Automotive Investments for the Future

Featuring Lutts’ Logic:

Up Mount Washington

The Lesson of the Stanley Steamer

Automotive Investments for the Future

Today marks the 110th anniversary of the first ascent of Mount Washington in New Hampshire by an automobile.  The car was a Stanley Steamer, driven by Freelan Oscar Stanley himself.

This is reason enough for me to tell you a little about the Stanley twins, finishing with a lesson that I believe is relevant to today’s automobile industry and certain investments you might make.

The twins were Francis Edgar and Freelan Oscar, born in Kingfield, Maine, in 1849.  They were identical in appearance, and inseparable.

As young men, they taught school, made violins and dabbled in charcoal portraits.  But it was in the world of photography where they found real opportunity for their genius and work ethic.  In 1884, they obtained a patent on “The Stanley Dry Plate” and in 1890 moved to Newton, Massachusetts, where their plate-making business thrived.  

It did so well, in fact, that they were able to dabble in the automobile business.  They’d seen a small, homemade steam car in 1896 and decided they could do better.  A year later, they had built their own car and were driving around the streets of Newton.  And soon after, they began to produce cars in earnest.

And they weren’t alone; by 1905, entrepreneurial Americans had produced more than 125 makes of “steamers.”

In 1904, George Eastman bought the Stanley photographic plate business for nearly $1 million.

And in 1906, a Stanley Steamer set a land speed record of 127 mph.

(No steam car ever went faster, interestingly, until this year!  The record is now 148 mph.)

Contrary to modern opinion, the steamers were safe.  The boilers never exploded; if the pressure vessel failed, it simply lost pressure slowly.  But steamers were limited in range because their water evaporated.  Many manufacturers, Stanley included, eventually added condensers to recapture steam but that made the vehicles more complex and heavier, which reduced speed.  Eventually, the internal combustion engine was improved to the point where it got the upper hand.  Henry Ford’s Model T was introduced in 1908, and by 1909 the number of gasoline-powered cars in Massachusetts exceeded the number of steamers.

But Stanley continued to produce steamers; after 20 years of production, the company had sold nearly 12,000.  And then it was over.

One summer day in 1918, Francis, who had always enjoyed the speed of his cars, was driving along a road in Wenham, Massachusetts, when he came upon two farm wagons, traveling side by side.  Swerving to avoid the vehicles, he hit a woodpile, his car overturned, and he was instantly killed.

His brother quickly sold his interest in the company, and the Stanley factory closed in 1924.

Up 92% in 4 MonthsFreelan Oscar Stanley died in 1940 at the age of 91.

So what’s the lesson?  

Adaptation is critical.  Had the Stanleys been more open-minded about gasoline engines, they might have offered their customers a choice between steam and gasoline, and thus kept their market share as well as their reputation.

And how are we to use this lesson today?  First, note that young automobile companies like Tesla, Fisker, Coda, Lightning, Hybrid Technologies and Aptera are working to bring radical new vehicles fueled by alternative power sources to the market.  Some of these companies will fail … but not all.  Then, take a good hard look at the established automobile companies and ask if they’re doing what it takes to survive in this period of transition.

You can’t invest in new automobile companies yet; but you can avoid investing in the old ones if their charts warn you that trouble lies ahead.  I looked at the charts of the big five public companies–Toyota (TM), Ford (F), Daimler (DAI), Honda (HMC) and Tata  (TTM)–and here’s what I found.

They all look decent. They’ve all rebounded out of the March market bottom, when it seemed the world would end.  They’ve hit highs in early August, and they’ve digested those gains since.  Of course, we’ve been in a broad bull market, so that’s not surprising.  And Toyota and Tata look a little stronger than the others, which is also not surprising; Toyota has the Prius and Tata the Nano.

But as the months and years roll on, I expect that some of these companies will struggle to adapt, and I expect the charts will help us identify the ones to avoid.

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My favorite automotive investment today is a company in the component business that I mentioned here briefly two weeks ago.  Its name is Maxwell Technologies (MXWL), and its products are ultracapacitors that use static electricity to store and release electrical energy and do it much more quickly than batteries ever can.  These ultracapacitors are used today in a variety of industries, including telecom and aerospace, but their biggest potential lies in the automotive market, which is rapidly turning to hybrid and electric vehicles that can make great use of the technology; in fact, they’re already being used in buses in China.  The company is not yet profitable, but analysts are predicting profits for 2010.  In the second quarter, revenues grew 30% to $24.8 million, while the loss per share shrank to six cents.  

As for the stock, it hit 15 in late July, and has been digesting that gain since, building a base around 13.  Selling volume has been minimal, suggesting that the action is dominated by institutional position-building and not distribution.

There aren’t a lot of institutions on board yet; at the end of the second quarter, only 33 mutual funds owned the stock.  I like MXWL as a buy today, with the warning that the stock market (very strong until today) is due for a correction, and if such a correction pushes the stock below 13, it could be painful.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

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