressive corporate culture, which reflected the personality of the man at the top.
In 1986, EMC went public. In 1994, sales surpassed $1 billion. In 1998, the Boston Globe named EMC the “Company of the Decade.” And in 1999, the NYSE named EMC the “Stock of the Decade” for best 10-year performance.
I remember those days well, not only because the bull market was fun but also because people who had never invested before (including my barber and my lawn guy) were talking about their investments. And here in Massachusetts, many of them were buying EMC, a well-known high-quality local company.
On October 28 1998, Cabot Market Letter recommended EMC (the stock). That was just 13 days after the end of a particularly punishing broad market decline. The fundamental economic news was absolutely horrible. But the market was rebounding strongly and our market timing signals gave a buy, so we jumped on it. And it worked out very well for many of the stocks we bought then, including Dell Computer, Medimmune, Charles Schwab and Yahoo!
After 13 months, 0ur profit in EMC was 213%.
Then in March 2000, the stock market topped out. Spending on technology, which had soared the year before in preparation for Y2K, shrank dramatically, and tech stocks went into a tailspin.
EMC actually kept climbing into October, peaking at 103. But when it fell, it fell hard, plummeting all the way to an eventual low of 4 (!) in 2002.
Richard Egan got out of the company relatively early in the decline, retiring on January 17, 2001.
And he didn’t stay idle long; just two months later, he was nominated by President George W. Bush to be the U.S. ambassador to Ireland. He served as ambassador from August 2001 to December 2002, but resigned--apparently, his take-charge aggressive personality was not suited to the give-and-take and compromise style of the diplomatic world.
EMC eventually recovered. Yes, revenues had shrunk 39% from 2000 to 2002, but they’ve grown every year since. Today, EMC remains the largest provider of data storage platforms in the world, with $15 billion in revenues in 2008. And today its stock (like other data storage stocks) is healthy, as consumers and businesses open their wallets once again.
Richard Egan said he sold much of his stock early in the decline. On its 2005 list of the Forbes 400, Egan was ranked as the 258th richest American, with a net worth of approximately $1.3 billion.
But just last month, on August 28, Richard Egan committed suicide (with a shotgun) at his Boston Four Seasons condominium. He’d been suffering from Stage IV terminal lung cancer as well as emphysema and diabetes, and apparently chose to remain master of his life to the end.
So what lessons can we take from this?
1. Never underestimate the power of storage technology stocks to make huge moves, both up and down. EMC made a lot of investors rich. But those who bought the stock too late, and held it too long, got hurt.
2. Note that technology is always changing, and in data storage, the technology leader has an advantage. EMC usurped IBM because it offered a technological advantage. Today, younger companies are nipping at EMC’s heels.
3. Never underestimate the power of a market timing signal. Our October 1998 buy signal proved a big winner, as has our March 2009 buy signal.
4. When you’re rich enough, you have more control over your life. And because you don’t need to worry about life insurance, you’re free to take control of your death as well.
--- Advertisement ---
The Bulls are Back
From the market’s bottom in March 2003 to the recent low in March 2009, the S&P 500 lost 18% in total and the Nasdaq lost 3.5%. Cabot Market Letter, however, left them in the dust: Advancing a total of 94% during the past six years (nearly 12% per year).
Cabot Market Letter has called every bull market since 1970. And this time is no different. In fact, the Letter was just ranked one of Timer Digest’s Top Ten Long Term Timers for two years. Our indicators are screaming BUY. Click here now to benefit from our proven market timing system, just as subscribers did when we recommended EMC.
http://www.cabot.net/info/cml/cmljb03.aspx?source=wc01
---
Sticking with the data storage theme, my investment recommendation today is STEC, Inc., (STEC), a young company that’s making inroads into the industry with revolutionary new products. These products, in short, are solid-state drives, like flash memory (which are used in iPods and other small portable devices) but in this case designed for the enterprise market. It’s still early--next year STEC may ship 200,000 to 300,000 drives, which is tiny compared to the 30 million hard disks that will be shipped--but the trend is under way.
On August 31, editor Michael Cintolo wrote, “We’ve always said that the big leaders of any new bull market tend to be little-known stocks, and STEC is a great example of that. The stock has enjoyed a monstrous run-up this year because it has a new, revolutionary product with little competition--its solid-state drives (SSDs) save tons of component and power costs in storage devices and servers. So far, EMC has been the only major customer of these SSDs; it was the first to test STEC’s products, and has placed a $120 million order for the second half of this year. But many other storage firms including Hitachi and Network Appliance could begin to order in volume soon, and IBM is using STEC’s drives in some of its most popular servers. Analysts believe the firm will earn north of $2 per share next year, possibly $2.50 or higher. It’s not for the faint of heart, but this remains a great story with big potential.”
Just remember, data storage stocks can give, but they can also take away.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
Editor’s note: Cabot Top Ten Report has recommended STEC six times since May 18, when it was trading at 15. It’s now at 41, but editor Michael Cintolo is still bullish on the stock. Cabot Top Ten Report is the best source to find out what he thinks about STEC and the other leading stocks in the market today. Click below to get started now!
https://www.cabot.net/info/ctt/cttjb05.aspx?source=wc01
---
