The Great Disruptors

THE GREAT DISRUPTORS

3 Breakthrough Stocks Set to Double Your Money

Get in on our 3 "Buy Now" stocks coiled to hand you 100% gains as they disrupt whole industries

This little stock drinks from a firehose of government money

This little stock drinks from a firehose of government money

Brett Velicovich had one job:

Hunt down the most dangerous terrorists in the world.                                       

At the age of twenty-five, he regularly decided whether men lived or died.

In the span of four months, his team killed 14 of the FBI’s 20 most wanted terrorists.

But Brett and his team weren’t out hunting bad guys on foot.

In fact, they never spent much time on a battlefield at all…

  • Brett spearheaded an elite US military drone targeting team.

Drones are unmanned planes that a pilot controls remotely.

You’ve likely seen kids playing with toy drones at the local park…

US military drones are different animals. They can glide through the sky at 300 miles/hour…. carry 4,000 lbs. of bombs… and cost up to $17 million apiece.

From a safe room in Creech Air Force Base, Nevada, pilots like Brett use drones to hunt terrorists 7,500 miles away in Afghanistan.

As I’ll explain, American military power relies on drones these days...

In fact, the US Air Force now employs more drone pilots than actual pilots!

And one little company makes the “brains” of these important machines.

It’s growing faster than any military stock I’ve ever seen.

And it’s set to soar as it wins billions of dollars in defense contracts over the next few years.

  • Do you know how much money the US government paid its top four defense contractors last year?

It paid Lockheed Martin (LMT)… Boeing (BA)… Raytheon (RTN)… and Northrop Grumman (NOC) a staggering $118.1 billion.

For perspective, that’s roughly what internet giant Google (GOOG)—the world’s fourth-largest publicly traded company—raked in last year.

And the companies drinking from this firehose of government money have been great investments.

This chart shows the top four US defense stocks vs. the S&P 500 since 2013:

You can see that shareholders have made a killing on the back of all those defense dollars.

The US government, as you may know, is the world’s biggest spender. This year it’ll shell out a record $4.7 trillion.

While this is nauseating for those of us who pay taxes, it’s a wonderful thing for companies that sell products and services to the government.

These days one of the surest ways to get rich is to figure out how to tap into the never-ending flow of government cash.

Lockheed Martin and Boeing have figured it out. As the two largest military contractors, they’ll collect $72 billion from the US government this year alone.

As you saw above, both have crushed the S&P 500 for many years. But I’m not recommending you buy either today.

Instead, I’m recommending a little company 1/70th the size of Boeing that’s shaping the future of warfare.

  • Mercury Systems (MRCY) makes US military grade computer chips…

Its chips power ALL the American military’s largest and most deadly drones.

They also enable other cutting-edge equipment like Patriot missiles, F-16 fighter jets, and the Navy’s “track and destroy” combat system.

As I explained a while back, computer chips are the “brains” of electronic devices.

Mercury’s state-of-the-art chips give drones a God-like view of the terrain below. They allow the drones to process what its cameras see in real time.

This helps them to pinpoint the location of suspects, track multiple vehicles, and make absolutely sure they’ve homed in on the right target before launching a deadly attack.

  • As I mentioned, the American military relies on drones these days.

It controls a fleet of 11,000 of drones… compared to just a handful 20 years ago.

In fact, drones make up over half of Department of Defense aircraft today.

Spending on drones is growing faster than any other military program and will hit a record $9.5 billion this year.

Drones are part of the rapidly growing “defense electronics” market. Leading aerospace research firm Renaissance Strategic Advisors estimates this market will grow to $117 billion in just three years.

Mercury Systems is growing into a dominant player in defense electronics. Yet it’s worth just $2.9 billion—too small for inclusion in the S&P 500.

This combination—small firms disrupting large markets—is exactly what we look for at RiskHedge. These are the kinds of stocks that could double or triple quickly and still have lots of room to grow.

Mercury is on pace to earn $500 million in sales this year. Even if it grows sales 10x, it would still control less than 5% of its target market.

  • Roughly 95% of Mercury’s sales come from the US government.

And it stands to collect billions more as it wins military contracts in the coming years.

Earlier I mentioned that defense companies that sell to the US government have been great stocks to own.

Well, in the past five years, Mercury’s performance has crushed all those big defense stocks.

You can see how Mercury has outperformed them by 2x, 3x, 4x on this chart:

It has achieved these gains by growing sales 163% in the past three years.

That’s 6.5x faster than Lockheed Martin… and 8x faster than Boeing.

As I said, it’s the fastest-growing military stock I’ve ever seen.

Mercury Systems has been on a tear since the start of the year, soaring 24%.

Because it has climbed so quickly, I wouldn’t be surprised if it takes a short-term breather soon.

But as military spending on drones and other cutting-edge equipment explodes over the coming years… I see Mercury’s stock climbing much higher.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Lorenzo asks about investing in 5G infrastructure stocks:

Stephen,

First of all I really want to thank you for your weekly letter, I find it very helpful.

Is it bad if I invest in both Nokia (NOK) and Ericsson (ERIC) or should I choose one? Is one superior to the other?

Lorenzo, thanks for your question.

As I mentioned a couple of weeks ago, with Huawei out of the picture, Nokia and Ericsson are the only companies that can build the infrastructure needed to upgrade networks to 5G.

As of 2018, Ericsson had a 27% market share of the mobile infrastructure market. Nokia was slightly behind at 23%.

If you dig into both companies, you’ll find they’re quite similar. Their sales growth margins are all right around the same levels. Their stocks have moved in tandem over the past six months, too. Because there’s not a clear winner between them, it’s reasonable to take a small stake in both.

This stock is America’s 5G “landlord” ... and it pays a 3.8% dividend

This stock is America’s 5G “landlord” ... and it pays a 3.8% dividend

In 1957 America was at war.

Its enemy, the Soviet Union, had just achieved something scary…

The Soviets had successfully fired the first ever ballistic missile... capable of hitting targets from 4,000 miles away.

They didn’t use it to fire a nuclear weapon…

But instead to launch the first ever satellite into space.

This was the first big strike in what’s now known as the “Space Race.”

During the Cold War, both sides believed control of space was crucial.

So the US government declared its space program a “national priority.”

It poured in billions of dollars… cleared regulatory roadblocks… and did whatever it took to help America beat the Soviets into space.

America unofficially “won” the space race in 1969 when the crew of Apollo 11 stepped onto the moon.

  • I’m telling you this because the US government recently stamped national priority on a new game-changing technology…

Longtime RiskHedge readers know I call the upgrade to “5G” the most disruptive event of the decade.

As a reminder… 5G is the new lightning-fast network our phones will soon run on.

And 5G is a BIG DEAL.

It’s not a small improvement over current 4G networks. It’s a HUGE leap that will enable world-changing disruptions like self-driving cars and next-generation military equipment.

Last time we talked about 5G, I told you about a little company called Xilinx (XLNX).

In short, it makes the computer chips inside the new cell towers that are needed for 5G. Its stock has gained 35% since I wrote about it.

Today I want to tell you about another 5G stock that could easily double within two to three years.

  • The Trump White House recently labeled 5G a national security priority for America...

You see, China and the US are neck and neck in the race to develop their 5G networks.

In fact, so far China has outspent the US by $25 billion in 5G, according to “Big 4” accounting firm Deloitte.

This has US officials worried that America is falling behind. The US National Security Council has warned if China is first in 5G it “will win economically and militarily.”

  • But government red tape is choking America’s 5G rollout.

As I’ve mentioned, 5G needs hundreds of thousands of new cell towers. But they’ll be tiny compared to the 100+ foot tall cell towers you’re used to seeing.

A 5G signal can only carry about half a mile. So, instead of placing one giant cell tower every few miles, we’ll need to place small ones every couple thousand feet.

These small towers are about the size of a trash can… and soon there’ll be one on almost every street corner.

AT&T (T) says 5G will need 300,000 new cell towers.

Keep in mind, there are only roughly 220,000 cell towers in the US today.

As you can imagine, building thousands of cell towers across America is a big, complex project.

Every state, city, and local government has its own ideas for where these towers should go, how much they should be taxed, and how they should be regulated.

And many are taking their sweet time to decide on these matters.

For example: It took California over 800 days just to process an application for a small cell tower from AT&T!

And FCC figures show it takes an average of 18 months to get a new cell tower approved.

Along with huge delays, some governments are charging big fees to build towers.

For example, the city of San Jose charged AT&T $2,700 last April for a single tower.

And in some areas of New York, companies must fork over five thousand bucks a year to the government in order to operate a tower.

  • Thankfully, the Federal Communications Commission (FCC) recently fast-tracked the 5G buildout…

The FCC is the government agency that regulates our wireless networks.

Think of it as America’s internet overlord. It controls the airwaves that allow you to surf the internet and make calls.

In September the FCC released its 5G FAST Plan… which Chairman Ajit Pai said is designed to “facilitate America’s superiority in 5G.”

The plan has swept aside many of the obstacles that were impeding 5G.

For example, once a company applies to build a 5G tower, governments must now respond within 90 days.

The FCC has also capped the fees governments can charge at $270 per tower.

According to the FCC, its plan will slash the cost of building 5G towers by 50% on average… and cut approval time by over a year.

And earlier this month we got some great news: Its plan is working!

According to FCC Commissioner Brendan Carr, 5G towers are now going up six times faster than before the FAST plan.

  • This has cleared the way for one company to make heaps of cash from the 5G rollout.                                                    

Keep in mind, big cell companies like AT&T, Verizon (V), and T-Mobile (TMUS) must spend tens of billions of dollars on 5G towers.

But cell providers don’t typically own towers. Instead, they rent space on towers built and owned by companies like Crown Castle (CCI).

In short, Crown Castle builds cell towers across America. It then leases space on its towers to wireless carriers who install their own antennas.

When it comes to the small cell towers that will power 5G, Crown Castle is lapping its competitors.

Rivals like American Tower Corp (AMT) or SBA Communications (SBAC) don’t own any small towers.

Crown Castle operates over 65,000 of them—more than any other company in America.

  • Crown Castle recently signed multi-billion-dollar contracts with America’s four largest cell providers to build 5G towers.

And this is only the beginning.

Crown Castle built 7,000 small towers in 2018… and it’ll put up 15,000 more this year.

By the end of 2019 Crown Castle will have roughly 80,000 towers. By 2025 my research shows the number of towers soaring to 240,000.

Crown Castle will collect rent on each tower from the likes of Verizon and AT&T.

Because of its build-and-lease business model, owning CCI’s stock is a low-risk way to profit from the 5G rollout. It pays a 3.79% dividend yield—close to double the S&P 500 average.

I’m looking for its stock price to double within two to three years as 5G comes online in America.

Do you own any 5G related stocks? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Tim has a question about disruptor stock Akoustis Technologies (AKTS). As a reminder, Akoustis makes the small filters that go inside our phones.

Stephen,

Thanks for your RiskHedge articles. They are very insightful, and I love your disruptive approach.

I have a question about Akoustis. How will they be affected by the US ban on Huawei?

Tim, thanks for your question. The US blacklisting Huawei is unlikely to have any effect on Akoustis.

As the world’s second largest smartphone maker, Huawei was a potential customer for Akoustis. But Akoustis had given no indications it was set to do a deal with the Chinese giant.

On the other hand, Akoustis is lining up many of the world’s biggest businesses like Samsung (SSUN.F) Apple (AAPL), and Qualcomm (QCOM) as customers.

How the Green New Deal could hand you 300% profits

How the Green New Deal could hand you 300% profits

Have you heard of Alexandria Ocasio-Cortez?

At 29 years old, she’s the youngest Congressperson in history.

She’s a founding member of the Democratic Socialists of America… and she makes Obama look like a right winger.

“AOC,” as she’s often called, is quite a sensation among young left-leaning folks. 2.4 million fans follow her on Twitter.

You might think of AOC as the Democrat version of Trump. She has rallied support by championing ideas that sound great to a certain type of person. Like giving free money to those “unwilling to work.”

  • Those are her words, not mine…

In a now-redacted factsheet, AOC promised to provide “economic security for all who are unable or unwilling to work.”

The document caused so much blowback that AOC’s team pulled it down from the internet.

Like any Socialist, AOC is full of “ideas.” Most of them involve taking money from one group of people and giving it to another.

She’s calling for a 70% top tax rate, for example. And free college.

But I want to set politics aside to tell you about her silliest idea of all.

Although she doesn’t know it—this idea will lead to a big boom in a beaten down stock…

One that soared 3,000% the last time it was launched into a bull market.

  • AOC’s big idea is called the Green New Deal.

Named after FDR’s “New Deal” from the 1930s, the Green New Deal aims to have America running on 100% clean energy by 2030.

AOC has called climate change “her World War II.” She wants to eliminate dirty energy like coal, oil, and gas that pollute the air.

Her plan calls for every house… apartment… office… factory… car… and train in the entire country to be powered by renewable sources like solar and wind.

Sounds pretty good, right? A clean environment is important for all of us. I certainly want my young daughter to grow up breathing clean air.

But there’s one BIG problem with AOC’s plan.

  • It excludes the cleanest energy source of all.

According to AOC "there is no place for nuclear power” in America’s future.

Many folks think nuclear power is dirty and dangerous. They associate it with big smokestacks and nuclear bombs.

These folks could not be more wrong. Nuclear is the best source of renewable, clean energy we have.

It doesn’t cause any pollution. The steam drifting out of nuclear plants is as harmless as the steam from your shower.

In fact the International Panel on Climate Change found nuclear power produces LESS air pollution than solar, wind, or hydro.

It is also the safest energy source on the planet, according to the World Health Organization.

  • The Green New Deal simply can’t succeed without nuclear...

There are 99 nuclear reactors in the US. They generate twice as much clean energy as every solar panel, wind turbine, and other clean energy source combined.

Excluding nuclear, clean energy sources like solar and wind make up 17% of America’s energy needs.

Getting that to 100% by 2030 without nuclear is impossible.

For one, it would cost trillions upon trillions of dollars.

Also, we need energy sources that are dependable and “always on.” This is a major problem for solar and wind.

Solar power is interrupted by darkness and clouds. Wind turbines only work when the wind blows.

That’s why solar generates power only 25% of the time… and wind 35% of the time.

  • But above all else, we already have a cheap and dependable source of clean energy.

As you likely know, nuclear power plants use uranium as fuel to produce electricity.

But the uranium sector has collapsed since 2011.

It began with the freak accident in Fukushima, Japan. First, the most powerful earthquake in Japan’s history caused a reactor to shut down. Then a tsunami disabled the emergency generators.

This caused a disastrous nuclear meltdown that contaminated a large area and killed and injured many people.

Japan shut down all but two of its reactors after the Fukushima disaster. Many other countries followed suit.

Germany moved to phase out nuclear power completely. And plans to build four new reactors in America were shelved.

  • Uranium demand plunged… and from 2011-17 its price cratered 86%.

This led to the vast majority of uranium companies shutting their doors.

In 2011 there were 585 uranium companies. Just 40 remain operational today.

And most of the survivors have seen their stocks plunge 90% or worse.

Last year uranium production in the US dropped to its lowest level since the 1950s… because virtually no producer can make money at today’s depressed prices.

  • It’s a total bloodbath. But as I’ve explained, the uranium market is poised to surge higher…

You can review my whole case for uranium here.

In short, nuclear use around the world is growing.

57 new reactors are currently being built. And uranium demand is expected to rise 23% by 2025.

Yet uranium stocks are priced as if nuclear energy is being phased out altogether.

Despite what the Green New Deal says, it’s not. I guarantee nuclear power will be a big part of America’s and the world’s clean energy future.

  • Cameco (CCJ) is the world’s largest uranium producer…

It’s hands-down my favorite uranium stock. In fact, it’s one of my top picks for 2019, period.

I recommended Cameco to you in August.

It has climbed 10% since then. And it’s up 30% in the past year.

Cameco produces around 15% of the world’s uranium. It operates two of the highest-quality uranium mines in the world. Both are located in Canada’s Athabasca Basin. The quality of the uranium there is 100x better than the global average.

This allows Cameco to produce uranium for less than its peers. Most companies mine it for $50–$60/lb. Cameco does it for around $35/lb.

A key thing to know about uranium stocks is they move in massive cycles. The “up” part of the cycle can produce some of the biggest gains you’ll ever see.

For example when the uranium price ran from $10/lb to $136/lb between 2000–2007, Cameco shot up over 3,000%.

Over the next few years as reality dawns on the markets, we have a great shot to triple our money or better in Cameco. And given that it rocketed 30x in the last uranium bull market, it could easily go a lot higher.

That’s it for today. What do you think of the Green New Deal? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Cason has a question about the stocks I cover in the RiskHedge Report:

I've been a subscriber for a few months and I wanted to say thank you! I appreciate you putting your money where your mouth is.

Do you plan on giving advice on how/when to exit the picks that you give? I know that it is of equal importance to sell at the right time as it is to buy.

Thank you for the awesome letter.

Cason

Thanks for writing in Cason. I don’t track my ideas in an official “portfolio” in this letter. But I’ll often follow up on my favorite ideas in a future issue, like I have recently with Disney (DIS) and 5G. And I’ll often let you know when my opinion on a stock changes, as I did last week when I mentioned I sold The Trade Desk (TTD) for a 120% gain.

Since you asked, you may be glad to know I’m developing a new letter where I’ll keep a portfolio and tell you exactly when to buy and sell the stocks I recommend. I’ll have more details for you in early spring.

How to be an “investing god”

How to be an “investing god”

Have you seen the hit movie The Big Short?

It tells the true story of a few clever investing pros who made a killing during the financial crisis.

They figured out early on that the US housing market was a house of cards… and placed bets to profit from its collapse.

When it all came crashing down in 2007/8, they walked away with more than a billion dollars profit.

The guys who pulled it off are revered as living legends… financial heroes… investing gods.

You might wonder: why?

Sure, a billion dollar profit is impressive.

But dozens of Wall Street guys make billions on trades every year.

Movies will never be made about them. You’ll never know their names.

  • The guys who pulled off The Big Short will go down in financial folklore for a different reason…

They made big profits during a bear market—while almost everyone else was losing money.

Have you heard the popular saying, “Everyone’s a genius in a bull market?”

It implies that even a rookie who lacks financial knowledge can profit when stocks are rising.

But when stocks stagnate or fall most investors struggle to preserve what they have, let alone make money.

In today’s issue, I’m going to show you how to make money this year no matter where markets go.

I’ll explain the two key principals I personally used to generate a 120% profit during stormy markets.

If you’re at all skeptical of where the market is headed this year… or if you’re uncomfortable staking your financial future on the hope that markets will rise… this issue is for you.

  • 2018 was a difficult year for many investors…

As I write, the S&P 500 trades for 2,789.

Its high from exactly one year ago, to the day, is 2,789.

A whole year and not a penny of profit to show for it.

But if you check your retirement account balance often, you know it hasn’t been a smooth ride.

Markets climbed most of 2018… then collapsed in the fall.                               

From late September to Christmas Eve, the S&P 500 plunged 19.8%. The Nasdaq suffered its worst December ever, while the S&P had its worst December since 1931.

Here’s how the stock market roller coaster of the last year looks on a chart:

  • Meanwhile, a little company called The Trade Desk (TTD) was quietly chugging along…

This name may sound familiar to longtime RiskHedge readers. The Trade Desk is one of the first “disruptor” stocks I alerted you to in this letter last June.

As regular RiskHedge readers know, disruptors are companies that create, transform, and disrupt whole industries. They often hand early investors gains of 3x, 4x, 5x, or better.

The Trade Desk is a little company that’s disrupting the giant online advertising industry. The online ad industry, as you may know, is extremely lucrative. It’s a fast-growing $80 billion pot of gold with very high margins.

But powerful companies Google (GOOG) and Facebook (FB) hog most of the profits.

Through their domination of the online ad game, they’ve grown into the 4th and 7th largest publicly traded companies on earth.

Facebook gets 98% of its revenue from selling online ads. Google gets 87% of its revenue from selling online ads.

Hold that thought and recall the ugly S&P 500 chart I just showed you…

Now look at how TTD performed during the same period:

Notice two important things:

One, TTD has gained 120% since I alerted you to it eight months ago.

Keep in mind, this was while the average investor was losing money in the market.

Two, see those circled parts where the stock jumped?

They mark the times when TTD announced quarterly financial results to the market.

From left to right, earnings grew 84%... 3%... 98%... and… 143%.

The latest one, on Feb 21, launched TTD stock to a 31% gain in one day.

  • TTD has the hallmark of a true disruptor:

Its profit engine keeps humming no matter what’s going on in the markets.

In fact, over the past eight quarters, TTD has grown earnings at an average clip of 88%.

That is off-the-charts incredible. The average S&P 500 company has grown earnings at a rate less than 8% over this period.

Even mighty Amazon (AMZN) could only muster average earnings growth of 58% in that time.

Thanks to its unstoppable growth, TTD stock powered right through last year’s rough markets.

Much like disruptors did during 2008.

As I’m sure you know, the 2008 financial crisis tore most of America’s companies to shreds.

The average S&P 500 company’s earnings collapsed by a disastrous 77%.

But disruptors held strong. From 2007–2009 online travel disruptor Priceline’s (BKNG) earnings surged 249%. Amazon’s shot up 89%.

This drove their stocks to gains of 393% and 241% from ’07-’09—one of the most difficult stretches in US stock market history.

  • There’s a second key principal driving TTD’s profitable run…

TTD is a small company disrupting a HUGE market.

Last year, its sales totaled $477 million.

Yet it is taking on the $725 billion global advertising industry.

TTD’s sales could soar 1,500% and it would still own less than 1% of its target market.

Which means its stock could double quickly—as it has in the past eight months—and still have plenty of room to triple or quadruple again.

Earlier I mentioned that Google and Facebook dominate online advertising. But their grip is slipping as TTD pries customers away.

Last year four of the world’s largest 10 advertisers boosted their spending with The Trade Desk by over 100%.

Meanwhile, big advertising spenders like Procter & Gamble (PG) are pulling hundreds of millions of dollars from Google and Facebook.

At $8 billion, TTD is still tiny compared to the monstrous companies it’s disrupting.

Facebook is more than 50X its size.

Google is almost 100X its size!

Which means, TTD can keep growing… and growing… and growing… through up and down markets... for years.

  • Although TTD’s future looks bright, I no longer own the stock…

I sold my shares last Friday when the stock jumped 31% on earnings.

TTD should continue to perform well as it siphons off more business from Google and Facebook. But it’s no longer an early-stage, “under the radar” play.

The company has more than doubled in size since I first wrote about it.

If you’re interested in what I’m buying now I recently took a stake in an early-stage disruptor stock recommended by my colleague Chris Wood.

The stock is named on this page, for free, no strings attached.

It’s our way of getting the word out about Project 5X.

Project 5X is our research service that hunts for early-stage disruptors with 500% or better upside.

As you may have heard, we had closed Project 5X down to new members late last month.

Today we’ve opened it back up.

75 new memberships are available on a first come first served basis.

We have to strictly cap it at 75, because the stocks in Project 5X are often tiny and move fast.

Chris’ January pick jumped 37% in the four trading days after he recommended it.

So you can see why too large a membership base could skew prices.

If you’re interested in becoming a member of Project 5X, go here to get the details.

Even if you’re not interested in becoming a member, you can discover the early-stage disruptor I recently bought, for free, on this page until our 75 membership spots are filled.

Talk to you next week,

Stephen McBride
Chief Analyst, RiskHedge

How communist spies lost $100 billion

How communist spies lost $100 billion

I’d like you to meet the most disruptive force on earth.

With one pen stroke it can ruin a business, crash a stock, and wipe out shareholders.

Last April it shocked the world when it banned Chinese phone maker ZTE (ZTCOY) from doing business in America.

ZTE stock plunged 55% in two weeks and never recovered, as you can see here:

Any day now, this force is set to shake the stock market again… 

And this time two “forgotten” stocks stand to hand investors big gains in the fallout.

  • As ZTE shareholders found out the hard way, the most disruptive force on earth is the US government.

In 2017 American officials discovered that ZTE was selling phones to US enemies like North Korea.

The US government told ZTE to stop. It refused… so lawmakers banned ZTE from doing any business in America.

ZTE had been manufacturing roughly 25% of its phone parts in the US. So the ban crippled its business overnight and sent shares plunging to a 55% wipeout in two weeks.

  • Now President Trump is getting ready to bring down a much larger and more important firm...

As you may have heard, Chinese phone maker Huawei stands accused of putting secret “backdoors” into its phones.

If true, these backdoors allow Huawei to spy on Americans who use Huawei phones.

Although Huawei is officially a private company, it is widely known to be an arm of the Chinese Communist government.

The US and China have been squabbling over this for a while. But the situation has reached its boiling point.

Within the next couple of days, President Trump is widely expected to sign an executive order outlawing Huawei products in America.

Keep in mind, Huawei isn’t some rinky-dink company. It sells more phones than Apple (AAPL) and generates as much revenue as Microsoft (MSFT).

  • But most importantly, Huawei is the world’s largest maker of 5G infrastructure.

If you’ve been reading RiskHedge, you know why this is crucial.

5G is the new lightning-fast cell network our phones will soon run on. And the “Great Upgrade” to 5G is one of the largest infrastructure projects in history.

Giant corporations like AT&T (T), Verizon (V), and T-Mobile (TMUS) must spend hundreds of billions of dollars to upgrade their networks to 5G.

Until recently, Huawei was first in line to receive much of this windfall.

It had secured $100 billion worth of 5G contracts—over five-times more than any of its rivals.

  • But with Trump expected to ban Huawei, almost all of Huawei’s 5G infrastructure contracts have been cancelled.

AT&T cancelled its 5G deal with Huawei last year.

UK based Vodafone cancelled its 5G contract with Huawei this year.

The governments of Japan, Australia, and New Zealand have stepped in to ban their cell companies from working with Huawei on 5G.

Of course, all the 5G infrastructure still needs to be built…

  • With the world’s #1 supplier blacklisted, billions of dollars are set to flow to Nokia (NOK) and Ericsson (ERIC).

You might call these two “forgotten” stocks.

Not all that long ago they dominated the cell phone market.

According to leading research firm Gartner, Nokia alone controlled 50% of the phone market in 2007.

Today it controls less than 1%.

And Ericsson shut down its phone business years ago.

They both totally missed the smartphone revolution. Their stocks have gone nowhere over the past decade, as you can see here:

  • But Nokia and Ericsson are two of the world’s only makers of 5G equipment.

According to IHS Markit, Nokia and Ericsson control 50% of the 5G infrastructure market.

And here’s the key: There are only four major makers of 5G equipment and infrastructure in the world:

Ericsson… Nokia… Huawei… and ZTE.

As I mentioned, Huawei and ZTE are essentially banned from the Western world.

Which means phone companies have little choice: They must work with Ericsson and Nokia to get 5G up and running.

  • Both Nokia and Ericsson recently won multi-billion dollar 5G infrastructure contracts from Verizon and AT&T—the two largest US phone companies.

And 3rd place T-Mobile has agreed to pay Nokia and Ericsson $3.5 billion each to build its 5G networks.

In short, Nokia and Ericsson have been handed the giant 5G infrastructure market on a silver platter.

When Nokia reported earnings two weeks ago, its network equipment sales shot above $6 billion for the first time in five years.

Meanwhile Ericsson’s 5G-related revenue jumped 10% last quarter.

The market is beginning to recognize both companies will be big winners from the 5G buildout.

After a decade of being stuck in the mud, Ericsson’s stock has surged 50% in the past year. Nokia stock has climbed 20%.

As the 5G rollout kicks into high gear, both stocks are low-risk, money making opportunities.

For example, Nokia sold around $20 billion worth of network equipment last year. My research shows this should jump above $50 billion in the next two years as 5G ramps up.

So no matter what happens with the stock market, a tidal wave of money is about to flow into Nokia and Ericsson.

That’s all for this week. Are you planning to buy a 5G smartphone when the first one comes out later this year? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Ken has a question about buying disruptive companies.

Stephen,

I love your RiskHedge Report and have bought several of your recommendations.

I’m a "senior citizen" in my 60s. While I certainly see the benefits of investing in disruptive companies, I'm wondering if they are appropriate for someone my age?

Thanks, Ken.

Ken, thank you for your question.

First off, you should limit your investment in any one stock to a maximum of 5% of your portfolio. This ensures your portfolio won’t take too big a loss if something goes wrong with one stock.

Having said that, truly disruptive companies perform well in all types of markets.

And if their stocks do slip in a market sell-off, they often bounce back strong.

Take the collapse in US stocks late last year, for example. Many disruptors we’ve talked about in this letter like data-refiner Alteryx (AYX), cyber company (OKTA), and online ad disruptor The Trade Desk (TTD) initially fell a bit along with the rest of the market.

But all three have shot right back up to hit all-time highs, even though the S&P 500 remains down 6%.

How we’ll collect 4.1% disruption-proof dividends

How we’ll collect 4.1% disruption-proof dividends

Last summer on a Friday in late June, 33,000 Americans lost their jobs.

That was the day Toys “R” Us shut its doors for good.

The company had been selling toys since 1948…

It once ran a 110,000 square-foot store in NYC’s Times Square, one of the most valuable pieces of land in the country…

And for decades, kids screamed to go to Toys “R” Us on Christmases, birthdays, and weekends.

  • Then the great white shark of retail came along…

Internet juggernaut Amazon (AMZN) essentially put Toys “R” Us out of business.

As you surely know, Amazon sells stuff online for cheap. Cheaper, usually, than what you’ll pay in a store.

Jeff Bezos founded Amazon 24 years ago. Since then it has contributed to putting Bon-Ton, Borders, Circuit City, RadioShack, and hundreds of other store chains out of business.

Many other retailers are barely clinging to life. Macy’s (M), JCPenney (JCP), and GameStop (GME) still have a pulse, but they’re fading fast. Since 2014 their stocks have plunged 53%, 77%, and 68%.

According to leading research firm Nielsen, store closings in the US hit an all-time high last year.

With all this destruction, many investors assume there are only two types of retailers:

Those that Amazon has already put out of business…                            

And those that Amazon will soon put out of business.

  • What I’m about to say will surprise those folks…

There’s a third type of retailer that Amazon can never disrupt.

One innovative company has figured out how to tap into these Amazon-proof businesses.

It has rewarded stockholders with twice the gains of Amazon in the past year…

It pays a big and growing dividend…

And super-investor Warren Buffet quietly bought 10% of the company in 2017.

  • STORE Capital (STOR) forms partnerships with businesses that are immune to Amazon’s disruption.

I’m talking about businesses like daycare centers, vet clinics, hair salons, dental practices, gyms, and restaurants.

In other words, businesses that you must visit in person.

Want a new TV? Order one on Amazon and it’ll be on your porch tomorrow.

But if you need a cavity fixed, or your dog groomed, or a babysitter to watch your kid, Amazon can’t help you.

You wouldn’t know it from watching the news, but these small- and medium-sized businesses are thriving while many others struggle to keep the doors open.

  • STORE is a unique real estate play…

It is a Real Estate Investment Trust (REIT). REITs earn rental income from properties they own. Then they hand most of the profits to investors in the form of dividends.

STORE is unlike any REIT out there. Most REITs specialize in a certain type of real estate. For example, a residential REIT might own condos or apartment buildings.

STORE handpicks businesses that are shielded from the disruptive force of online retail. In short, it buys land and buildings from these “undisputable” businesses, then leases it back to them.

The arrangement is a win-win. Many smaller shops have a lot of money tied up in real estate. STORE helps them turn that value into cash they can invest in their growing businesses.

  • STORE is worth around $7 billion and is going after a $3 trillion market.

As regular RiskHedge readers know, we often look to invest in smaller firms going after large markets. These are the kinds of stocks that could double or triple quickly and still have lots of room to grow.

STORE is going after a HUGE market. Mid-sized businesses employ one in every four American workers. STORE could triple its market share and it would still own less than 1% of its target market in the US.

STORE owns properties used by 421 tenants operating in 103 different industries in 49 US states. 75% of its tenants collect over $50 million in revenue a year.

According to company filings, the businesses it works with are growing profits at roughly 15% a year.

  • Super-investor Warren Buffett holds a big chunk of STORE… and it’s the only real estate stock he owns.

As I mentioned, Warren Buffett owns 10% of the company.

Buffett has built his $85 billion fortune by owning great businesses for the long haul.

For example he first bought $1 billion worth of Coca-Cola (KO) shares over 30 years ago and says he’d “never sell a share.”

Buffett’s big stake in STOR tells you all you need to know about how strong its business model is.

  • Last quarter, STOR reported record earnings of $137 million, good for a 69% jump from a year earlier.

It pays a 4.1% dividend—more than double the S&P 500 average.

And over the past five years STORE has raised its dividend 32%.

As it continues to partner with “undisputable” businesses, I see its dividend growing in the neighborhood of 7–8% per year.

Today, for every STORE share you own you’ll get a $1.32 cash payment each year. If it continues to hike its dividend as I expect, you’ll get an automatic raise each year.

That’s it for this week. Are you buying STORE? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Arianne has a question about which stocks to buy right now.

Hi Stephen.

I don't have a lot of money, I'm living on a high school teacher's salary–so I'd like to invest wisely. I don't have thousands of dollars to throw around.

Where would you recommend investing right now?

Thank you, Arianne

Arianne, thanks for your question.

I can’t give individual investing advice, but I’ll give you two pointers that should help you invest wisely.

First, you should limit your investment in any one stock to a maximum of 5% of your portfolio. So, if you have $2,000 to invest, don’t buy more than $100 of any one stock.

This ensures your portfolio won’t get crippled if something goes wrong with one stock.

Second, think about investing in ETFs. As you may know, ETFs hold a basket of stocks. Owning an ETF is a cost-effective way to “spread your bets” so you don’t have too much of your portfolio riding on any one stock.

For example, if you like cybersecurity stocks, take a look at the Prime Cyber Security (HACK) ETF.

How to safely profit from the mother of all disruptions

How to safely profit from the mother of all disruptions

What has been the most financially disruptive event of this century?

Many Americans would answer this question with a number:

2008.

No more need be said… we all know exactly what “2008” means.

It was a year filled with trauma, stress, and anxiety.

During the 2008 financial crisis, more than eight million Americans lost their homes.

Another 10 million lost their jobs.

And the S&P 500 cratered 56%.

As you know the source of all this was a collapse in US housing.

Between 2006 and 2009 the average home lost over a quarter of its value.

This shocked millions of folks who believed the lie that US housing was a slam-dunk, can’t-lose investment. 

The fallout scarred a whole generation of Americans.

  • So when housing stocks began to slip early last year, investors couldn’t sprint for the exit fast enough…

Did you see the bloodbath in US homebuilding stocks last year?

They were obliterated, having their worst year since 2008.

The US Home Construction ETF (ITB) cratered 32%, as you can see here:

This was no run-of-the-mill correction.

In 2018, homebuilder stocks plunged as much as they had during the first 12 months of the 2008 housing collapse!

It was pure panic.

But I’m going to explain why it’s a big moneymaking opportunity for us.

We’re going to buy a company that’s earning record profits… while trading at its cheapest valuation since the depths of the housing crisis in 2009.

It’s the kind of safe but lucrative opportunity you only find in the wake of massive disruption.

  • In 2018 homebuilders were peppered by a flurry of not-so-good news…

Mortgage rates spiked to their highest level since 2011.

Trump’s new tax law removed some of the tax incentives for owning a home.

And after hitting a 10-year high in November 2017, home sales fell.

But one key fact trumps all this negative news:

US homes are still very affordable.

To measure affordability, let’s look at the National Association of Realtors affordability index.

It takes three key metrics—home prices, mortgage rates, and wages—and boils them down into a single number.

This number represents how affordable housing is for the average American.

Here’s the index going back to 1992:

You can see affordability has dipped from generational highs in the past few years.

But it’s still well above the 50-year average as shown by the red line.

Over the past half century, the affordability index has averaged 127.

Today it’s at 145. Outside of the past six years, that’s the highest reading since 1971!

You see, every housing bust in the past 50 years has happened when affordability was below 120.

Put another way… there’s no evidence that investors should be fleeing homebuilder stocks.

The huge selloff is not justified.

Look, the 2008 housing bust was the mother of all disruptions. Investors lost their shirts in homebuilding stocks.

Had you invested $10,000 in homebuilder ETF ITB in 2006, you’d be left with just $1,300 in 2009.

That’s a painful memory. I understand why investors are skittish.

But the fact is the risk of a housing bust today is virtually zero.

Yet many homebuilder stocks are trading at crisis prices!

  • We’re picking through the rubble to buy America’s top homebuilder: NVR, Inc. (NVR).

First, you should know that NVR achieved all-time record earnings in January...

Yet its stock is trading at just 13-times earnings… its cheapest level since 2009.

That’s a combination you rarely see outside of a crisis.

Under the hood, NVR is an exceptional company with a unique business model.

You see, most homebuilders buy raw land then build houses on it.

This is risky. The company must first pay up-front to own the land. Then it will plow money into developing the land… and then finally into building the houses.               

This can take a long, long time. Most homebuilders must pump in vast sums of money for years before they see even a penny of return.

Even worse, they hold the land on their books the entire time.

Imagine buying land in 2004 when the housing market was booming?

You would have paid through the nose.

And by the time you finished developing it years later, the market had tanked.

  • NVR never buys raw land. It only buys developed land.

This is unique among homebuilders. It means NVR avoids the riskiest part of the business.

It’s why NVR was the only homebuilder to turn a profit every year from 2006 to 2011.

Think about that… even in the worst housing downturn ever, NVR still managed to turn a profit.

Today NVR is far more profitable than its rivals. Its net profit margin is almost double the industry average. Meaning for every dollar of sales, NVR shareholders see twice as much profit.

This all makes NVR a very safe investment. And because it plunged 43% last year, there’s plenty of upside.

I see NVR climbing 50% in the next 12 to 18 months as it makes a run back to its recent highs.

Are homes selling fast in your neighborhood? Tell me at Stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

New RiskHedge reader Bill has a question about quantum computing:

I’m a new subscriber and I’ve already made a little on your most recent recommendations.

I really like the idea of finding disruptor stocks to invest in.

One technology I think has huge potential is quantum computing, which could completely disrupt everything from the internet to healthcare. Which companies are the best investments in this space? Google… IBM?

Thanks, Bill

Bill, thanks for your question. I’m glad to hear you’re making money on disruptor stocks.

As you alluded to, Google, IBM and a handful of startups are working to create the most powerful computers the world has ever seen.

In fact, you can’t compare computers today with quantum computers. They run on totally different principals.

I often say, it’s like jumping from the candle to the lightbulb.

Experts in quantum computing tell me the technology is still in its infancy. I wouldn’t be surprised if we don’t see true quantum computing for at least 20 years.

So while it’s an exciting trend that’s worth keeping an eye on, no company will be making money in quantum computing anytime soon.

Meet the invisible watchdog who’s keeping you safe

Meet the invisible watchdog who’s keeping you safe

Today I’m going to tell you about the most important little company you’ve never heard of. 

Not 1 in 500 investors know its name.

But you likely use its services every day.

Huge clients like Major League Baseball and the US government happily pay it many millions of dollars.

And my research shows its stock could double in as little as 12 months.

Let me explain…

  • Picture Cowboys Stadium in Dallas, Texas.

On football gamedays, some 100,000 people cram in to watch the Cowboys play. 

As you would expect, security is hectic.                         

In the span of a couple of hours, the guards who man the gates must size up 100,000 eager fans as they pour in. 

They must let in the law-abiding ticket holders… and keep out the drunks, scalpers, violent fans, people carrying weapons or drugs, and other troublemakers. 

  • Now multiply this chaos by 100…

And you’ll begin to understand the cybersecurity nightmare America’s largest online companies deal with all day, every day.  

Take Adobe (ADBE) for example. I’m sure you’ve used its PDF software.

Like all software companies, Adobe used to sell its software on CDs.

As regular RiskHedge readers know, “the cloud” changed that.  

Now you access its software over the internet—no installation required.

This has been fantastic for Adobe’s business and its shareholders.

Since switching to the cloud in 2012, its stock has surged 740%.

  • But it also opened up a gigantic security risk. 

Millions of users now access Adobe’s software over the internet every day.

Millions of people… coming and going on its networks… every day.

That means millions of new potential security holes.

A hackers dream.

And keep in mind, practically everything is on the cloud these days.

I’m typing this on Microsoft Word… through the cloud.

When you watch Netflix (NFLX)... you’re using the cloud.

When you file your taxes later this year through TurboTax… you’ll be using the cloud.

Can you even imagine the billions of vulnerable connections out there every minute of every day?

  • A company called Okta (OKTA) has pioneered the solution.

Ever book a flight through JetBlue (JBLU)…

Or sign into the Major League Baseball website…

Or check your credit score on Experian (EXPGY)?

Chances are Okta has kept your data safe.

Okta’s unique “Identity Cloud” acts as an invisible blanket that protects users from being hacked. 

Okta works silently behind the scenes. You won’t know it’s there.

But many big American companies like Adobe, MGM Resorts (MGM), and Western Union (WU) rely on Okta to keep users safe.

The US government trusts Okta, too. The State Department and Justice Department pay it to safeguard their networks. 

And if you’ve logged into the US Social Security or Medicare website in the last couple of months, you’ve been protected by Okta.                                                   

  • Okta provides US military-grade cybersecurity everywhere, on any device.

In a nutshell, Okta verifies that the people accessing a network are who they say they are. And that they have permission to be there.

This is different from traditional cybersecurity, which often relies on firewalls.

A firewall, as you may know, is a digital barrier meant to keep out unwanted intruders.

Firewalls are effective at ringfencing a given online area—like your home network or a university’s network.

As long as you stay within the confines of the firewall, it can protect you and your data. 

But remember, “clouds” consist of millions and millions of connections. It’s hard to wall off a cloud. Okta protects users where traditional firewalls fall short.

  • Okta’s business is booming…

Sales have exploded 150% in the past two years. Since it went public in 2017, its quarterly year-over-year sales growth has never slipped below 57%.

One of Okta’s big moneymakers is helping companies keep employees secure.

For example, if an employee works from a coffee shop, or an airport, or from home, Okta’s software ensures the connection is secure.

This is a HUGE security risk. According to Verizon, 8 out of 10 data breaches come from hackers getting into the network through employee accounts.

Another thing I like to see: Okta’s customers spend more and more money with it every year.

For every dollar a customer spent with Okta in 2017, it spent $1.21 in 2018.

This puts its dollar “retention rate” at a world-class 121%... crushing even Apple’s (AAPL) 92% retention rate.

  • I love the cybersecurity business right now…

As I’ve said before: No cost is too high when it comes to protecting your customers’ data.

Recently we discussed how Facebook’s (FB) business was essentially ruined by a data breach.

Its stock plunged 17% on the day of the news. It marked the biggest single-day wipeout of shareholder value in US stock market history.

Even with its stock jumping 11% this morning on strong earnings, it’s still down 24% in the past six months.

Back in November, hotel company Marriott (MAR) revealed its network was compromised. Hackers stole personal data for 500 million of its customers.

The stock plunged 18% in the following month. Marriott now faces a $155 million fine.

Any wise CEO will pay whatever it takes to keep his company’s networks secure. It’s an easy choice...

You either pay millions now for top-notch cybersecurity… or you skimp and end up paying hundreds of millions, or billions, later to clean up a disaster.

Okta’s security services are essential to some of America’s biggest, richest companies. It’s exactly the kind of business I want to invest in.

  • Okta is an “autopilot stock.”

If you’ve been reading RiskHedge you know why autopilot stocks are ideal investments. In short, they collect heaps of recurring cash by selling subscriptions.

94% of Okta’s sales come from selling subscriptions to its services, giving it a constant and predictable stream of cash.

This helped to insulate Okta from the recent market selloff. While most stocks are still down 10%–20%, Okta is scraping up against its highs. Investors take comfort in the steady flow of cash that autopilot stocks like Okta can generate.

  • Okta is on track to rake in around $400 million this year.

My research suggests it will grow earnings at roughly 35% per year for the next three to five years. If it can achieve this rapid growth in the next 12 months, its stock could easily double.

I encourage you to take a small position in Okta today. Note that it has surged about 50% from its December lows.

Anytime a small stock shoots up so much so quickly, a pullback could be around the corner. So keep your position size small for now.

That’s it for this week. Have you ever been hacked? Tell me about it at stephen@riskhedge.com

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Johnathan has a comment about network tower companies as they relate to 5G.

I recently signed up for your letter and find it very interesting.

I’m an ex-money manager and used to follow the network tower stocks like American Tower (AMT) and SBA Communications (SBAC).

With 5G’s short signal I believe there has to be many more tower locations built. I think this is an interesting way of playing 5G.

Johnathan, thanks for your comment. I agree with you.

During the rollout of 4G, these tower companies handed investors up to 10 times their money. For example, between 2008 and 2015, SBA Communications (SBAC) shot up roughly 1,000%.

Given 5G’s fragile signal, hundreds of thousands of new cell towers will need to be built across America. So the tower companies you mentioned should do great business in the coming years.

A company that’s already raking in millions from 5G is chipmaker Xilinx (XLNX). I recommended the stock in early December, and it’s shot up about 25% since.

The brilliant guy who tricked an emperor

The brilliant guy who tricked an emperor

[Stephen’s note: Last night’s American Disruption Summit was a huge success. A big thanks to the thousands of investors who tuned in from around the world. If you missed it, you can watch the replay for a short time right here.

In today’s RiskHedge Report, I’m handing the reins to RiskHedge Chief Investment Officer Chris Wood. Below, he explains the secret behind why he’s seeing more “disruptor” stocks with huge upside today than at any time in his 15-year investing career...]

*   *   *   *   *  

Have you heard the story of the brilliant guy who invented chess?

Legend has it he took the game to the emperor of what is now India.

The emperor was so impressed, he told the inventor to name his reward.

All the inventor wanted was some rice to feed his family… so he made what sounded like a humble request.

He asked for one grain of rice for the first square of the chess board, two for the second square, four for the next, and so on, for all 64 squares.

The emperor agreed. It seemed like a small price to pay for a brilliant invention.

After 10 squares, the emperor had given the inventor just 1,000 grains of rice.

That’s about half an ounce... less than I’d put in a bowl of New Orleans gumbo.

After 20 squares, the emperor had given out about 1 million grains.

Which is 35 pounds or so—enough to serve 140 adults.

After 30 squares, the inventor was entitled to about 1 billion grains.

After 32 squares—the first half of the chessboard—the total was up to about 4.3 billion.

It dawned on the emperor where this was headed.

On the second half of the chessboard, growth really takes off.

After 40 squares, the inventor would get over 1 trillion grains.

After 50 you’re over 1 quadrillion

And at square 64, you’re at about 18.4 quintillion grains of rice.

That’s an impossibly huge number, enough to cover all of India in a meter-thick layer of rice.

All that rice would be worth about $1.96 trillion in today’s money.

The Awesome Force That Sneaks Up on You

The brilliant futurist Ray Kurzweil coined the term “the second half of the chessboard” in 1999.

He used it to illustrate the incredible, almost unbelievable power of exponential growth.

At last night’s American Disruption Summit, super investor Mark Yusko made a great observation.

He said humans tend to be pretty good at linear math, like 2 + 2 + 2 = 6.

But we’re bad at understanding exponential math. Most folks don’t really “get” what it means when something doubles 64 times. They don’t understand the true magnitude of exponential growth.

It’s happening right under our noses, though…

You see, technology has been improving exponentially for more than 50 years.

Have you heard of Moore’s Law?

Named after Intel founder Gordon Moore, it observes that computing power doubles roughly every 18 months.

Moore’s Law has held true for more than half a century.

For the past 57 years, computing power has doubled about every 18 months.

That’s 38 doublings.

Which means, we’re now living on the second half of the chessboard.

A funny thing about exponential growth is it sneaks up on you.

In the early stages, you barely notice four grains of rice doubling to eight… or 32 grains doubling to 64.

Likewise, a computer built in 1991 wasn’t much more powerful than one built in 1990.

But over time, the gains quietly accumulate. When you get to “the second half of the chessboard,” where we are now, progress hits a ramp and goes vertical.

Growth accelerates at warp speed… much faster than most folks believe is possible.

Here’s how exponential growth looks on a chart:

And it’s not just computing power that’s growing exponentially.

In 1968, you could buy one transistor for $1.

Today, you can buy 10 billion transistors for $1. And they’re better, smaller, and faster than ever.

This is why the smartphone in your pocket is millions of times more powerful than the computers NASA used to send men to the moon in 1969.

But you can buy 24,000 new iPhones for the price of just one of those NASA computers.

     
-

Disruptor Stock

Noun. [dis-ruhpt-or stok]

A small stock that creates or transforms a whole industry. Has an unfair advantage over its competition. Known for making early investors profits of 1,000%+.

Click here to get the name of the $6 Disruptor Stock revealed to all American Disruption Summit attendees

-
     

Exponential growth is in biology, too.

The Human Genome Project took more than 10 years and about $3 billion to map the first human genome.

Today, we can map a person’s DNA in one day for about $1,000.

Soon, it will take minutes and cost only $100.

How to Get Rich from Exponential Growth

You might be thinking: That’s great Chris, but how do we make money from this?

Take a look at the stock chart of DNA-mapper Illumina (ILMN) just below. This company is the driving force behind the plunge in DNA mapping costs:

It has handed early investors 20,000%+ gains and counting.

Notice its chart looks a lot like the exponential growth chart above.

Illumina stock achieved small gains in the early stages. Thanks to exponential growth, these gains would go on to snowball into life-changing profits.

Or consider Cisco (CSCO), which piggybacked on one of the most disruptive trends in history—the internet.

It provided networking tools that made the internet rollout possible.

And it rewarded early investors with exponential gains that turned every $1,000 invested into almost a million dollars.

Note the exponential pattern.

In just the last few years, humans have invented computers that think… built cars that drive themselves… developed cures for some cancers… and figured out how to produce energy efficiently without burning a trace of fossil fuel.

Just imagine what’s coming next as we zoom up the vertical part of the curve.

We’re living in a truly unique time. Exponential progress has opened a whole new world of investment opportunities for us.

Hands down, I see more opportunities to make big gains in exponentially growing stocks today than at any time in my 15-year investing career.

If you missed it, I shared one such stock—ticker and all—at last night’s American Disruption Summit.

It trades for $6 on the Nasdaq.

And as I said on camera, I see it gaining 500% in the next 2 ½ years.

You can get the full story by watching the replay for free, right here, while it’s still available.

Chris Wood
Chief Investment Officer, RiskHedge

PS: Have you heard about Project 5X? It’s my new research service where I hunt for exponentially growing “disruptor” stocks with the potential to hand you 500% profits at a minimum. Go here to find out more. Please hurry if you’re interested—your 29% Charter Member discount expires soon.

The end of Apple

The end of Apple

“Oh man, that’s almost a month’s rent for me…”

Here I am sitting in a cab in New York City.

I’m headed uptown to Columbia University where we’re holding the first-ever American Disruption Summit.

You can register to watch for free here… more on that in a minute.

The driver and I are talking about the absurd price tag of the latest Apple (AAPL) iPhone.

He’s shocked when I tell him the cheapest model is $1,149.

Who can afford that?” he asks.

  • In today’s letter I’m going to show you why Apple stock is a terrible investment.

Apple has had an incredible decade.

Since the iPhone debuted in 2007 its sales have jumped 10X.

Its stock has appreciated over 700%. And up until November it was the world’s largest publicly traded company.

But two weeks ago, Apple management issued a rare warning that shocked investors.

For the first time since 2002 it slashed its earnings forecast. The stock cratered 10% for its worst day in six years.

This capped off a horrible few months that saw Apple stock crash roughly 35% since its November peak.

The plunge erased $446 billion in shareholder value… the biggest wipeout of wealth in a single stock ever.

  • Apple has a dirty secret…

From looking at its sales numbers, you wouldn’t know anything is wrong.

Apple’s revenue has marched up since 2001, as you can see here.

By the looks of the chart, Apple’s business is perfectly healthy. But there’s a secret hidden behind these headline numbers.

Although Apple’s revenue has grown… it is selling less iPhones every year.

In fact, iPhone unit sales peaked way back in 2015. Last year Apple sold 14 million fewer phones than it did three years ago.

  • Apple has kept revenue growth alive solely by raising iPhone prices...

In 2010 you could buy a brand new iPhone 4 for 199 bucks.

In 2014 the newly released iPhone 6 cost 299 bucks.

As I mentioned, the cheapest model of the latest iPhone X costs $1,149!

That’s more expensive than many laptop computers. It’s a 500% hike from what Apple charged eight years ago.

  • It’s an iron law of disruption that technology gets cheaper over time...

Not all that long ago, a flat-screen high-definition TV was a luxury. Even a small one cost thousands of dollars.

Today you can get a 55-inch one from Best Buy for $500.

In 1984, Motorola sold the first cell phone for $4,000.

According to research firm IDC, the average price for a smartphone today is $320.

Cell phone prices have come down roughly 92%...

But Apple has hiked its smartphone prices by 500%!

Frankly, it’s remarkable that Apple has managed to pull this off.

  • But let me tell you… Apple is a disruptor in decline.

It comes down to the lifecycle of disruptive businesses.

Twelve years ago only 120 million people owned a cell phone. Today over 5 billion people own a smartphone, according to IDC.

Apple was the driving force behind this explosion. As the dominant player in a rapidly growing market, it grew into the most profitable publicly traded company in history.

As I mentioned, iPhone sales growth stalled out in 2015. This would’ve been the end of the line for most businesses.

But Apple did a masterful job of extending its prime through price hikes. Its prestigious brand and army of die-hard fans allowed it to charge prices that seemed crazy just a few years ago.

But now iPhone price hikes have gone about as far as they can go.

  • After all… what’s the most you would pay for a smartphone?

$1,500?

$2,000?

You might wonder… how bad, exactly, is the decline in iPhone sales?

It’s so bad that Apple now keeps it a secret.

In November, Apple announced it would stop disclosing iPhone unit sales.

This is a very important piece of information. Investors deserve to know it. Yet Apple now keeps it secret…

  • Keep in mind, the iPhone is Apple’s crown jewel.

It generates two-thirds of Apple’s overall sales.

Let that sink in…

A publicly traded company that makes most of its money from selling phones is no longer telling investors how many phones it sells!

And its other business lines can’t pick up the slack for falling iPhone sales.

Twenty percent of Apple’s revenue comes from iPads and computers. Those segments are also stagnant.

Which means 86% of Apple’s business is going nowhere.

Could Apple go the other way and slash iPhone prices?

I ran the numbers. If Apple cut prices back to 2016 levels, it would have to sell 41 million additional phones just to match 2018’s revenue.

  • We’ve seen the fall of a cell phone giant before…

Before Apple, Nokia (NOK) was king of cell phones.

In 2007 the front-cover headline of a major business magazine read:

“Nokia: One billion customers—can anyone catch the cell phone king?”

The iPhone debuted in 2007. Here’s Nokia’s stock chart since then:

  • Before I sign off, an important announcement…

Next Wednesday I’m taking part in the first-ever American Disruption Summit.

It’s going to be a fun and profitable night for all attendees. Just for showing up, you’ll get the name and ticker of a small $5 “disruptor” stock that has 500%+ upside in the next two and a half years.

We’re broadcasting from New York City, but you can watch online for free. Go here to reserve your seat.

As a RiskHedge reader, you already know how important disruption is to your investing results. At the American Disruption Summit, we’re gathering together world-class disruption experts to tell us where they’re putting their money in 2019.

Hope to see you there. You can reserve your seat right here.

And if you can’t make the premiere, no worries—a replay will be available to all who register.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Chris has a question about my projection for uranium prices:

“Stephen,

I don't disagree with your argument that uranium prices will move higher, but the timing and extent of the move may not be what you expect.

The reason prices have rebounded is that several of the major producers have cut production. When the uranium price gets into the low $40s, that production likely will be brought back on line.”

Thanks for your note, Chris. As I mentioned in my last article, the catalyst for much higher uranium prices will be the tidal wave of demand from nuclear power plants in the next 2–3 years. From talking to industry insiders, I can tell you many producers are holding out for about $70/lb. uranium.

As for the price of uranium itself, remember it rarely stops at a “rational” price. A shortage leads to surging prices, and momentum often carries the price well past “equilibrium.” That’s the norm not just in uranium, but for most commodities.

“Druck” the bloodhound is buying disruptors. Are you?

“Druck” the bloodhound is buying disruptors. Are you?

Has billionaire Stan Druckenmiller been reading RiskHedge?

“Druck,” if you don’t know him, might be the greatest investor alive today.

He’s low-key and rarely gives interviews. But his track record is astonishing…

Druck strung together 30 straight profitable years from 1980 to 2010.

During that time he earned returns of 30% per year.

If you took $10,000 and compounded it at 30% per year for 30 years… you’d amass a $26.2 million fortune.

And Druck has never had a losing year… ever!

He made money in 2001 during the dot-com crash. And reportedly made $260 million in 2008, while most investors were losing their shirts.

  • In a rare interview with Bloomberg, Druck was asked what he’s investing in today...

He said:

We are long the disruptors and short the disrupted… it has worked beautifully.”

Regular RiskHedge readers know all about disruptor stocks.

Disruptors are not ordinary stocks. They don’t come in and compete with industry leaders. They destroy them.

They steamroll the competition… and often hand investors big gains of 3x, 4x, 5x, or better.

  • Take a company like Adobe Systems (ADBE), whose “PDF” software transformed American offices…

Remember Xerox (XRX)? It makes those big, clunky paper copiers.

Believe it or not, Xerox was once a mighty tech giant. 30 years ago it was America’s 20th largest company.

Today its stock chart is a sad reminder of what it’s like to get steamrolled by a disruptor.

Xerox stock peaked at $168/share in the late 1990s. Today it trades for just $21/share… a wipeout of 87%, as you can see on this chart:

Canon (CAJ), one of the world’s biggest manufacturers of printers, is a victim of Adobe’s disruption too. In the past decade printer sales have plunged 30%, and Canon’s stock has been cut in half since 2007.

Meanwhile, Adobe stock has surged 600% since 2010. That’s four and a half times better than the S&P 500.

And if you’d bought Adobe when it was an “early stage” disruptor in the late 1990s, you’d be sitting on profits of over 20,000%.

  • Today, Druck is plowing billions into a disruptive trend we’ve talked about before…

“The cloud.”

As I explained recently, the cloud gives businesses cheap access to powerful supercomputers.

Druckenmiller has invested over $1 billion in cloud businesses including Microsoft (MSFT)… Amazon (AMZN)… and ServiceNow (NOW).

In fact according to SEC filings, 52% of his stock holdings are in cloud companies.

In the chart below, you can see how cloud disruptors have crushed the S&P 500 over the last five years.

  • Druck isn’t the only legend buying disruptors…

Have you seen the movie The Big Short?

It tells the story of a few investors who made a killing by betting on the US housing collapse in 2007-8.                                               

Steve Eisman, who was played by Steve Carrell, was a mastermind behind the trade. His fund made about $1 billion from the housing collapse.

In a recent interview, Eisman was asked “what are the biggest opportunities you see today?”

He said “the disruptor vs. disruptee theme. [It] will last for a long time and there’s lots of way to play that...”

  • Druck and Eisman are what I call “bloodhound investors...”

As you may know, many investors got rich by specializing in one strategy.

Warren Buffett buys undervalued businesses and holds them forever.

Carl Icahn is an “activist” investor. He buys big chunks of companies and influences CEOs to make changes.

Neither Druck nor Eisman specialize. Instead, they seek out moneymaking opportunities like bloodhounds.

Druck has famously made big money across all assets: stocks… bonds… currencies.

Eisman made his fortune during the worst market crash since the Great Depression.

You could say they’re agnostic in what they buy.

It’s like when bank robber Willie Sutton was asked why he robbed banks? He answered “because that’s where the money is.”

Go where the money is.

In a recent interview Druckenmiller said “We’re in the most economically disruptive period since the 1880s.”

Clearly, these guys know the big money today is in disruptor stocks.

I like to see two of the world’s smartest money managers on our side, buying disruptors along with us.

That’s all for today. Be sure to check out next week’s issue. I’ll be making an important announcement…

Plus I’ll make the case for why one of the world’s largest companies—whose stock you almost certainly own—is in big trouble.

Write me at stephen@riskhedge.com with any questions or comments.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

In response to my article about Waymo’s self-driving cars, RiskHedge reader Syd asks:

“Stephen, great article on Waymo & self-driving cars, thank you.

Which Google shares do you recommend, Class A (GOOGL) or Class C (GOOG)? What's the difference, other than a small difference in price?”

Syd, the difference is Class C shares (GOOG) have no voting rights, while Class A shares (GOOGL) have one vote each.

For this reason, GOOGL trades at a slight premium to GOOG. But the two move in tandem. For example, since the stock split in April 2014, the correlation between GOOG and GOOGL has been 0.9988. 1.0 is a perfect correlation. So you can go ahead and buy either one.

RiskHedge reader Jim has some good thoughts on self-driving cars.

“I read the RiskHedge report on AI and self-driving cars. I probably wouldn't climb in one today, but in a few years, I'm not sure I'd have a problem with it.

I realize that self-driving cars have a lot more sensors and computational power than the average vehicle. I love the driver-assist package in my wife's 2014 Jeep Cherokee. I don't think I'll ever own anything without adaptive cruise control again. Really helps for those "not so good" drivers who pass you then pull in front and slow down.

Nice thing about self-driving cars is the millions of senior drivers who should no longer be driving can stay more independent. As someone nearing 65, I know I'll be there one day. If the self-drivers aren't there, I hope I have the sense to give up my car, as my grandmother did... first stopping driving at night, then giving up her license at around 89. She lived several more years and despite living in a country village, never missed her car.”

Jim, I completely agree. Elderly folks who can’t drive will be the first big winners when self-driving cars rollout. They’ll no longer have to take public transport to get groceries or visit family.

This is why Waymo is smart partnering with city councils to fill the gaps in their public transport systems. And bringing people to buy their groceries at Walmart.

On the face of it, self-driving cars seem like a young person’s thing. But in a few years, Americans of all ages will be riding in them.

What to do with your money in a bear market

What to do with your money in a bear market

“Sell everything, I can’t take anymore!”

My stockbroker friend got a phone call from a hysterical client on Christmas Eve.

She was panicking over all the money she had lost in the market… and was demanding to sell her whole portfolio of stocks.

December, as you surely know, was horrendous for U.S. markets.

The S&P fell 10% for its worst December since 1931 during the Great Depression.

In fact, it was the S&P’s worst month overall since February 2009.

  • From 2009 to 2017, U.S. stocks posted a gain every single year…

That nine-year winning streak is now over. On Monday the S&P closed out 2018 with a 6% loss.

All this bad news has many investors freaking out that a dreaded “bear market” in stocks has arrived.

If we are in a bear market, there’s likely more downside from here. In the 10 bear markets since the 1920s, stocks fell an average of 32% from their highs.

Meanwhile the S&P has already fallen 17% since peaking in September 2018.

So if we’re in for an “average” bear market, stocks should continue falling.

  • Of course, markets often defy averages… 

And I’ve heard from a lot of readers who are nervous stocks are headed for a full-blown crash.

So in the rest of today’s letter, we’re going to look at how “disruptor” stocks perform in a worst-case scenario…

Like when U.S. markets cratered 57% during the 2008 financial crisis.

  • As regular RiskHedge readers know, “disruptors” are stocks that create, transform, and disrupt whole industries.

“Disruptors” are not ordinary stocks. They don’t come in and compete with industry leaders. They destroy them.

Buy a disruptor early on, before it becomes a household name, and you’ll often stand to make profits of 1,000% or greater.

Take online travel disruptor Priceline (BKNG) for example.

Remember when you had to talk to a travel agent to book a vacation?

Now you can book a whole trip from your computer in under ten minutes.

Priceline was the main driving force behind this disruption.

Its online booking platform dominates the $240 billion global travel services industry. Close to half of all vacations booked online today are booked through Priceline’s network of websites.

  • Early investors in Priceline stock earned profits up to 14,000%...

Back in 2007, just before the financial crisis, Priceline was still a small firm with just $140 million in sales.

In the next two years—2008 and 2009—its earnings surged 249%.

Let me repeat that…

During the darkest days of the worst financial crisis since the Great Depression, Priceline’s business didn’t just hold up...

It grew faster than ever.

And its stock price soared 144% from 2008–2009. You can see from this chart it crushed the S&P 500.

  • Priceline wasn’t the only disruptor that sailed through the 2008 crisis…

A few months ago we talked about a super-profitable business called the cloud. 

In short, the cloud gives businesses cheap access to powerful supercomputers.

Salesforce.com (CRM) pioneered this business two decades ago. Today over 150,000 clients pay Salesforce a monthly fee to use its customer relationship tools. Investors who got into Salesforce stock early booked profits up to 1,750%.

Like Priceline, Salesforce’s profit and revenue growth powered right through 2008 and 2009.

During this period the average S&P 500 company’s earnings tanked by -77%.

Salesforce’s earnings, meanwhile, more than doubled.

Look at the chart below. You’ll see that after markets bottomed in 2009, Salesforce stock rocketed six times higher than the S&P by the end of 2010.

  • The financial crisis was barely a speed bump for great disruptor stocks.

Iconic American stocks like Lehman Brothers, Bear Stearns, and Merrill Lynch couldn’t survive 2008. How did these disruptors do it?

It comes down to the difference between a business and a stock price.

The father of “value investing” Benjamin Graham once said:

 “In the short run, the market is a voting machine. But in the long run, it’s a weighing machine.”

In the short run, emotional buyers and sellers push stock prices around. When fear grips markets, stock prices go haywire.

But ultimately, business performance is what matters.

True disruptor stocks have a rare quality: they grow… and grow… and grow… no matter what the broad markets are doing.

As I mentioned, their profit engines kept on purring right through the 2008–2009 meltdown.

Priceline’s earnings surged 249% during the financial crisis. Salesforce’s more than doubled.

Earnings for another disruptor—Amazon (AMZN)—shot up 89%.

To put some numbers to it, say you had invested 10,000 bucks each in Priceline, Salesforce and Amazon at the beginning of 2008.

So $30,000 total.

By the end of 2009, your stake would’ve grown to $54,000.

  • In other words, you would have made an 80% profit during the worst crash in 70 years.

Compare that to markets as a whole. If you’d bought the S&P 500 on January 1, 2008, it would have taken until March 2012 just to recoup your losses.

Your investment was dead money for over four years.

Look, I doubt we’re headed for a crushing bear market like 2008.

Huge crashes like that just don’t occur often.

But if we are headed for stormy markets… I want to own disruptor stocks that will power right through it.

Where do you think markets are going in 2019? Tell me at stephen@riskhedge.com.

Until next week,

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Terry asks about overseas disruptors:

“Can you please mention any UK companies that come up in your research?”

Terry, as you likely know, the majority of great disruptive companies are born in America. But one UK-based company did catch my attention recently.

Ocado Group (OCDO.L) (OCDDY) is an online grocery retailer with some pretty unique technology. You might have seen the video of its fully automated grocery warehouse. I’m not recommending Ocado today, but it’s a player in one of the disruptive trends I’ll be talking a lot about this year—disruption of grocery stores.

Longtime reader Rakesh asks about Netflix:

“Hello Stephen, I've been following RiskHedge for a while now. It’s thorough and has one of the best edges in the market. Do you think vernacular language content creation will help Netflix grow going forward?”

Thanks for your kind comment Rakesh. I believe you’re asking if creating original content in several different languages can propel Netflix forward.

Around 60% of Netflix subscribers are from outside America. And in the past year, it’s added 4x more international subscribers than US ones. As I explained back in July, Netflix’s US growth is nearly tapped out. So to continue growing, it MUST create successful programming in many different languages.

The problem, as I wrote here, is that it will be extremely difficult for Netflix to develop programming expertise in many languages and countries. It’s possible they’ll succeed, but I wouldn’t put money on it.

A special peek behind the curtain at RiskHedge

A special peek behind the curtain at RiskHedge

Happy holidays from the whole team here at RiskHedge.

Our offices are closed this week while we spend time with family. So today we’re doing something a little different…

Instead of the usual weekly essay, I’m sharing a lively “behind the scenes” conversation I recently had with RiskHedge Chief Investment Officer Chris Wood. He’s the smartest guy I know when it comes to investing in early stage disruptive companies.

Below, we chat about what it really takes for a small disruptive company to grow into a large one… discuss which disruptive stocks you should avoid… and divulge early details of a unique project we’re working on.

Enjoy your holidays,

Stephen McBride
Chief Analyst, RiskHedge

*  *  *  *  *  *  *  *  *  *

Stephen McBride: Chris, our readers hear from me every week. They probably don’t know we have a whole team of talented people working here at RiskHedge. Tell them who you are.

Chris Wood: Yeah Stephen, you really hog the spotlight! I’m only kidding. As chief investment officer here at RiskHedge, I do two things. First, I co-manage the RiskHedge Fund with you, which all of RiskHedge’s founders are personally invested in.

Second, I specialize in finding “early stage disruptor” stocks.

SM: Which are what, exactly? 

CW: As you often say, disruptive companies literally invent the future. The true disruptors aren’t out there making small improvements. Instead they’re blowing up norms… taking down the entrenched players… creating or transforming whole industries.

I specialize in finding these stocks years before you’ll ever read about them in the Wall Street Journal. By getting into these tiny disruptors early, you give yourself a real shot at very large gains—often 1,000% or more. Sometimes a lot more.

SM: Give our readers an example.

CW: Take a company like Adobe Systems (ADBE). Its “PDF” software changed how we read things. Most American professionals use it a dozen times a day without giving it a second thought. Adobe’s software was a driving force behind the whole “going paperless” trend that swept through American offices.

Had you got into Adobe stock early on, when it was an early stage disruptor, you’d be sitting on gains of over 130,000%. That’s enough to turn even a small stake of a thousand bucks into well over a million.

SM: A lot of skeptical folks will assume you’re cherry-picking with that example.

CW: I know, a gain that big is hard to fathom for most investors who have never seen anything close to it. But the fact is, there are dozens and dozens of examples of early stage disruptors achieving tremendous gains.

One your readers know well is Netflix (NFLX). I know you’re no fan of Netflix’s (NFLX) stock—and its certainly nowhere near “early stage disruptor” status today.

But think back to 2007 when it was just getting off the ground. Its disruption of the movie rental business was only getting warmed up, right? It would go on to disrupt not only Blockbuster video, but the whole American cable TV business.

Today, Netflix is bigger than networks ABC, CBS, NBC, and Fox. And as you know, its stock has handed early investors something like 47,000% gains.

SM: So which stocks you buy is only half the challenge. The other half is when you buy them.

CW: Right. You have to get in well before the crowd catches on. Like you, I have zero interest in owning Netflix today.

SM: You’re known for recommending both Amazon (AMZN) and Google (GOOG) way back in 2012, long before they became two of the so-called “FAANG” stocks. Any interest in owning them today? 

CW: They’re both great businesses. But they’re gigantic already. Its mathematically impossible for either of them to grow, say, 10X over the next few years. The best you can really hope for is a double.

I only want to buy tiny businesses taking on very large markets. The ideal early stage disruptor is a tiny, little-known stock on the cusp of transforming a big industry. That’s how a company can realistically set itself up to grow 10x–100x, which leads to a soaring stock price.

SM: And finding these gems is much easier said than done. Its not something an investor can do part-time or on the side.

CW: Right—and that’s why we set up RiskHedge. As far as I know, we’re the world’s only investment research firm 100% focused on disruption.

I want to mention one more big advantage to investing in early stage disruptors. If you identify the right stocks, you don’t have to time your buys and sells precisely.

Take Adobe. As I said earlier, you’d have made something like a 130,000% gain if you got in and out at the right times. Of course, no one can consistently nail the timing. But with gains that big on the table, you’re afforded plenty of leeway. Even if you totally botched the timing and made only 1/20th of the available gain, you’d take home a profit of 6,500%.

SM: Okay, let me shift gears a little bit. You’ve been a professional investor for 15 years, and you know as well as I do there are a whole lot of what I’ll call “pretend” disruptors out there. For every truly disruptive stock, there are a dozen others that claim to be the next big thing but are really just capitalizing on hollow hype.

Tell our readers the unique way you pinpoint true winning disruptors when there’s so much “fool’s gold” out there.

CW: You’re talking about my CHAOS Formula. It’s my proprietary tool for evaluating the profit potential in disruptive stocks.

I like to explain it like this. Finding early stage disruptors with 1,000% or greater profit potential is like finding a needle in a haystack. My CHAOS Formula is like a powerful magnet that homes in on truly disruptive stocks and discards all the others.

SM: Why “CHAOS”? 

CW: It’s an acronym. Very briefly, it evaluates a stock based on five criteria—Change, Hype, Acceleration, Ownership, and Size.

I’ll only invest in a stock that passes all five. Its sets the bar high—only about 1 in 85 stocks I feed into it earn a passing grade.

SM: I’m sure readers are wondering where they can get your CHAOS Formula picks.

CW: I’ve always kept them confidential. The challenge, as you know, is these stocks are often tiny. They typically have a market cap of around $100 million. Which means too many investors buying in a short window would skew the price.

We have a pretty big following at RiskHedge. Tens of thousands of investors read this weekly letter, and millions more read our work in the media. Your recent piece on Forbes was read by, what, 2.5 million people? And that’s just one article. Even if just 0.1% of them followed along and bought a tiny disruptor I recommended, it would artificially inflate the price.

SM: But we’re creating a solution. We’re not quite ready to announce the details yet, but can you give readers a little taste of the special project we’re working on? 

CW: Sure. In January, I’ll be launching a new service where I share my early stage disruptor stock recommendations with a small circle of investors. For the reasons I just explained, we’ll only be able to accept around 1,000 members max. I hate to turn folks away, but the stocks I recommend are just too small and under-the-radar to share beyond a small circle of serious investors.

That’s really all I can share for now.

SM: Thanks Chris. Looking forward to hearing more in January.

Buy this small stock that turns data into cash

Buy this small stock that turns data into cash

Peter Cavicchia got fired for spying on his bosses.

He was a former US Secret Service agent in charge of running JPMorgan’s (JPM) employee surveillance program.

His job was to make sure employees weren’t up to anything illegal, like insider trading.

Although all big banks have surveillance teams, Cavicchia’s was different.

It was one of the first to use data to inform its spying.

His team read personal emails of employees… tracked GPS locations of work phones… trawled through internet history… and even transcribed employee phone conversations.

It then fed all this data into special computer algorithms that could identify suspicious patterns of behavior… ones that simple surveillance would have missed.

Cavicchia was fired in 2013 when JPMorgan’s top brass discovered he was spying on them, too.

  • Today, using data to predict people’s behavior is BIG business.

Whether you’re aware of it or not, you generate a lot of data every day.

Every time you shop online, use your phone for driving directions, send an email, browse Facebook (FB), or watch YouTube… you’re generating data that savvy companies turn into cash.

25 years ago before any of this was around, the whole world generated just 100 gigabytes of data a day.

That’s equal to downloading 30 HD movies.

Today we generate roughly 4.3 billion gigabytes per day… which is a 4,300,000,000% explosion from 25 years ago!

Here’s how this incredible growth looks on a chart:

Amazon (AMZN), Google (GOOG), and Facebook are three of the largest, most powerful companies on earth. Data is the lifeblood of their businesses.

Take Amazon for example. Did you know that one in every three items it sells comes from its “recommended for you” tab?

This is where it offers you items you’re likely to buy based on what you’ve bought in the past.

This one strategy generated $36 billion in sales last year alone!

That’s more revenue than fast food giant McDonalds (MCD) earned.

  • But while tech giants like Amazon and Google have figured out how to turn data into cash…. most firms don’t have a clue how to unlock the value in their data.

Today many companies collect tons of raw data on their customers. But most don’t have the tools to make good use of it.

You see, data is like oil. When oil is first sucked out of the ground, it’s a raw, useless muck.

It only becomes useful when refined into gasoline to power our cars.

Like oil, a big blob of raw data does you no good. Data must be refined and analyzed into valuable information.

This year alone, companies will spend at least $50 billion on data analysis.

  • A small company called Alteryx (AYX) is quietly becoming a top data “refiner.”

Its platform gives companies access to powerful data tools previously reserved for the Amazons and Googles of the world.

Internet giant Cisco (CSCO), for example, is a happy Alteryx customer.

It used to take Cisco seven days to tally up all the money the company was spending on things like research and development. Its well-paid data scientists were wasting 90% of their time tracking down data rather than analyzing it to gain insights.

Using Alteryx’s platform, Cisco slashed reporting time from seven days to 20 minutes.

And by freeing up its data scientists’ time, it cut expenses by about 4%.

  • Southwest Airlines (LUV) is a happy Alteryx customer, too.

Over 150 million people took a Southwest flight last year. Southwest built a computer model to identify which of these folks are likely to use its frequent flyer program, and therefore become a repeat customer.

It used to take Southwest eight weeks to update this complicated model. Using Alteryx, Southwest automated the whole process and saved $80 million.

Alteryx counts some of America’s biggest businesses as its clients, including Wells Fargo (WFC), T-Mobile (TMUS), Home Depot (HD), Nike (NKE), and McDonalds (MCD).

  • Alteryx’s sales have exploded 140% in the past two years.

It went public in 2017, and in each of the past eight quarters, its sales have soared over 50%.

Alteryx has doubled its customer base since 2016. And existing customers are spending more and more money.

For every dollar a customer spent with Alteryx in 2017, it spent $1.30 in 2018. This puts its dollar “retention rate” at a world-class 130%.

For comparison, this crushes even mighty Apple’s 92% retention rate.

  •  Alteryx is an “autopilot stock.”

If you’ve been reading RiskHedge you know why autopilot stocks are ideal investments. In short, they earn heaps of recurring cash by selling subscriptions.

Every one of Alteryx’s 4,300+ customers pay a monthly fee to access its platform. 95% of its sales come from selling subscriptions, giving it a constant stream of cash.

As publicly traded companies go, Alteryx is still small. It’s worth $3.7 billion—too small for inclusion in the S&P 500.

Meanwhile, it’s becoming a dominant player in the rapidly growing data analytics market. Leading research firm IDC estimates this market will be worth $81 billion in just three years.

This combination—small firms disrupting large markets—is exactly what we look for at RiskHedge. These are the kinds of stocks that could double or triple quickly and still have lots of room to grow.

Alteryx is on track to rake in around $200 million this year. My research suggests it should double its sales over the coming two years. That would bring its total sales to around $400 million in 2020.

If it achieves this sales growth, the stock should climb 100–200% by 2020.

  • Alteryx stock has already soared 125% this year.

It’s wise to be careful with any stock that’s run up so far so fast. But I’m comfortable taking a stake in Alteryx here.

As you likely know, US stocks are having a rough year. On the Thursday you’ll get this letter, S&P 500 is down for the year and has slipped 12% since its September highs.

Many widely followed stocks are down big, including Apple (-26%) and Netflix (-29%).

Alteryx, meanwhile, is holding strong near its all-time highs. As you can see in the chart below, it’s sailed right through the selloff, as true disruptors often do.

That’s all for today. Are you nervous about the recent stock market selloff? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Elizabeth asks:

“Hello Stephen,

My husband and I both enjoy reading your letters and RiskHedge. We are both teachers and with that comes a limited salary.

We would appreciate if you could write something for your subscribers who are starting out and only have limited funds to invest, such as a few thousand dollars. I know you deal with the big guys and huge funds, and it would be interesting to hear your perspective on what to invest in when you have limited funds.

Sincerely, Elizabeth”

Elizabeth, thanks for your note. I’m glad you and your husband enjoy the RiskHedge Report.

A great thing about “disruption investing” is you can get started with just a few thousand dollars. In the past 10 years truly disruptive companies like Amazon (AMZN) have turned a $1,000 investment into $27,000.

And autopilot stock Adobe Systems (ADBE) has turned $1,000 into $8,500 in that time.

When you’re starting out with a modest-sized portfolio, it’s key to keep your investment in any one stock small. You’ll often hear this referred to as proper “position size management.” It’s one of the most important but overlooked keys to profitable investing.

I can’t give individualized investing advice, but here’s one smart rule of thumb. Limit your investment in any one stock to a maximum of 5% of your portfolio. So, if you have $5,000 to invest, don’t buy more than $250 of any one stock.

Muffins, dogs, and self-driving cars

Muffins, dogs, and self-driving cars

America’s top researchers were stumped.

How do you teach a computer to “see?”

By 2012 technology had advanced a great deal. For 199 bucks you could buy a tiny supercomputer called the iPhone 5.

You could talk to it—and it would talk back. It could hail you a cab or give you driving directions or play a movie. All of which would stun a person living just five years prior.

But computers were still laughably bad at recognizing images.

Take a look at these pictures:

Source: Huffpost.com

A toddler could tell you half of them show a chihuahua dog, and the other half show a blueberry muffin.

But in 2011, researchers showed them to the world’s best image recognition computer and asked it “is there a dog in this picture?” 

The top performer got it wrong 28% of the time.

  • The world’s smartest computers couldn’t tell a muffin from a dog. 

While “seeing” is second nature to humans, it’s extremely difficult for computers. And if the top computer couldn’t even tell a dog from a baked good, there was no hope for a technology like self-driving cars that required computers to see.

But in 2012, after 50+ years of failing, researchers finally cracked it.

Using a technique called “machine learning,” they slashed error rates in the world’s leading image recognition computer to 15%.

Today the best computer gets it right over 95% of the time... which is better than the average human eye.

  • Machine learning gave computers the ability to “see.”

For the first time ever machine learning enables computers to learn without human intervention.

It works by processing massive amounts of data. Show a computer millions of pictures of a stop sign, for example, and it can learn to recognize stop signs on its own in the real world.

Because of machine learning, computers can now learn from their experiences, just like humans. And it’s allowing them to perform tasks once thought impossible…

  • Like operate self-driving cars.

We last discussed self-driving cars in August. I mentioned Google’s (GOOG) subsidiary Waymo was testing its robo-taxis in Arizona.

At the core of Waymo’s self-driving car fleet is a centralized “brain.” It learns from every mile driven by every Waymo car.

It’s taught itself to recognize stop signs, pedestrian crossings, red lights, and all the other obstacles human drivers navigate.

In Waymo’s words, it’s using machine learning to build the “world’s most experienced driver.”

And get this: Waymo officially launched the world’s first self-driving, ride-sharing service last Tuesday! Residents in four Phoenix suburbs can now ride around in its robo-taxis for a small fee.

  • Waymo is one the most disruptive forces in America.

Recently I explained why self-driving cars are going to gut the auto industry like a fish. Phoenix is only the first step in Waymo’s domination of American roads.

Waymo’s cars have driven 11 million miles already. And they’re clocking up roughly 1 million more every month. Based on Department of Motor Vehicles data, its five biggest rivals have only covered about two million miles combined.

Waymo is crushing them, as you can see from this chart:

Right now Waymo is running tests in 25 US cities. And it’s the only company allowed to test fully driverless cars in California because of its first-class safety record. My research suggests Waymo is at least three years ahead of its peers.

  • And it’s going to upend ride-sharing giant Uber.

By far the biggest cost of operating a car today is paying the driver. Roughly 80% of the money Uber takes in through fares goes to the drivers.

Waymo’s self-driving cars slash this to near zero, so it can offer a far cheaper service.

This is Waymo’s BIG opportunity.

According to the Department of Energy, around 60% of all car trips in 2017 were under six miles.

Whether dropping the kids at school, commuting to work, or buying groceries… these short trips are ideal for ride-sharing. But who wants to pay $10 each way for an Uber?

In the not-too-distant future, depending on where you live, you’ll be able to grab a Waymo for a fraction of what Uber costs.

  • It’s important to know that 94% of road crashes are caused by human error. 

40,000 Americans died on the roads last year. Worse yet, 10,000 of those died in alcohol-impaired crashes.

Robo-taxis will save thousands of lives a year at a minimum. Once governments figure this out, they’ll be begging Waymo to come to their city next.

BUT… Waymo understands a single fatality involving its cars could set it back several years.

That’s why it’s put safety front and center. Ahead of last week’s launch, it hired the former chair of the National Transportation Safety Board to become its chief safety officer.

It’s cozying up to local governments too. It’s partnered with Phoenix’s public transport to connect people with the city’s bus and rail services. It’s also bringing retirees to Walmart to buy their groceries.

Making self-driving cars a success isn’t just about the technology. It’s also about gaining public trust. Waymo leads the way in both.

  • Nobody will catch Waymo.

As regular RiskHedge readers know, Waymo is tucked inside Google, the world’s fourth-largest public company.

That’s important because Waymo’s technology comes from Google. It uses Google’s machine-learning tools to teach its centralized “brain” how to drive.

This gives it a gigantic advantage over its rivals. You see Google is the unquestioned leader in machine learning.

Over the past decade it’s spent four times as much in this space as anyone else. Along with teaching computers to drive, it used machine learning to slash costs in its data centers by 30%.

Analysts at Morgan Stanley value Waymo at $175 billion today. But because you can’t buy Waymo stock individually, investors are completely overlooking its potential.

Google trades at 22 times forward earnings today, its lowest valuation in over a year.

That’s a fair price just for its core business, which as you probably know, holds a near-monopoly on the internet search market. 92 out of every 100 internet searches flow through Google.

In other words, buying Google stock at today’s prices is a bit like getting Waymo for free.

I recommended buying Google at $1,070 a few weeks back. It’s trading right around there today, and it’s still a strong buy.

Would you be comfortable getting in a self-driving car? I want to hear from you at stephen@riskhedge.com.

Until next week,

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

 Hi Stephen,

 Just read your article and The Great Disruptors report. It sounds like Fortinet (FTNT) might be offering something that Booz Allen Hamilton (BAH) doesn’t have.  

 I'm reading up on both, since I know little about cybersecurity, but your take on the comparison of the two would be appreciated.

Andrew, you’re correct in saying Fortinet offers something Booz Allen Hamilton doesn’t. But the opposite is also true.

Think of it like this… you can split the cybersecurity market in two: private business and the US government.

Fortinet provides cybersecurity services to private businesses. Its Security Fabric platform is designed to insulate companies from hacks and breaches.

On the other hand, Booz Allen helps the US government solve its toughest cyber problems. The US government knows it can’t afford to fall behind in the cyber arms race. It will continue to pay Booz Allen handsome sums of money to keep its networks secure and its cyber capabilities ahead of America’s enemies.

The secret weapon for getting America 5G ready

The secret weapon for getting America 5G ready

Who sells the basics?

That’s the first question I answer when evaluating an investment trend.

In markets, he who sells the basics gets rich.

James Marshall did not sell the basics... and he left California broke.

He was the first guy to pull a gold nugget out of the mud during the 1848 gold rush.

He literally struck gold and ended up penniless.

You know who got fabulously wealthy though?

The businessmen who sold the basic tools needed to find and extract the gold.

Investing in “who sells the basics” requires you to buy stocks that will never make the front page of The Wall Street Journal.

For example, Google (GOOG) is famous for turning the search engine into a $120-billion-a-year business.

Along the way it handed investors 1,900% gains.

But without keyboards, mice, and screens… the search engine wouldn’t have taken off.

Logitech (LOGI) is a leading maker of this “basic” equipment.

Over the past five years its stock has more than doubled Google’s performance, as you can see here:

  • We’re getting in on the ground floor of companies making the basics that will power superfast 5G… 

We talked about the lightning-fast Fifth Generation Wireless Technology (5G) recently.

In short, 5G is the new wireless network all our phones and computers will soon run on.

It will be superfast—with speeds up to 20 gigabytes per second. That’s 1,000x faster than what we have today.

It’s important to understand that 5G isn’t a small improvement.

It’s a huge leap that will enable world-changing disruptions like self-driving cars and remote surgery.

Launching 5G will require the biggest overhaul of America’s wireless networks EVER. According to the GSM Association, which represents 800 of the world’s largest mobile operators, it’ll cost roughly half a trillion dollars to build out the necessary infrastructure!

  • The first wave of dollars will flow straight into the basics that enable 5G.

Superfast speeds are a key benefit of 5G.

But just as important is the HUGE improvement in the amount of data that can run through a 5G network.

Think about a cell network like a highway. The more lanes it has, the more traffic it can handle.

5G is going to widen the wireless “highway” by around 100x from what we have today.

This is crucial because new technologies will require far more data than current 4G networks can handle.

For example, according to Intel (INTC), a single self-driving car uses roughly 4,000 GB a day.

That’s like downloading 1,000 HD movies a day—per car!

To expand 5G’s “highway” network providers like Sprint (S) and AT&T (T) are using something called Multiple Input, Multiple Output—or MIMO.

Sprint Chief Technology Officer John Saw calls it “our secret weapon to getting 5G built.”

  • MIMO involves packing more antennas onto cell towers­.

Each antenna acts like a new highway lane, allowing the network to handle more traffic.

Using MIMO, Sprint increased 5G’s capacity by 300%.

Demand for MIMO is expected to explode by 1,500% over the next eight years, according to ResearchandMarkets.com.

Here’s a picture of a MIMO box in Seattle. Although it looks basic, each box houses roughly 1,000 antennas. And a large cell tower might house 50 boxes.

  • Computer chip maker Xilinx (XLNX) builds the “brain” of these MIMO boxes.

Computer chips are the “brains” of electronic devices like smartphones and computers.

Xilinx is the leading maker of a type of chip called field-programmable gate array (FPGA). Think of them as powerful blank canvases that can be used for many different tasks.

For example, Amazon (AMZN) and Google use Xilinx’s chips in their giant data centers. The U.S. Air Force uses them for its drones.

The key advantage of Xilinx chips is they are adjustable. You can change them to perform a brand-new task, or optimize an existing one.

Most other chips are built for a specific purpose and aren’t adjustable.

This gives Xilinx a huge competitive advantage for 5G.

Network providers like Sprint, AT&T, and Verizon (VZ) are figuring out how 5G works as they build it. For the most part industry standards haven’t been set. Things are constantly changing… which requires the equipment to change along with it.

Several wireless carriers in America and South Korea are already using Xilinx’s chips in their 5G rollouts.

Using Xilinx chips, one carrier was able to slash the energy use of its MIMO boxes in half. It also reduced the number of chips inside each from 24 to 4.

  • Xilinx is already collecting checks from the 5G buildout.

It charges roughly $40,000 for each chip inside a MIMO box.

Last quarter sales from this business line jumped 33% to $260 million—thanks mostly to the early 5G rollouts in America and South Korea I mentioned.

Xilinx is a profitable, well-run business. Over the past year its profits soared 24% to an all-time high.

And not only are its margins at record highs—they’re 3x better than the industry average.

Disruptive companies must hit a delicate balance between growth and profitability. To achieve record highs in both at the same time is impressive.

Xilinx is trading at $92 today. My research suggests the stock could hit $130 in the next 12 months as it starts collecting bigger checks from the 5G buildout.

I’ve said it before and I’ll say it again: “The Great Upgrade” to 5G is one of the greatest booms in American history.

Best of all, it’s just getting started. We’re in the initial infrastructure buildout phase. Now’s the time to get in early on companies that “build the basics” to bring 5G to all of America.

Wireless carriers have started upgrading to 5G in several American cities. Are you on 5G yet? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

After reading our Great Disruptors special report, RiskHedge reader Spindrift wrote me with a question about 5G.

Mr. McBride...

I thoroughly enjoyed this report which is clearly representative of the areas of current disruption.

My only concern is that your report fails to mention that China is already using 5G and is clearly ahead of the US in this space. I would be grateful for your thoughts.

Spindrift, I’m glad you enjoyed the report. It’s true that China is pouring billions into 5G. According to “Big 4” accounting firm Deloitte, China has outspent the US by $24 billion in 5G infrastructure. So far, it has built roughly 10 times more small cell towers than the US.

China does not plan to launch any 5G services until the second half of 2019. But the key thing to know is 5G is not a winner-take-all game. Both America and China will have it, just like they both have 4G. And because America’s financial markets are more developed, transparent, and trustworthy than China’s, most of the best investment opportunities are in the American businesses pushing 5G forward.

One controversial stock to buy… and one to avoid

One controversial stock to buy… and one to avoid

Today we check back in on two of my most controversial calls…

If you’ve been reading RiskHedge, you know I’ve been warning you to keep your money out of stock market darling Netflix (NFLX).

This was not a popular thing to say when I first wrote it in July.

Back then Netflix was the hottest stock on Wall Street, had surged 107% in six months, and was hitting record highs.

But it turns out that July was the right time to bail out of Netflix.

Since then it has crashed 37%, as you can see in this chart:

  • Netflix’s worst nightmare is coming true… 

You can review my reasoning for why Netflix is set to disappoint here and here.

It comes down to the lifecycle of disruptive businesses.

Netflix pioneered “streaming” video where you watch shows through the internet rather than on cable TV.

For years it was the only streaming game in town. Early investors rode this first-mover advantage to 10,000% gains from 2008 to July of this year.

But the door is slamming shut on Netflix’s Goldilocks era where it enjoyed almost zero competition.

It’s now coming up against powerful rivals like Disney (DIS)—which I recommended you buy in July.

Disney will launch its own streaming service called “Disney+” next year. It’s going to pull all its shows and movies off Netflix and put them on Disney+ instead.

This is a huge problem for Netflix because Disney has the world’s best content by a long shot. It owns household brands like Marvel… Pixar Animations… Star Wars… ESPN… ABC… X-Men… not to mention all the traditional characters like Mickey Mouse and Donald Duck.

When it launches next year, Disney+ will be a no-brainer purchase for most families. I’ll certainly be subscribing for my daughter.

Meanwhile Netflix will lose a lot of its best content… and potentially millions of subscribers who switch to Disney+.

  • If that’s not bad enough, Amazon (AMZN) is carving out a foothold in streaming, too.         

In February, Amazon announced it would spend $5 billion developing original shows and movies this year. In response, Netflix upped its spending by 50%.

Netflix had planned to spend $8 billion on shows and series this year… now it’ll spend roughly $12 billion. It now invests more in content than any other American TV network.

Keep in mind, Amazon is the third-largest publicly traded company on earth. It has much deeper pockets than Netflix or even Disney.

To have any hope of keeping up with its rivals, Netflix must keep ramping up its spending on content.

Problem is, it can’t. Netflix makes only a small profit, so it’s had to borrow gobs of money to fund its show creation. Its debt has exploded 71% in the past year to $8.3 billion.

That’s not sustainable. Netflix has three bad choices: continue borrowing billions and bury itself deeper in debt… dramatically raise its subscription prices… or cut back on making new content.

  • Netflix traded at $400 when I first sounded the warning… 

It has dropped to around $275 today. And as I mentioned last time, my research shows its worth $190–$200 a share, max.

So, Netflix is still a “no-touch.”

Disney, on the other hand has gained 11.5% since July and hit multi-year highs earlier in November. That’s doubly impressive when you consider most stocks have struggled in the last few months.

Disney is still a great buy at today’s price of $116. It’s heading for $170—roughly 45% higher than today.

  • On a separate note, have you been following uranium prices?

We last discussed uranium in August when I wrote it was one of the best moneymaking opportunities I’d seen in years. 

In the last few weeks, uranium has hit its highest price since early 2016. This time last year, the uranium price was sitting at $18 per/lb. It has shot up 55% to $28 per/lb since then.

And my research shows it’s headed A LOT higher.

As you likely know, uranium is used by nuclear power plants to produce electricity. Some readers have written in to express their unhappiness that I’m investing in “dangerous” nuclear power.

But despite its reputation, the fact is nuclear energy is quite safe. And it powers one in every five American homes.

Thanks to a supply-demand imbalance, the uranium price had cratered 85% from 2007–2017. Almost no company on earth can turn a profit selling it at today’s prices.

  • But the catalyst for a BIG surge in uranium prices is fast approaching.

Nuclear power plants are the largest buyers of uranium. Between 2005–2012 they signed contracts for roughly 1.55 billion lbs, giving them enough supply to last years.

But supply is finally running out. On average, nuclear plants have about two-and-a-half years of supply left. They typically keep between 2-3 years in inventory. So, they’ll have to buy more uranium soon.

But it’s not that easy. Producers have said they won’t sign new contracts until the uranium price rises much higher than where it is today. After all, why would they deplete their assets for a loss?

From talking with industry insiders, many producers will hold out for about $70/lb uranium. Or 140% higher than today’s price.

  • I guarantee you the nuclear plants will blink first in this “standoff.” 

Many folks are surprised to learn that uranium only accounts for about 3% of the cost of operating a nuclear plant. So, it doesn’t matter much to their bottom-line profits if they pay $30/lb or $70/lb.

In August I recommended you buy the world’s largest public uranium company, Cameco (CCJ). We’re doing well on this trade, having gained around 11% so far.

But as the price of uranium surges, Cameco will head much higher. Now is an excellent time to buy.

As I’ve explained in the past, uranium stocks are extremely cyclical. Once they enter a bull market, they can rocket higher at warp speed. Keep in mind, Cameco shot up 2,000% in the last uranium bull market.

That’s it for today. As always, you can reach me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge subscriber Doug is unhappy with my midterm election essay:

“In your note about what happens after midterm elections, you claim that Trump has been good for stocks. Don't you look at history? Even recent history? 

Obama took the market from below 7000 to above 18,000. So, while Trump's 28% in two years isn't bad, it doesn't compare to what the market did under Obama. A better representation of the past two years is that Trump continued the market performance begun during the Obama administration. Please try to tell all of the truth next time.”

Doug… thanks for reading. My essay was about the 2018 midterm elections. If I were to write about the 2010 or 2014 midterm elections, I would certainly mention that stocks performed well under Obama.

In reply to my article about the length of the current bull market, RiskHedge subscriber Hiram asks:

“You said that the S&P 500 trades for about 16.5x forward earnings. But the WSJ says the S&P has a price-to-earnings (P/E) ratio of 22. Could you clarify your comments?”

Hiram, the price-to-earnings (P/E) ratio you cite uses trailing earnings. The P/E ratio I cited uses forward earnings, which factors in expected earnings growth over the next year.

When Will the US Get Attacked in Space?

When Will the US Get Attacked in Space?

Stephen McBride’s note: US markets are closed today in observance of Thanksgiving. Instead of my usual essay, I’m sharing some brief but useful research written by RiskHedge Chief Investment Officer Chris Wood. In it, you’ll discover an investment idea stemming from a disruptive trend that less than 1 in 100 investors knows about…

Enjoy the holiday weekend—I’ll be back next week.

*  *  *  *  *

Object 2014-28E gave the US military quite a scare.

It was thought to be a piece of junk floating around outer space… until it came to life and started zipping around.

Former Air Force Major General William Shelton called that “concerning.”

It turned out that Object 2014-28E was actually a Russian satellite “playing dead.”

It was designed to lay dormant to avoid attention. Then, when it woke up, it could get close enough to inspect other satellites or latch onto them.

Or, as the US military feared, potentially sabotage them.

You probably don’t spend much time thinking about what’s happening in outer space. But I can assure you the US military does.

Its network of satellites orbiting earth are crucial to its ability to defend America. Without them, the military couldn’t guide missiles or monitor troop movements.

A loss of its satellites would also short-circuit warning systems, leaving the US military in the dark.

Russia and China Threaten the US in Space

A recent “Threat Assessment” from the US Intelligence Community read:

“Both Russia and China continue to pursue antisatellite (ASAT) weapons as a means to reduce US and allied military effectiveness.”

As you can imagine, the US military takes this threat seriously. Lately, it has plowed more and more money into defending its satellites in space.

This year, the Air Force has asked for an 8% increase in space funding. That’s after securing a big increase in last year’s budget.

Now, I’ve been a professional investor for almost 15 years. In that time, I’ve developed a few a guiding rules.

One of them is to follow government money.

Where there’s a lot of government money being thrown around, there are often great opportunities for investors like us to profit.

The “Holy Grail” of Space Investing

Satellites cost a fortune to manufacture and launch. On average, it costs around $500 million to build a typical weather satellite and put it into orbit. A spy satellite might cost an additional $100 million.

But get this: there’s no reliable way to maintain, repair, or refuel a satellite.

That leaves the US military and private companies that operate satellites in an unusual situation.

They pour more than $250 billion a year into developing, building, launching, and providing services for satellites…

But once a satellite leaves earth, they can’t protect their investment.

The average low Earth orbit (LEO) satellite stays in orbit for about five years. When it runs out of fuel, gets damaged, or becomes obsolete, that’s it.

It’s now a worthless piece of space junk.

As you can imagine, the ability to extend the life of a satellite through refueling or repair is something of a “holy grail” for the satellite industry.

It would save tens of billions of dollars.

And the US military will happily pay a handsome sum for the right solution.

Well, one company is on the cusp of figuring it out…

Making a Deal with the US Military

In June, defense company Northrop Grumman (NOC) bought a rocket-making company called Orbital ATK for $7.8 billion.

Many analysts say Northrop overpaid.

I completely disagree. Northrop is playing the long game.

Orbital ATK builds communication satellites, spacecraft that deliver cargo to the International Space Station, and rockets for NASA.

It also builds missiles for the military.

But what I’m really interested in is its Mission Extension Vehicle (MEV).

The MEV is designed to dock with and take over the operation of another satellite.

“We take it over like a jet pack in orbit,” says Tom Wilson, president of space logistics at Northrop Grumman Innovation Systems.

The goal of the MEV is to dock with a certain type of satellite, then take over the propulsion system so the satellite can remain operational for five more years after it runs out of fuel.

As one of the five major defense contractors, Northup is already a trusted partner to the US military. My research suggests that the US military will make a deal with Northrup to develop and build out a whole fleet of MEV satellites.

In the meantime, Northrup will make money selling its MEV capabilities to private companies.

Beyond their importance to the military, satellites are crucial to everyday life.

Without them, hundreds of millions of internet connections would go dead. Your cell phone and TV would probably stop working. Credit cards and ATMs would go dark.

Even before factoring in the big growth I expect from MEVs, Northrop is already very profitable.  

Over the past year, it earned $2.3 billion, or $14.54 per share, on $27.0 billion in sales.

Its MEV program will help sales and profits grow to new highs.

Now’s a great time to buy Northrop stock. It has pulled back from its recent record high of $360 in April. At under $280 today, it’s now 7% less expensive than the S&P 500.

Meanwhile, its earnings are growing significantly faster than the average S&P 500 company.

Northrop also pays a big dividend of $4.50 per share. And it has an impressive record of raising its dividend for the past 15 years straight – including during the 2008 financial crisis.

Thanks for reading,

Chris Wood
Chief Investment Officer, RiskHedge

Who deserves your trust?

Who deserves your trust?

Obama called it “the worst disaster America has ever faced.”

41 miles off the Louisiana coast, oil giant BP (BP) had completed drilling the deepest oil well in world history.

At six and a half miles deep, it was like a giant needle jabbed into the earth’s veins.

But just before it was set to begin pumping oil, workers made a terrible mistake.

They failed to seal the well properly, which allowed flammable oil and gas to shoot up to the surface and cause a huge explosion.

In all, it killed 11 people… sank the $560 million Deepwater Horizon drill rig to the bottom of the ocean… and released three million barrels of black oil into the Gulf of Mexico.

The US government would fine BP a record $21 billion.

BP’s stock would plunge 55%, wiping out $105 billion in shareholder value.

  • How much do you think BP management would have paid to avoid this catastrophe?

Keep in mind, it was the worst environmental disaster in US history and the worst oil spill in world history.

BP will be associated with it forever.

And beyond the financial costs, BP suffered a total loss of trust with the public. For years it was perhaps the most hated company on the planet.

So how much is too much to pay to avoid all this?

Ten billion?

Fifty?

A hundred billion?

  • I pose this question because CEOs of the world’s most powerful companies are asking it every day.

They aren’t worried about oil spills.

They’re worried about something far more financially devastating.

Something that could ruin their business overnight.

In 2017, The Economist magazine ran a story about how data has surpassed oil as the world’s most valuable resource.

Makes sense, right? The 20th century’s most powerful companies got rich selling oil—like John D. Rockefeller’s Standard Oil, the first ever $1 billion company.

Many of today’s super-firms have gotten rich collecting and selling personal data. Amazon (AMZN), Google (GOOG), and Facebook (FB) all earn a BIG chunk of their profits from leveraging and selling users’ data.

These are the third, fourth, and sixth biggest publicly traded companies on earth.

This year Google will earn over $100 billion from selling online ads. It has mastered the business of collecting data and using it to figure out who you are and what you’re likely to buy.

For example, try doing a Google search for a ski vacation. Chances are ads for skis, mittens, and lift tickets will start following you around to every website you visit.

  • In the data business, trust is everything… 

Look at Facebook to see how a loss of trust can ruin a company.

Since going public in 2012, Facebook stock has shot up 400%. For years it was a Wall Street darling.

In April, the love affair ended with a thud.

Facebook admitted that the personal data of 87 million users had been sold—without users’ explicit permission—to political consulting firm Cambridge Analytica.

This data breach potentially helped Donald Trump win the presidency.

Facebook stock plunged 17% on the day of the news. It marked the biggest single-day wipeout of shareholder value in US stock market history.

Things only got worse from there.

In the past four months, Facebook stock has plunged 35%—erasing $221 billion in wealth. Take a look at this chart of Facebook stock. It is ugly.

The company’s reputation is in shambles. A recent study by Fortune found Facebook is the least trustworthy of all major tech companies when it comes to safeguarding data.

  • Now everything Facebook does is met with skepticism. 

For example, have you heard about its new video-calling device—The Portal?

You probably have not, because the major media have practically ignored it.

A Wall Street Journal review summed it up best: “I couldn’t bring myself to set up Facebook’s camera screen in my family’s home. Can you blame me when you look at the last 16 months?”

Facebook’s data breach has been a total disaster. 98% of its revenue comes from selling online ads, which it can only do effectively if people continue to allow it to collect their personal data.

When nobody trusts Facebook, the company is dead in the water. Its user growth numbers in the past two quarters have been terrible. For the past two years it has added an average of 46 million new users every quarter. That’s now been cut in half to 23 million.

  • How much would Mark Zuckerberg and his management team have paid to avoid this catastrophe? 

Facebook has hired the equivalent of a small city to shore up its cybersecurity. Its cybersecurity headcount has doubled to 20,000 workers… in just 6 months!

It’s too little too late. Once you lose the trust of your customers, almost nothing will get it back.

No cost is too high when it comes to protecting your customers’ data.

This is why I love the booming cybersecurity business.

Smart companies are spending billions to upgrade their digital defenses. According to top IT research firm Gartner, cybersecurity spending will hit $114 billion this year. Demand for cyber services is set to explode by 70% in the next five years.

The best thing about cybersecurity is there’s a bottomless appetite for it. Hackers are constantly finding new ways to exploit vulnerable systems.

So companies must keep pouring money into building their digital defenses.

The largest cybersecurity ETF (HACK) has trounced the S&P 500 close to 5x in the past year, as you can see here:

Every company—big, small, domestic, global—needs reliable cybersecurity today. You can’t run a business without it.

Growth in cybersecurity is one of the top disruptive trends that will define the next decade.

  • How do we make money from it?

I like what cybersecurity firm Fortinet (FTNT) is doing.

My contacts in the cyber industry tell me many companies suffer from one key problem. They use many different cybersecurity products, which leave holes in their defenses that hackers can exploit.

A report from Cisco (CSCO) found that 46% of firms use more than 11 different cybersecurity products.

Fortinet’s Security Fabric platform solves this.

It combines dozens of cyber solutions into a single product. You get network, email, web, cloud, mobile security, and much more… all in one.

Gartner just named Fortinet as a cybersecurity market leader for the ninth time in a row. The company’s revenue has exploded 135% in the past four years. And its stock is up 140% in the past two years.

So… have you been victim of a cyber hack? Had your personal info stolen? Tell me about it at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge 

Mailbag

I received a lot of questions on my article about NVIDIA (NVDA). I’ll answer two of them here:

RiskHedge subscriber Sid asks:

“Are NVDA chips used in Augmented Reality devices?”

Sid, thanks for your question. Yes, but AR makes up a tiny portion of NVIDIA’S revenue. By far the largest driver of NVIDIA’s stock is its gaming business, which accounts for roughly 55% of its sales.

RiskHedge subscriber John writes:

Stephen, thanks for the newsletter. On NVDA, two things: #1 - Some of the large tech firms have started talking about making their own chips. #2 - It seems that self-driving cars will be much more limited in their usage as there are still plenty of problems to be resolved (rain, snow). Hence they'll operate in places like Arizona where weather is generally clear. Given these factors, will NVDA be able to maintain this level of growth?

John, you’re correct in saying companies like Amazon and Google are building their own chips. The thing is… it’ll take them at least five years to get remotely close to making cutting-edge chips like NVIDIA.

On self-driving cars, it’s true that rain and snow can still cause major problems for the sensors and LIDAR systems. However, Waymo is using machine learning to “teach” the cars how to drive in these environments.

In September, it announced it was making good progress. And it’s now testing self-driving cars in 25 cities across America, including snowy Detroit and rainy Seattle. Fully self-driving cars will take a little longer to roll out in places with bad weather. But you can be sure they’re coming.

Will you buy this hated stock with me?

Will you buy this hated stock with me?

Will you listen to me?

Will you buy the stock I recommend in this issue?

I hope so… because we have a realistic shot to make roughly 140% on our money in just a few months.

Stock markets don’t often hand us opportunities like this. I study markets for a living and I see one setup like it a year, max.

But I know there’s a good chance you won’t take advantage of this opportunity. Because to join me in this trade, you’ll have to do something painful…

  • You’ll have to buy the single most hated asset class on the planet today.

Gold.

Since 2011 gold has plunged 35%. Even worse, gold stocks have cratered 70% in the past seven years.

Investors have completely given up on gold and gold miners. The VanEck Gold Miners ETF (GDX), which tracks the performance of gold stocks, recently suffered a losing streak where it closed lower for six weeks in a row.

That almost never happens. If fact, going back to the creation of GDX in 2006, it has only happened twice.

The last time was in late 2015. I’ve marked it in the chart below.

Do you see what happened last time gold stocks plunged six weeks in a row? They bounced around for a few months before ripping to 140% gains in eight months:

  • Today, just like in 2015, GDX has entered a state of exhaustion. 

Finance nerds use the word exhaustion to describe an investment that’s been subject to relentless selling pressure.

You see at some point, all investors interested in selling a stock have sold it. When this happens we say the supply of sellers has been “exhausted.”

Because there’s no one left to sell, exhaustion often signals that a stock has put in a bottom and is ready to march higher.

GDX has entered a state of exhaustion for the first time since 2015. And after months of sharp drops, it’s finally perking up.

It recently jumped 6% in a single week… one of its best stretches since its 140% surge in 2016.

  • Now when I say gold mining stocks are hated, I mean HATED.

Six straight weeks of losses in GDX is just one data point that shows investors want nothing to do with gold stocks.

According to the Commitment of Traders report, last month professional traders were “short” gold more than any time in last 17 years… since 2001!

As you may know, 2001 marked the beginning of the last great gold bull market that saw gold soar 630% in a decade.

The 2001 bottom also kickstarted a 1,350% surge in gold stocks.

Here’s another telling statistic. Since the beginning of 2018 investors have yanked $3.5 billion from gold-related ETFs. That’s the highest level of withdrawals in five years.

To get a sense of what market insiders are seeing right now I called up Adrian Day of Adrian Day Asset Management. Adrian is a professional investor who’s been putting money to work in the resource sector for over 25 years. Here what he told me:

“Gold stocks are more or less at the same level they were in 2001 when gold was a fifth the price it is today. Very few funds hold any gold stocks today, whereas 15, 20, 25 years ago, a lot of them did. But the stocks are now responding to good news—a very positive sign that the market is turning.”

  • It’s no exaggeration to say gold stocks have NEVER been as hated as they are today. 

This extreme hatred tells me buying gold miners now is a smart move.

It’s never easy to go against the crowd and buy a hated asset. You’ll probably feel uneasy hitting the “buy” button.

But as regular RiskHedge readers know, buying hated stocks is one of the lowest risk ways to make big profits in markets.

In fact, the last “hated” stock I recommended to you was 3D printing company Stratasys. It has leapt 25% in the last week thanks to better than expected earnings.

  • Gold may lack the excitement of the disruptive technologies I often write you about... 

Self-driving cars, DNA mapping, and the coming superfast 5G cell phone network are much “sexier” than gold mining stocks.

But please, don’t let that stop you from taking this opportunity seriously.

Gold miners are perhaps the most explosive group of stocks on the planet. Gold stocks have exploded for triple- or quadruple-digit gains seven times in the past 48 years.

Buying gold stocks at the correct time is one of the few legitimate strategies for earning big returns quickly in the stock market.

It’s also a backdoor way to profit from one of the most insidious disruptions to your finances: the slow death of the US dollar.

I won’t get into the whole case for gold here. If you’ve paid a medical or tuition bill recently, you know a dollar doesn’t go far these days.

And if you’re familiar with how our financial system works, you know our money isn’t tied to anything of real value anymore.

Rather, the value of the dollar largely depends on politicians making responsible financial decisions.

By the US government’s own calculations, a dollar is worth 86% less than it was 50 years ago.

Think of gold as the reciprocal of the US dollar. Although it goes through short-term price swings, it has held its value for thousands of years.

Gold miners are a supercharged version of gold. Even a modest move in gold can slingshot gold stocks much higher. As I mentioned earlier, when gold jumped 30% in early 2016, GDX shot up 140%.

I’m buying GDX here. My research shows we could double our money or better in the next few months.

Will you join me and buy GDX? If not, why not? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

In response to my article about the coming superfast 5G cell phone network, reader John writes:

“Stephen, thanks for the disruptor ideas. On QUALCOMM (QCOM) you don't mention its legal troubles with Apple (AAPL)… and more importantly the Federal Trade Commission (FTC). Are they impactful?”

John, Apple owes QUALCOMM around $7 billion in unpaid patent royalty payments. The case is going through the courts right now… and Apple will eventually have to cough up the money.

On the FTC case, I expect QCOM might have to pay a small sub-$1 billion fine sometime next year.

But this won’t change the fact that QUALCOMM is at the center of the coming 5G revolution. In fact, just last week, it made the first-ever public call on a 5G phone at its summit in Hong Kong!

Should You Sell Your Stocks Before Tuesday’s Big Elections?

Should You Sell Your Stocks Before Tuesday’s Big Elections?

Are you prepared for Tuesday?

It’s going to be a crucial day for the stock market.

As you likely know from the lawn signs dotting American neighborhoods, midterm elections take place this Tuesday.

If the polls are correct, President Trump and Republicans are in big trouble…

According to statistical analysis firm FiveThirtyEight, there’s an 85% chance Democrats will seize control of the House of Representatives from Republicans.

This is causing bigtime anxiety for investors who’ve enjoyed the 28% stock market rally since Trump took office.

No matter what you think of Trump, his reign as president has been great for stocks. But as the election has drawn closer, the market has fallen apart.

Yesterday the S&P 500 closed out October for a 7% monthly drop—nearly its worst month since the financial crisis!

  • I’m going to tell you exactly how to be invested ahead of Tuesday’s big elections. 

But before I continue, a warning…

Few topics stir emotion in America like politics. Many perfectly reasonable people lose the ability to think straight when they hear the name “Trump.”

Politics and investing do not mix. Superinvestor Warren Buffet often says “If you mix politics and investing, you’re making a big mistake.” 

So let’s steer clear of opinion and emotion. Instead, I want to focus solely on the facts that are relevant to you as an investor.

As you’ll see, you don’t need to waste even one second worrying about which party will win on Tuesday.

  • My team went back and studied every midterm election since the Second World War.

I was surprised by what we found.

It turns out there’s a shockingly easy way to predict whether stocks will rise or fall after a midterm election. And it has nothing to do with predicting in advance which party will win.

Here’s what we found…

Since 1946, there have been 18 midterm elections.

US stocks have climbed higher in the next 12 months after every single one.

Every single one.

That’s 18 for 18!

I’ll repeat it because this is so important:

For each of the past 18 midterms, stocks have ALWAYS climbed higher a year later.

Always.

We’ve had every possible political combination in the past 72 years. Republican president with Democratic Congress. Democratic president with Republican Congress. Republican president and Congress. Democratic president and Congress.

The market climbed higher every time.

  • And stocks don’t just grind higher after a midterm election. They often surge…

Since 1946, stocks have jumped an average of 17% in the year after a midterm.

And if you measure from the yearly midterm lows, the results are even better. From their lows, stocks jumped an average of 32% over the next 12 months.

For perspective, that’s more than double the average performance for stocks in all years.

We’re also entering the third year of a presidential term, which is historically the strongest year for stocks.

Take a look at this chart. You can see that the performance of stocks in the third year of a presidential term beats all other years by a long shot:

  • The facts are clear… but why do markets behave this way with such remarkable consistency?

Glance up at the chart above once more and you’ll notice the second year of the presidential cycle is typically the worst for stocks.

That’s the year we’re in right now—the year when midterms occur. 

There’s one last important point you should know. Leading up to midterms, US stocks typically perform poorly. From January to October in midterm years, they drop an average of roughly 1%.

In all other years stocks rise roughly 7% in that timeframe.

Think of midterm elections like a thick fog covering markets. They obscure what the political situation will look like in the near future.

Unable to see what’s coming, investors get nervous and act cautiously. Just as they would slow down while driving a car through a thick fog.

Once the election concludes and the fog clears, investors regain confidence and the market gets back on track.

2018 is following this script to a T. For all the market’s gyrations in the past few weeks, the S&P is roughly flat year to date. If we stay on script, we should expect the market to surge in November after the uncertainty of the elections is behind us.

  • Knowing all this, now is your chance to take advantage of the market’s pre-election jitters.

If you’ve been reading the RiskHedge Report, you know I practice “disruption investing.” I identify and invest in companies that are disrupting industries and inventing the future. Often, these stocks can hand us big gains of 3x, 4x, 5x our money or more.

This stock market pullback is our chance to get in on great disruptive businesses at much cheaper prices than we could a few weeks ago.

Today I want to highlight your opportunity to buy Google (GOOG) at a great price. I’ve called Google one of the “ultimate disruptors,” because it’s like an octopus with tentacles in many disruptive sectors.

As you surely know, Google has an effective monopoly on the internet search market. For every 100 searches performed, 92 of them flow through Google. And this year it’ll earn over $100 billion from selling internet ads on its search pages.

But this is only scratching the surface. Google also owns YouTube, which my research shows could be a $150 billion company on its own.

It also owns Waymo, the world’s leading self-driving car company. As I explained recently, it will launch a fully driverless ride-sharing service in Arizona later this year.

Underneath it all, Google is super-profitable. In the latest quarter it increased its net profit margin to 27.2%. Meaning for every $100 in sales, it can reinvest $27 into growing its disruptive businesses.

A few weeks ago, I recommended you wait to buy Google until it pulled back to near $1,050/share. Today we have our chance. As I type it’s trading for about $1,070/share – close enough for me to pull the trigger.

I’m buying Google here and I plan to hold for at least two years.

That’s all for today. What do you think… Are you worried about the stock market pullback? Or do you see it as an opportunity? Write me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge reader Lorenzo writes:

Stephen, on your recent post If I Could Only Buy One Stock for the Next 5 Years, I found your arguments really strong. I did some research and bought the stock at $207. But now I see that the stock has high volatility. And the news about the chip sector going down is also a bit scary to me. I wanted to invest for the long term in NVIDIA but I am considering it a high risk stock right now. 

My question is what do you think now about investing in NVIDIA after these past couple of days?

Lorenzo, thanks for writing in. The recent market selloff has hit chip stocks hard. The VanEck Semiconductor ETF (SMH), which measures the performance of chip stocks, slipped 11% in October.

As I mentioned in last week’s reader mailbag, despite the drop in Nvidia’s share price, its business has never been stronger. I reiterated buying it at last Thursday’s price of $195. Today, it’s trading at $215, and I’m still buying.

Like many top-performing stocks, NVDA can be volatile. It’s not unusual for a stock that has climbed 200% in the past two years, as NVDA has, to give back a chunk of its gains in a broader market swoon. NVDA has incredible long-term disruptive potential. I expect today’s volatility to look like little more than a bump in the rearview mirror as it climbs much higher in the next three to five years.

The Key to Handling a Market Crash Like a Pro

The Key to Handling a Market Crash Like a Pro

“Stocks are plunging… what should I do?”

That’s the #1 question readers are asking me after the S&P 500 plunged 8% in the past two weeks.

From looking at my emails, I can tell folks are nervous.

I understand why. This has been no run-of-the-mill dip for stocks.

By one widely followed measure of market momentum, stocks briefly entered a freefall that was worse than anything we’ve seen since 1990!

  • As usual, journalists and reporters are serving up a big dose of fear… 

CNBC held a special six-hour long Markets in Turmoil segment. All the big networks broke out their scary red BREAKING NEWS banners.

If you’ve been reading RiskHedge, you know why I urge you to ignore these so-called “experts.”

Let me elaborate on why fearmongers in the media are your worst enemy...  

  • As “disruption investors,” we aim to buy great businesses that are inventing the future

We do this because investing in great disruptive companies is where fortunes can be made.

For example Amazon (AMZN) effectively invented the online marketplace. It has handed early investors 22,000% gains and counting.

And Apple’s (AAPL) invention of the iPhone is the main reason why 85% of Americans carry a smartphone. Its stock has rocketed 14,000% since 2004.

These results show you can make life changing gains by investing in the right disruptor… at the right time.

But owning these businesses is NOT a one-way road to riches.

As you likely know, they attract a lot of excitement from investors. Which makes their stocks prone to big moves both UP and DOWN.

  • Take Amazon… the second largest publicly traded company in the world after Apple. 

Amazon took shareholders for a roller coaster ride in 2014. The stock plunged 30%, prompting the media to run stories like… 

“Is Amazon Going Through an Identity Crisis?

“Amazon to $100?”

I met a friend in Ireland around this time who told me he was shorting Amazon.

The stock is up over 400% since then… and trades at $1,750 today.

It’s the same story for big disruptors like Google (GOOG), Microsoft (MSFT), and dozens of others. They all suffer through bad weeks and months. But investors who’ve stayed the course have made 10x gains or bigger.

  • Think of a correction as the market’s way of testing you.

As you may know, I spend 100% of my professional time on the hunt for disruptive businesses with the potential to hand us triple-digit profits.

But identifying these stocks is only half the battle.

Once you buy a disruptor… your biggest challenge is to own it through the bumps and dips which the market will serve up.

It’s not easy to hold on when markets look wobbly like they do right now. You’ll feel like hitting the sell button when you see nothing but red charts on the screen.

But let me tell you something…

  • As I write you on October 25, US stocks haven’t had a losing year since 2008. 

The S&P 500 has surged almost 300% in the past nine years.

But it has NOT been “smooth sailing.” In the past nine years the S&P has dropped 19%, 16%, 13%, and 10% five separate times.

These corrections were nothing to panic over. In fact, pullbacks suggest that investors are acting cautiously.

This is a good thing for the market’s longer-term health. It’s when the market goes straight up every day that you should be worried.

Remember in January when stocks were on a tear? Investors cheered as the S&P soared 8% in the first 26 days.

That euphoria concerns me far more than any correction.

Case in point: The market peaked on January 26. In just a few days it plunged 10%, erasing all its 2018 gains.

  • Let me show you why we’re unlikely to see a 20%+ drop in stocks in the near future. 

Please understand, I don’t make these assertions lightly.

I have tons of research to back them up… because this is how I invest my own money.

A reliable way to check the market’s “pulse” is by examining the economy. The vast majority of crashes in US stocks have happened while the US economy was shrinking.

Since the 1920s there have been ten bear markets in US stocks. Eight of the ten have come inside a recession. 

The ninth was during the Cuban missile crisis. And the tenth was “Black Monday” 1987, when stocks cratered 23% in a single day. You could consider both once-in-a-lifetime events.

On average, these non-recession bear markets lasted less than six months and fell an average of 31%.

The others lasted two and a half years and fell 49%, on average.

Drilling down further: When the S&P 500 falls 10% or more while the economy is growing, stocks rise 24% on average the following year.

  • So, unless the economy tanks… a correction is unlikely to turn into a full-blown crash. 

How is the economy looking today?

In a word, great. Most of the indicators I monitor say the US economy is healthy as an ox. I’ll give you one example: the unemployment rate.

My research shows the unemployment rate began to rise about 12 months before each recession in the past 60 years. Essentially, it has warned us of every single recession for the past six decades… roughly a year in advance.

Unemployment in the US today is 3.7%, which is almost a 50-year low. This indicator, along with several others, continue to give me the "green light" for owning stocks today.

  • Here’s what I recommend you do with this information.

I told you a few weeks ago that if I could only buy one stock for the next five years it would be Nvidia (NVDA).

Nvidia makes high-performance computer chips called graphics processing units (GPUs). They are powering several disruptive megatrends like self-driving cars, artificial intelligence, and video gaming.

Hundreds of billions of dollars are pouring into these trends, sending Nvidia’s profits soaring to near all-time highs. In fact, it is achieving a better net profit margin than known cash-generating machines Google and Microsoft.

In short, Nvidia’s fundamentals have never been better. But its stock has slid 26% in the market’s selloff.

Earlier I said disruption investors like us should buy great businesses that are inventing the future. Nvidia’s cutting-edge computer chips are doing exactly that.

Nvidia has firmly planted itself at the center of disruption. And today you can own it for a 26% discount to what investors paid three weeks ago. That’s exactly what I’m doing.

So… what do you think? Are you worried this correction is the start of something more sinister? 

I want to hear from you… write me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

In response to my letter about the resurgence of “Made in the USA,” Leo asks:

“I love reading your report and love how you write: clear, concise, and to the point. But can’t help but wonder: Why share this knowledge? I always expected people with this level of understanding to hoard it for their own benefit, not that of others.”

Leo, thanks for your kind message.

There’s a lot of investment information out there. I spend more than 12 hours a day wading through research and speaking with experts. But as you alluded to… by far the hardest thing to find is a clear and concise take on what’s really going on.

That’s what I aim to do for RiskHedge readers every week. To help investors like you make sense of the rapid changes taking place and to profit from them. So if you like my work, please forward it to anyone who might be interested in understanding and profiting from disruption.

How We’ll Profit from the Resurgence of “Made in the USA”

How We’ll Profit from the Resurgence of “Made in the USA”

“Made in America.”

Remember when this label was something to be proud of?

Today it sounds like the punchline of a joke.

Any business student will tell you only a sucker makes stuff in America these days.

According to the Bureau of Labor Statistics, the average US factory worker earns around $27/hr.

Meanwhile, factories in Indonesia pay workers about 70 cents an hour.

This cold, hard math has led to the hollowing out of American manufacturing. Between 1990–2007, America lost over four million manufacturing jobs.

  • What if I told you a disruptive technology is set to unleash a resurgence in American manufacturing?

Maybe you’re rolling your eyes right now.

Maybe you think it’s laughable to suggest traditional manufacturing jobs will ever return to America.

If so, you’re right.

Those jobs are likely gone for good.

But a new kind of “Made in the USA” is here.

Because how we make things is totally changing.

A few weeks ago I explained that some of the world’s biggest companies like Airbus (EADSY), Boeing (BA) and Nike (NKE) are pumping billions of dollars into 3D printing.

Think of 3D printing as “manufacturing 2.0.”

A 3D printer builds objects layer by layer. Starting from scratch, it stacks thin slices of material like plastics and metals to build from the bottom up.

You may remember the craze around 3D printing a few years ago. The technology has improved 100-fold since then.

Leading 3D manufacturers can now print jet engines, car parts, and even key pieces in US military submarines.

For example, General Electric (GE) recently 3D printed an entire aircraft engine. This engine used to have 855 different parts. Would you believe that GE’s 3D-printed version has just 12?

  • 3D printing flips manufacturing on its head.

Traditional manufacturing requires a lot of manpower. To make, say, a car, thousands of parts must be made separately and then assembled. Take a look at this picture of an auto assembly line:


Source: Alibaba

That’s a long row of highly-paid workers operating expensive machinery. You can imagine why carmaker Ford (F) employs 202,000 people… and spent over $7 billion on machinery last year.

  • Now take a look at a 3D printing factory.


Source: DIY 3D Printing

Those machines you see cost around $300,000. But as 3D printers can make whole products from scratch… you don’t need nearly as many assembly workers. There is often nothing to assemble, because it can print a finished product.

Fortune 500 companies are pouring hundreds of millions into the technology. Nike, for example, has started 3D printing some of its shoes. It reports that it has cut labor costs by 50%... and cost of materials by 20%.

Adidas (ADDYY) is 3D printing shoes, too. Earlier this year it opened its second 3D printing plant. Not in China, Vietnam, or Mexico… but right here in the USA. The Atlanta-based factory will spin up one million pairs of shoes per year.

Defense contractor Boeing now 3D prints titanium parts for its 787 Dreamliner. It has shaved $3 million off the cost of each one.

And according to General Motors (GM), its new 3D-printed metal seat bracket is 20% stronger and 40% lighter than a conventional one. And it’s made of only one part instead of eight.

Notice the theme. 3D printing makes things stronger… lighter… cheaper… more efficient. All of which boosts profits. This is music to the ears of business executives. Just about every company that makes things stands to benefit by adopting 3D printing.

  • For investors like you and me… it’s crucial to understand that 3D printing is still in the earliest innings.

According to leading research firm Wohlers, the 3D printing market totaled $7.3 billion last year.

That’s roughly 1/100th of the $700 billion US companies spent on traditional manufacturing machinery.

Morgan Stanley estimates the 3D printing market will triple to $21 billion by 2020. I agree… my independent research suggests it’ll expand to a $100-billion market in the next decade. This represents about 13x growth from today.

Sales of metal 3D printers will be a key driver. 3D printers that print in plastic have been available for years. But ones that can print metal components for engine parts have only been rolled out recently.

Sales of these metal printers exploded 80% last year. The latest machines are 100x faster than existing ones… and make parts for 1/20th the cost.

This is like pouring Miracle-Gro on the 3D printing industry. For example, there are 2.3 million parts on a Boeing 787. Less than 5% are made from plastics. Around 45% are metal. We can expect a big chunk of these to be 3D printed in the near future.

In fact, the Federal Aviation Administration (FAA) has already set guidelines for all 3D-printed parts.

As disruption investors, this is exactly the type of rapid progress we like to see.

  • Here’s how we’ll make money in 3D printing…

When we last talked 3D printing I recommended Stratasys (SSYS), a leading maker of 3D printing hardware. Stratasys shares are on sale today after the whole stock market took a nosedive last week. I’m a buyer at today’s price of $21.

Today I want to fill you in on my top 3D printing software pick. Like all hardware, 3D printers run on computer programs. Before an object can be 3D printed, engineers must first design it using creative design software.

Think of it like this. A traditional manufacturer has to create a physical mold of a product before making it. With 3D printing you don’t need a mold, because the model is designed on a computer.

The software behind this is very important. It allows engineers to try out hundreds of different materials… measure weight and performance… and modify an object down to the millimeter… all in virtual reality.

  • My #1 3D printing software pick is Autodesk (ADSK).

Autodesk owns a 29% share of the creative design software market, which makes it a dominant player. Its AutoCAD program is considered the premier 3D printing software. It counts many big, important companies like Airbus and General Motors as happy customers.

Autodesk charges a subscription fee to use its software. Last quarter it boosted its subscriber base by a massive 290,000. It now has just under four million paying customers.

If you’ve been reading the RiskHedge Report you know I like businesses that run on a subscription model. I call them “Autopilot Stocks” because they can generate big, predictable streams of cash. More important, many of these stocks have trounced the market over the past few years.

I see Autodesk doubling over the next two years as 3D printing takes off.

Its stock dropped along with the rest of the market during last week’s selloff. Now you have a chance to buy it at a 10% discount to what folks were paying just two weeks ago.

That’s all for today. As always, you can reach me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge reader Imran writes:

“Hi Stephen, I was curious about your views on Lam Research (LRCX)? I think at $150 this should be a screaming buy!”

Imran, I’ve done a lot of research on Lam Research… and I much prefer its competitor ASML (ASML).

You may remember I recommended ASML in the first ever RiskHedge Report. The company makes machines that produce computer chips that are up to 100-times faster than what we have today. It’s on track to sell 18 of these $145-million machines to chip makers like Intel and Samsung this year.

ASML just released its latest earnings report… and it drove its profits to another all-time high. I expect the stock to go much higher from here.

I Forbid You to Own this Popular Stock

I Forbid You to Own this Popular Stock

Today we're BLACKLISTING an iconic American company.

I'm imploring you not to buy its stock… no matter what the cheerleaders on CNBC say.

Tens of millions of Americans buy this company's products every year. Even more own its stock, both directly and through index funds.

They're going to regret it… because there's almost nothing this doomed company can do to avoid being steamrolled by unstoppable disruption.

After you read this letter, consider forwarding it to your family and friends who invest. Everyone with a 401(k) should know to steer clear of this toxic stock.

To recap, fully driverless cars are driving around American roads today.

Waymo, Google's (GOOG) self-driving car subsidiary, is leading the way. Within three months, it will launch a robo-taxi service outside of Phoenix.

It'll be like Uber, but with no drivers. The cars will drive themselves.

Driverless cars are going to be a wonderful thing for the world. Drunk driving will become a thing of the past. Elderly folks who can no longer drive will regain independence. Moms and dads can work on their commutes and spend more time with the kids when they get home.

Not to mention driverless cars will save us a ton of money. They'll all but eliminate the need to own a car for the 63% of Americans who live in urban areas.

Cars are one of the biggest expenses for American families. A typical two-car household drops about $1,000/month on car payments, insurance, registration, inspections, repairs, parking, oil, and gas.

Driverless cars can make these expenses vanish. Any financially savvy person will have to seriously consider giving up their car when they can instead summon a robocar to pick them up anywhere… anytime.

  • But it's not all good. Plunging car ownership means plunging car sales… which will ravage the auto sector.

The auto industry is very big and very important. According to the Bureau of Labor Statistics, the American auto sector employs about 4.3 million people.

Carmakers, dealerships, repair shops, parts makers, and so on make up 3% of the US economy. Collectively, publicly-traded American auto companies are worth over $300 billion.

Every company is at risk as self-driving robo-taxis put a crater in car ownership.

You see, the whole auto ecosystem depends on Americans buying many millions of new cars every year. For decades, rising car sales have been the norm. Driverless cars are all but guaranteed to kill it.

Now, car sales won't fall off a cliff right away. There are lots of places in the US with icy mountain roads that driverless cars won't be capable of navigating for at least a decade. Folks who live in these places will continue to own cars with old-fashioned steering wheels.

  • But overall car sales will begin to shrink.

A new report from Boston Consulting Group (BCG) predicts car ownership will plunge by 46% by 2030 if robo ride-sharing services takeoff. My research puts the number closer to 30%.

Either way, it represents a rapid "shrinking of the pie" of global car sales. This is key.

Making and selling cars is already a ferociously competitive business with low margins. And that's with an auto market that's generally been growing for the past several decades. As the pie starts to shrink, competitors will have to eat each other alive just to survive.

To be clear, not every auto company will go broke. Those that adapt and partner with self-driving car platforms like Waymo can thrive.

For example, rental firm Avis (CAR) cleans and services Waymo's driverless fleet. Since it signed the agreement Avis shares have climbed over 60%.

But things are about to get very tough for the auto industry. You want to keep your money far, far away from any car stocks with questionable finances or poor management.

  • That's why I'm blacklisting Ford Motors (F).

Ford has plunged 50% in the past five years, to its lowest point since 2009, as you can see here:

Many folks see this as an opportunity to buy Ford at a cheap price. They see an iconic American company selling at 5x its earnings… and think "value stock opportunity."

They're flushing money down the toilet.

Did you know Ford's business has been slowly dying since well before self-driving cars were even on the radar?

In the past three years, Americans bought a record 52 million cars. Ford is the country's second-largest carmaker. So you'd think its sales should be booming.

Its sales are not booming. Last year Ford sales were lower than in 1999! And this year it's on track to sell even less.

Meanwhile, Ford's US market share has plunged to its lowest ever. In the '90s every fourth car sold in America was a Ford. Now it's every seventh car.

Let me drive this point home: Ford is struggling even with auto sales near an all-time high.

What do you think will happen when driverless cars begin to eat into sales?

  • Ford is too financially weak to survive the coming disruption.

In July it announced a restructuring that will cost $11 billion. Ratings agency Moody's downgraded Ford's credit rating to one notch above junk status on the news.

Ford already has 4x more debt than cash. And given it only earned $7.6 billion last year… it can't afford to spend another $11 billion.

Ford's precarious financial position stems from its poorly-run business. Its operating margin is just 3%. Meaning for every $20,000 car it sells, it must spend $19,400 to sell it.

That's bad, even for the auto industry where margins are famously low. General Motors (GM), Ford's closest rival, has a 6% operating margin.

  • As you know, my aim in this letter is to help you profit from disruption.

And just as important, to avoid being caught on the wrong side of it. That's why we're slapping a "BLACKLIST" sticker on Ford. As I said up top, if this stock is in your portfolio, get rid of it now. And forward this letter to your family and friends who might own it.

Will you ditch your car as driverless cars go mainstream? If not, why not? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge reader Kathrine asks:

"Do you follow any gold stocks?"

Yes we do. We follow gold stocks because they're one of the most explosive asset classes on earth, capable of returning 10x in a short period. For example, did you know gold stocks have exploded for triple- or quadruple-digit gains seven times in the past 48 years?

Above all else, the key thing to understand about them is they're cyclical, meaning they go through big booms and busts. These sweeping trends usually take all gold stocks along for the ride. So it's almost always a bad move to go against the primary trend. When gold stocks are in a bust, like they are today, the high-quality gold miners get dragged down right along with the average and poor ones.

GDX, the biggest gold stock ETF, is plumbing 2+-year lows today. I'm interested in buying gold stocks, but I'm waiting until I see some indication that the trend has changed.

Catch Serial Killers. Unlock Secrets. Make 100% Gains.

Catch Serial Killers. Unlock Secrets. Make 100% Gains.

Joseph DeAngelo murdered 12 innocent women.

And for 44 years he got away with it.

Dubbed the Golden State Killer, he terrorized California throughout the ‘70s and ‘80s… and the police never got near him.

Until April of this year when they made a surprising breakthrough.

In short, one of DeAngelo’s distant relatives anonymously submitted DNA to GEDmatch, a family tree website.

Police obtained it and matched it to the killer’s DNA from their database. It helped prove DeAngelo was the Golden State Killer.

Nearly half a century after he first committed murder, the police finally threw him in jail.

  • Good story Stephen… now how does this make us money?

As you read this sentence, a huge breakthrough is happening in DNA “mapping.”

Although it has escaped the notice of most investors, doctors and scientists have been waiting on this breakthrough for decades.

It’s no exaggeration to say it will save millions of lives… and bring tens of billions in profit to the company achieving it.

Let me give you some quick background.…

  • You’ve probably heard of the Human Genome Project… 

It aimed to “crack the code of life” by “mapping” the 3 billion DNA pairs present in humans.

DNA carries your genetic information. Think of it as a set of instructions for your body. Mapping your DNA allows scientists to decipher your body’s unique set of instructions.

Among other things, DNA determines which diseases we’re vulnerable to. Most diseases—cancer, heart disease, diabetes—stem from our DNA.

By learning the secrets hidden within your DNA, doctors can tell what diseases you’re likely to get. This allows them to catch problems earlier… and diagnose them more accurately.

According to leading scientific journal BMJ Quality & Safety, 12 million Americans are misdiagnosed every year. When it comes to a disease like cancer, an accurate and timely diagnosis can literally save your life.

On average, humans have a 90% chance of beating cancer if it’s caught early on in stage 1. But less than a 10% chance if goes undetected until later stages.

  • Scientists have long known that our DNA holds the key to our health.

The problem was… accessing the secrets within our DNA has been prohibitively expensive.

It took scientists 13 years and $3 billion to complete the Human Genome Project.

And just 17 years ago, getting your personal DNA mapped would have set you back $100 million.

Even as recently as 2011, Steve Jobs, co-founder of Apple (AAPL), forked over $100,000 to get his DNA mapped.

But this is all changing…

Today in the fall of 2018, it costs about $1,000 to map a human’s DNA.

And according to leading maker of DNA mapping machines Illumina (ILMN), within a few years, it will cost only $100..

That’s one-millionth of what it cost in 2001!

You can see the staggering plunge in cost right here:

  • Don’t be surprised if your doctor recommends you get your DNA mapped soon.

As the cost plummets, the usage of DNA mapping in healthcare is exploding.

For example, a new prenatal test based on DNA mapping can detect hard-to-find problems with babies inside a mother’s womb. It’s the fastest-growing medical test in American history.

Earlier this year, Medicare and Medicaid announced they will start reimbursing patients for DNA mapping tests.

And medical provider Geisinger Health has started including these DNA tests in its routine care.

  • A company called Illumina (ILMN) is almost single-handedly responsible for driving down the cost of DNA mapping.

Illumina is far and away the world leader in DNA mapping. It commands a 90% market share and dominates all competitors. In fact, Illumina’s technology has completed 9 out of every 10 DNA mappings ever done.

Illumina has flown under the radar, and most investors haven’t heard of it yet. But as DNA mapping becomes routine, it will be a household name. I expect Illumina to be synonymous with DNA testing—just as folks say “Google” for “search” today.

Illumina’s cutting-edge DNA machines are the reason the cost to map a human’s DNA has fallen below $1,000. When Illumina entered the market in 2006, it cost $10 million to map one person’s DNA. Each new Illumina machine has slashed these costs by millions of dollars… and its latest release will give us DNA mapping for $100.

  • Illumina’s competitors lag years behind it.

Roche (RHHBY), the world’s second-largest pharma company, and Thermo Fisher Scientific (TMO) are its closest competition.

Neither can compete with Illumina’s speed of innovation. And neither is a serious challenge to its dominance in DNA mapping. With 800 patents on its DNA mapping machines, Illumina has an iron grip on this market. And it recently teamed up with healthcare giant Bristol-Myers Squibb (BMY) to help introduce DNA mapping into hospitals across America.

  • Illumina has superb management.

Illumina essentially created the DNA mapping market. As you can imagine, this wasn’t cheap. It took billions of dollars and countless man hours to drive mapping costs down to a level where most Americans can benefit from them.

Despite this, Illumina has achieved record profits for 5 years running. And it’s on track to beat its record once again this year.

Illumina’s sales mix is the secret to its success. The company is best known for the DNA mapping machines it sells to hospitals and other medical professionals. These cost up to $10 million each.

But drill down and you’ll find that two-thirds of its revenue comes from a different source.

To conduct a DNA mapping, a doctor will first take a sample of your blood or saliva. Then she’ll apply chemicals to it to extract the DNA. The DNA gets inserted into one of Illumina’s machines, which essentially spits out a computer file that contains your genetic information.

The chemical part is key. These specialized chemicals are consumed with each mapping. So, hospitals and doctors must continually buy more. Illumina’s chemical sales have more than tripled in the past 5 years.

This model gives Illumina a big financial advantage. Its ongoing chemical sales allow Illumina to collect a steady stream of cash every month.

Regular RiskHedge readers know I like disruptive businesses with big, predictable cash flows. As I explained in a recent issue, I call these “Autopilot Stocks” for their ability to generate consistent profits, month after month, as if on autopilot.

  • Illumina’s net profit margin just hit an all-time high.

Even as it drives the costs of DNA mapping into the ground… Illumina is achieving record profitability.

Illumina is truly a disruptive company that’s set to dominate an exploding industry. If it can maintain its 90% market share as I expect, its sales should triple over the next 3 years. This should send its stock soaring to double its current stock price.

I’m buying Illumina today at $359.

Have you or a family member had a DNA mapping test done? Tell me at stephen@riskhedge.com.

To disruptive profits,

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

In response to last week’s essay on the coming lightning-fast cellular network known as 5G, RiskHedge reader Bob writes:

“If a tree or car can interfere with a 5G signal how is it ever going to work? Also, you said it can only reach 1 kilometer. How will they achieve widespread 5G coverage when the range is so limited? 

Bob, there’s no doubt the 5G rollout has some challenges ahead. But right now, network providers are developing cell towers so small they’ll sit on top of traffic lights and lamp posts. So in the not-too-distant future you can expect to see one of them every few blocks.

As for 5G’s fragile signal… the companies leading the 5G rollout are developing something called “beamforming” which will solve this problem. We’ll be talking a lot more about this in future issues of the RiskHedge Report.

The Most Disruptive Event of the Decade Is Here

The Most Disruptive Event of the Decade Is Here

A new tech boom begins this year…

Remember when you couldn’t watch videos on your phone because the internet was so slow?

New infrastructure for cell phones called “4G” solved that problem.

4G stands for “Fourth Generation Wireless Technology.” Most smartphones run on the 4G cell network today. But getting it up and running wasn’t cheap.

The cost of building out the 4G network hit $200 billion in 2015. Around 200,000 cell towers were built to broadcast the 4G signal that blankets most of America today.

A big winner from this spending spree was cell tower operator American Tower Corp (AMT).

The chart below shows the performance of AMT from 2011, when the 4G buildout started. As you can see, it has soared 185%:

  • 4G was huge… but there’s a MUCH bigger investment opportunity in front of us right now.

It’s a $500 billion project called 5G, or Fifth Generation Wireless Technology.

As I mentioned, 4G required around 200,000 new cell towers.

AT&T says 5G will need another 300,000.

And that’s only the start.

No phone, computer, or modem on the market today is 5G “ready.” Which means EVERYTHING needs an upgrade.

I’m going to tell you about the company that’s developed the first 5G chips and antennas for phones. The world’s biggest network providers and device makers like T-Mobile, Verizon, and Apple are already scrambling to secure access to its products so they can participate in the 5G revolution.

  • America’s cell networks started with the 1G (first-generation) network in the 1980s.

You couldn’t access the internet on 1G. You could only make calls. And you had to make them from cell phones the size of a brick.

Roughly every 10 years since then, a new network has gone live. 2G, 3G, 4G…  each brought faster speeds and opened up more uses. The most recent one, 4G, went live around 2011.

We’re moving to 5G starting in 2019.

5G will be lightning fast—with wireless speeds up to 20 gigabytes per second. That’s 1,000x faster than what we have today. It’s even faster than what you can get using physically wired internet connections.

5G will open up a whole new universe of possibilities. It’ll take just seconds to download a full season of your favorite TV series on 5G.

But that’s just scratching the surface. 5G’s nearly instant data transmission will make driverless cars possible. And doctors will be able to perform surgery from 1,000 miles away using robots connected through 5G.

  • There’s a drawback to 5G, though. 

For now, its signal is extremely fragile. Moving cars can interfere with it. Even leaves blowing around on a tree can interfere with it.

And a 5G signal can only reach 1 kilometer… or about 4 city blocks. Compare that to a 4G signal, which can reach up to 70 kilometers.

For this reason, 5G will require the biggest revamp of America’s wireless networks EVER.

4G required tall cell towers to blast signals over long distances. 5G will need hundreds of thousands of smaller towers. These small towers are about the size of a trash can…and soon there will be one on almost every street corner.

5G will run on a new frequency that’s never been used before. This is very important, because it means every phone and computer will need new antennas and chips to connect to 5G.

In other words, we’re all going to have to throw away our phones and buy new ones to get on 5G

This is why the GSM Association, which represents 800 of the world’s largest mobile operators, says companies will have to spend $500 billion in the next two years to get 5G ready.

  • As the 5G buildout begins in America, tens of billions of dollars are set to flow into chipmaker Qualcomm Inc. (QCOM).

Not many people know this, but QCOM owns the cell phone service known as CDMA. It’s the technology underpinning wireless networks that allows your phone to send and receive data. If you’re a customer of Sprint, Verizon, or Virgin Mobile, your phone runs on it.

Around 75% of QCOM’s profits come from its near monopoly on both 3G and 4G network patents. With a portfolio of more than 130,000 patents, QCOM can charge device makers like Apple and Samsung a licensing fee of up to 5% of the price of each phone they sell.

QCOM collected $6.44 billion through its licensing segment last year. This business is ultra-profitable, as its 85% operating margin shows.

QCOM holds 15% of the patents for 5G—the most of any company in the world. Which means it will charge many device makers a fee of 3%–5% on the price of each 5G device sold.

QCOM is best known, though, for selling computer chips. This segment has a much lower operating margin of 17%. But it generates 74% of QCOM’s sales.

This will be its most important segment going forward.

You see, QCOM is the world’s largest “System on Chip” (SoC) maker with a 42% market share. Its closest rival, Apple (APPL), has only 22% of the market.

A SoC is a microchip that has all the components required to power a phone.

Central processing units (CPUs) sold by the likes of Intel (INTC) and AMD (AMD) can’t run a computer or phone on their own. Qualcomm’s SoC, on the other hand, integrates all the components needed to run a device onto single chip.

It’s been a tough four years for this segment. Sales have slipped 15% since peaking in 2014.

That’s because Apple and Samsung stopped using QCOM’s chips in many of their phones.

  • The launch of 5G will change all this. 

When the world switched from 3G to 4G between 2010 and 2013, QCOM’s sales skyrocketed 126%.

During that time, 80% of 4G devices were powered by QCOM chips. In fact, it was the only company making 4G modems and antennas for years. So phone manufacturers like Apple and Samsung had to use them.

I think we’re going to see history repeat itself. Today, Qualcomm is the only company making 5G modems and antennas in America.

As I mentioned, current phone antennas can’t connect to 5G’s high frequency signal. Which means all new devices will have to be fitted with new antennas.

Twenty wireless providers are already planning to use QCOM’s chips and antennas in their 5G trials, including AT&T, Verizon, and Sprint.

And device makers like Sony, LG, and HTC plan to use them in their 5G products.

The first 5G networks and devices will launch next year. With QCOM being the only company to develop 5G chips and antennas, tens billions of dollars are set to flow its way.

I’m buying QCOM here and I expect it to at least double as 5G rolls out across America in the next 3–5 years.

Keep in mind its stock has jumped 48% since April… so it easily take a breather here before it marches higher.

  • 5G is what I call a “core” disruption. 

As I mentioned, its nearly instantaneous speeds will usher in world-changing tech like self-driving cars and remote surgery.

5G is truly going to be one of the most disruptive trends we’ve seen since the late 1990s.

I’ll be writing a lot about profitable 5G opportunities in the RiskHedge Report. As just one example, we’re currently researching under-the-radar companies working to solve 5G’s signal fragility problem.

My colleague Chris Wood, Chief Investment Officer of RiskHedge, is talking with CEOs in this promising space. More on that soon…

That’s all for today. As always, thanks for being a RiskHedge reader. I’m happy to say our community of disruptive investors is growing fast.  

If you know anyone interested in learning about disruption and how to profit from it—please forward them a copy of the RiskHedge Report.

And you can reach me at stephen@riskhedge.com.

Until next week,

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

In response to my article about “Autopilot stocks” and Google, RiskHedge reader Carl writes:

Stephen, my biggest gaffe was when Amazon was selling at $600 per share. I decided it was too expensive and would wait until I could buy at $500.  Whoops. I'm still waiting. It's trading at $2,000/share today. Google is a screaming buy now. For just the reasons you named, it may never dip below $1,000.

Carl, you make a good point. It’s often a mistake to wait for a pullback in disruptive stocks that are changing the world. Sometimes the train pulls out of the station and never slows down. But keep in mind, for the world's fourth-largest company, Google stock is quite volatile. This year alone it has corrected 15%, 13%, and 9%. A dip of this size would take GOOG back down to where it was trading in May. That's where I'll be buying.

Why I’m Buying “Autopilot Stocks”… and You Should Too

Why I’m Buying “Autopilot Stocks”… and You Should Too

I call them “autopilot stocks”...

Do you know many of America’s fastest-growing businesses are built on one key principle?

I’m talking about disruptors like Amazon (AMZN). Thirteen years ago, it launched its Prime delivery service. Today, there are nearly as many Prime subscribers as there are full-time workers in America.

Or the recently IPO’d Spotify (SPOT). Eighty-five million people listen to music on its innovative app.

Or Netflix (NFLX). 45% of all American households now subscribe to its video service.

  • Amazon, Spotify, and Netflix all rake in cash by selling subscriptions.

Selling subscriptions is a wonderful business model. Instead of charging a one-time fee, a subscription business collects constant streams of cash from customers.

Think about this: More than 57 million Americans have agreed to let Netflix take $10.99 directly from their bank accounts every single month.

This is an incredible financial advantage. No other business model can match the big, predictable cash flows that a well-run subscription business can generate.

Netflix’s monthly charge is small enough that many folks barely notice it. Yet since 2013, it has added up to $37 billion in revenue… propelling Netflix to a 2,600% gain.

  • According to consulting firm McKinsey, spending on subscription services has exploded 500% in the past five years.

Of course, subscription services are nothing new. But they’re exploding lately thanks to a disruption “enabler” we discussed a few weeks ago: cloud computing.

As a refresher, “the cloud” gives businesses cheap access to powerful supercomputers. Businesses can now utilize Amazon’s servers, for example, for a fraction of the price of buying their own.

This may not sound like a big deal. But in fact, cloud computing has unleashed a whole new class of subscription-based businesses. I call these autopilot stocks—because they rake in cash month after month, as if on autopilot.

Wait until you see the huge gains they’re achieving...

  • Remember how computer programs used to be sold in shrink-wrapped boxes with a CD inside? 

The cloud has rendered this way of doing things obsolete.

Consider Adobe Systems (ADBE). Its “PDF” files are the standard way to view most documents online. It also makes the image editing software Photoshop.

Practically everyone with a job has used Adobe’s software. Yet from 2007 to 2012, its business stagnated. Sales stopped growing, and its stock was dead money from 2000 to 2012.

Like most other software companies, Adobe sold its computer programs on physical CDs. But in 2012, it made a change.

It decided to stop selling one-off products and began selling subscriptions to its computer programs. Instead of selling CDs, it asked customers for $30 a month to access its programs on the cloud.

Since then, Adobe has exploded for an 830% gain and counting:

Prior to the cloud, Adobe had to persuade customers to buy an updated physical CD every few years. Now customers pay $30/month automatically, every month, unless they cancel their subscription.

Switching to a subscription model was like a shot of adrenaline right into Adobe’s veins. Its net profit has surged 170% in the past five years. And its net profit margin has jumped from 19% to 25%. Adobe’s profits are growing faster than ever today.

  • Intuit (INTU) is raking in the subscription profits, too… 

Ever use TurboTax to file your tax returns? Or QuickBooks to keep your finances straight? Intuit makes both products.

Just like Adobe, Intuit used to sell physical CDs. As you probably know, tax and accounting rules change all the time. So every year, accountants and tax preparers had to buy a whole new set of CDs to keep up with the new laws.

And as you can imagine, this cost Intuit billions of dollars. Every year it had to pay for shelf space… to manufacture CDs… to ship CDs… to design packaging. Not to mention, it had to hope customers wouldn’t switch to a competitor's cheaper software each year.

From 2006–2009, Intuit’s revenue climbed 35%. But because it was dumping so much cash into operating costs, its net profit rose only 14%.

Then in 2014, it launched a cloud-based version of QuickBooks and began offering a subscription option. Since then it has handed investors a 190% gain:

  • Clearly, Wall Street loves these autopilot stocks.

I like them too. But I’m not buying either one today. I’m more interested in pinpointing the business that will be the next to switch to a subscription model.

My research tells me YouTube could be the next mega-hit subscription business.

YouTube, as you may know, is owned by Alphabet (GOOG—formerly known as Google).

YouTube makes most of its money selling ads. But it’s just starting to dip its toe into the subscription waters. It launched YouTube Premium earlier this year, which includes ad-free viewing.

This could be the beginning of something really big. You see, YouTube’s user base is mind-bogglingly huge—1.9 billion people use it every month. That’s more than one in every four people on planet earth! And it’s 15x larger than Netflix’s celebrated subscriber count.

If YouTube can convert just 5% of these users to Premium… at $11.99 per month… it’ll earn $13.7 billion a year. With that kind of revenue YouTube could easily be a $150 billion company on its own.

Yet because YouTube is tucked inside GOOG, investors don’t pay it much attention.

  • Google is like an octopus with tentacles in many disruptive sectors…

A few weeks ago, I explained how its self-driving Waymo cars are light-years ahead of the competition. Longer term, I think Waymo could be a subscription service, too. Ridesharing services Uber and Lyft are already experimenting with this model.

Can you imagine the profits to be made by combining self-driving cars with the superior economics of a subscription model?

If you’ve been reading the RiskHedge Report, you know I want to own Google stock. But it’s still a bit expensive, so I haven’t bought it yet. As I mentioned a few weeks ago, I’m waiting for it to dip to around $1,050/share.

At $1,180/share, I think we’ll get our chance to buy Google for a good price before the end of the year. I’ll let you know when it’s time to pull the trigger.

How much do you spend on subscriptions each year? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge subscriber Mike asks:

Your article on how self-driving cars will kill many car companies was very interesting. I agree with most of your assumptions. But keep in mind, some people like driving. I think vehicles that people like to drive will survive, even if they just get driven on weekends by people who use driverless cars during the week.

Harley Davidson (HOG), for example, seems to have thrived despite its products being overvalued, clumsy & pointless symbols of rebellion for impotent old men. Sorry, just kidding! 

So I think while dull, mass-market models will disappear, classics and fun vehicles will remain. Hopefully, they’ll be even more fun to drive on roads less choked with parked cars…

Mike, I think you’re right. As you know, I expect the self-driving car revolution to rip through the car industry and send many prominent auto stocks to zero. Mass-market carmakers like Ford (F) are in big trouble.

But companies that make small quantities of very high-priced cars—think Ferrari (RACE)—could do just fine. The market seems to agree with your assessment. Since IPO’ing in 2015, Ferrari stock has marched 145% higher. Ford stock, meanwhile, is plumbing seven-year lows.

If I Could Only Buy One Stock for the Next 5 Years…

If I Could Only Buy One Stock for the Next 5 Years…

If I could only buy one stock for the next 5 years… this would be it.

If you’ve been reading the RiskHedge Report, you know about the disruptive megatrends that are powering stocks to huge gains.

We’ve discussed the companies that have shoveled almost $100 billion into developing self-driving cars

That the world’s most powerful companies including Apple (AAPL), Amazon (AMZN), and Google (GOOG) are pouring billions into artificial intelligence

And last week, I explained how video gaming has exploded into a $138 billion monster market.

  •  What if I told you one company is powering all these megatrends?

This company is Nvidia (NVDA).

Take a look at its 720% surge since 2016:

Now I know you might be thinking: Stephen, this stock has already had a heck of a run… why buy it now?

I understand the concern. But when investing in truly disruptive companies, this way of thinking is often a mistake.

From 2009-2013, AMZN stock gained 680%. Most so-called “experts” said the easy money had already been made. In 2013 CNN “reported” that “Amazon is one of the most overvalued stocks.”

Amazon has soared another 700% since 2013.

  • NVDA makes high-performance computer chips called graphics processing units (GPUs).

NVDA developed the first mass-market GPU in 1999. GPUs use what’s called “parallel processing,” which allows the chips to perform millions of calculations at the same time.

That’s different from how other computer chips work. Most computer chips, like the one powering the laptop or phone you’re reading this on, calculate one by one.

At first, GPUs were mostly used to create realistic graphics in video games. Remember the blocky Nintendo graphics from the early ‘90s? The ability of GPUs to process huge amounts of data all at once helped create the movie-like video game graphics you see today.

  • But it turns out that GPUs are also ideal for “training” machines to think like humans.

In other words, artificial intelligence (AI).

I’m sure you’ve seen the Hollywood movies about AI going rogue and attacking humans.

In reality, AI isn’t that glamorous. It all comes down to processing massive amounts of data.

Show a computer millions of pictures of a stop sign, for example, and it will learn to recognize stop signs on its own in the real world.

AI is the driving force behind Google’s self-driving car subsidiary Waymo. As we talked about a few weeks ago, Waymo’s robot cars are cruising around American roads right now.

At the core of Waymo’s self-driving car fleet is a centralized “brain.” It has learned to recognize stop signs, pedestrian crossings, red lights, and all the other obstacles human drivers navigate.

  • The recipe for AI success is simple… 

The faster a computer can process data, the faster it can “learn” by recognizing patterns in the data.

NVDA’s latest chips process 125x faster than traditional computer chips. They can process 125 trillion data points per second… which slashes AI “learn” times from 8 days to 8 hours.

This is why more than 2,000 companies including Amazon, Google and Microsoft use NVDA’s hardware to “train” their AI programs.

Last quarter, the revenue NVDA earned from selling AI chips and hardware jumped 82%. In the last two years, AI-related sales have accounted for over 70% of the surge in NVDA’s revenue. AI sales now make up 24% of its total revenue.

  • NVDA will earn around $600 million from its automotive business this year.

As I mentioned, it supplies self-driving car companies with chips that “train” cars’ brains. It also sells hardware that processes data from the cars’ many cameras and sensors.

For example, NVDA’s self-driving supercomputer, named Pegasus, can tackle 320 trillion operations per second. And it does so using one-third the electricity at just one-fifth the cost of its closest competitor.

Over 370 companies working on self-driving cars now use NVDA’s products. Auto sales make up just 5% of NVDA’s total revenue today; I see this exploding higher over the next few years as true self-driving cars roll out.

I mentioned earlier that $100 billion has been spent on developing self-driving cars so far. With the likes of Google and Apple pouring billions into driverless projects, I see that jumping to $1 trillion over the next 2–3 years.

Thanks to its superior technology, I expect NVDA to capture a large chunk of this.

  • NVDA is considered a “high-flying” tech company… 

But please understand, it’s nothing like many of the profitless tech darlings out there.

While many high-flying tech stocks get by on stories and hype, NVDA is extremely profitable.

It has a net profit margin of 33%. That is, for every $1 in sales, $0.33 becomes pure profit.

That’s better than Google’s 21% margin… and even Microsoft’s 29%.

NVDA’s high margins allow it to continually pour cash into Research & Development (R&D). It reinvests close to 20% of its revenue into R&D every year, which is a key reason why it has blown away its rivals.

NVDA is financially sound, too. It’s sitting on a record $7.95 billion in cash. Which is enough to pay off its total debt four times over.

  • Some may be concerned about NVDA’s price-to-earnings (P/E) ratio of 39.

Can buying a stock at such a high valuation be risky? Sure. But I believe NVDA’s deserves its rich valuation.

NVDA’s earnings are growing at almost six times the rate of the S&P 500. Yet its P/E ratio is not even double the S&P’s.

I think investing in a company like Ford (F), with a P/E of 5, is far riskier than buying NVDA. I can hear the groans coming from the value investors out there. But the fact is, NVDA is leading the self-driving revolution… while Ford is going to get crushed by it.

Because it is powering today’s most disruptive trends, I see NVDA doubling over the next two years. I’m buying it today at $272.

Are you buying NVDA here? Tell me at stephen@riskhedge.com

To disruptive profits,

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge reader Riekele asks:

I’m a 69-year-old retired man who has worked his whole life in a semi-government job. My wife and I live on a pension, and have about $120,000 as a nest egg.

I’ve been invested in precious metals ETFs for about five years now. These have been losing investments – I’m down about 22%. I think we have to change our strategy. From reading your letter, it seems like investing in risky investments, like technology stocks, could be more prudent and profitable. I’m eager to hear your opinion.

Riekele, it sounds like you put a lot of your investable assets in precious metals. No matter how promising an investment seems, you should always spread your bets so you're not overinvested in any one stock or sector. Disruptive stocks can make us big gains in short periods, but they're also prone to big swings. Keep your position sizes manageable so you can hang on through the inevitable volatility. 

Unleashing the Fringe for 375% Gains

Unleashing the Fringe for 375% Gains

Picture 18,000 fans packed into a sold-out Brooklyn arena.

They’re watching the championship game in the world’s fastest-growing sport…

Along with millions of others watching from home on ESPN’s prized prime-time slot.

Are you picturing LeBron James dunking? Tom Brady throwing touchdowns?

No… these crowds are gathered to watch kids play video games.

  • Professional video gaming—also called “e-sports”—is getting wildly popular.

Fifty-seven million people tuned in to watch a recent professional video game match. That’s almost 3x more than the 2018 NBA finals.

Maybe you’re thinking it’s a stretch to call video gaming a “sport.” Call it whatever you want… so long as you understand that massive sums of cash are pouring into this booming sector.

There are now American video gaming leagues modeled after the NBA and NFL. Instead of the Philadelphia Eagles, professional gaming has the Philadelphia Fusion.

And like the NFL, e-sports has millions and millions of hardcore fans who will happily fork over $100 or more for a ticket to watch a big game live.

  • Many investors dismiss e-sports as a silly fad…

They’re wrong, and they’re going to miss out on big stock gains.

Do you know that more than 80 American colleges now offer e-sports scholarships?

Or that last year, some of the world’s biggest companies like Intel, Coca-Cola and T-Mobile spent $700 million to sponsor e-sports?

Or that the average salary in one American professional e-sports league is $320,000?

  • All the evidence says that e-sports is going to be a huge moneymaker…

Yet many investors roll their eyes because it sounds like the punchline of a joke.

Let me tell you a different joke that has investors laughing to the bank with 375% gains.

Chances are you’ve seen at least a few minutes of American professional wrestling.

I’m talking about “Hulk Hogan”-type wrestling. Where muscular guys wearing spandex hit each other in the head with folding chairs.

Juvenile, right?

Well, look at this chart of World Wrestling Entertainment (WWE):

Source: Yahoo Finance

The WWE has turned fake wrestling into a $6.8-billion business. Investors in WWE have made 375% since January 2017. It’s the 12th-best-performing medium-to-large US stock this year.

  • WWE was dead money for 17 years.

It went public in 1999, and its stock fell 25% through 2016.

Everything changed in 2017. As regular readers know from my essays on Netflix and Disney, technology has totally disrupted the business model of TV.

In the past, big cable companies acted as gatekeepers that decided what we watched. Today, we can watch practically anything on streaming services like Netflix and the internet.

WWE took advantage of this to launch a “Netflix-style” streaming service for wrestling. By bypassing cable companies to connect directly with fans, WWE has transformed its business.

Thanks to 1.8 million streaming subscribers, its revenue has jumped to all-time highs. A few years ago, it was at the mercy of cable companies, with half of revenue coming from TV contracts. Today, just one-third of its revenue comes from traditional TV.

  • Professional video gaming has existed on “the fringe” for decades too...

And like WWE, streaming video is unleashing its full moneymaking potential.

As I mentioned, people can now watch whatever they want on the internet. And it turns out hundreds of millions of people like to watch others play video games professionally.

Have you heard of Twitch? It’s a website owned by Amazon (AMZN) that broadcasts video game matches. More people watch it every day than CNN or MSNBC!

And that’s the key to this whole thing: Video gaming has a massive audience of engaged fans.

This is an incredibly valuable asset that is crucial for making money in any content business.

In fact, a massive audience of engaged fans is the source of the financial strength of the NFL and NBA. It’s why the Dallas Cowboys are worth $4.2 billion and the New York Knicks are worth $3.6 billion.

They’ve each got millions of fans not only watching them on TV, but buying tickets, memorabilia, and merchandise year after year.

Based on the stats I shared with you earlier, I’m convinced the global fanbase for e-sports is bigger than the NFL and NBA combined.

This fanbase has been there for decades. But it took the disruptive force of streaming video to bring fans together online in huge numbers. E-sports is shining a light on just how gigantic and enthusiastic the video game audience really is.

I believe this industry is just in its infancy. People are going to be shocked at how fast e-sports grow in the next five years.

  • Okay Stephen, make us some money. How do we profit from this? 

This year, people will spend around $138 billion on video games. That’s a 95% surge from six years ago. Look at this chart of my three favorite gaming stocks vs. the S&P 500:

Source: Yahoo Finance

As you can see, they’ve all trounced the market. I think that’ll continue as the popularity of e-sports explodes.

Here’s a runown of why I like each stock:

  1. NVIDIA Corporation (NVDA)

NVDA makes high-performance computer chips used for gaming. They can cost up to $3,000 a piece.

NVDA’s chips are the gold standard in gaming. 86% of competitive gamers use them, and NVDA has become the official hardware provider for almost every major e-sports league in the world.

Next week, I’m going to tell you more about NVDA and its growing presence driverless cars and artificial intelligence.

  1. Activision Blizzard, Inc. (ATVI)

If you read my other essay on Netflix and Disney, you know I believe producing great content is a bigger competitive advantage today than ever before. ATVI is one of the world’s best video game makers.

It’s owns five franchises that have brought in over $1 billion in revenue. And its games are among the most widely played in the e-sports world.

And get this… ATVI recently struck a deal with Disney to broadcast its popular Overwatch League matches live on primetime ESPN.

  1. Tencent Holdings Limited (TCEHY)

Not many people know this, but Chinese social media giant Tencent is the largest gaming company in the world. Its gaming revenue is 72% higher than second place Sony.

It owns mega-hits like League of Legends, Fortnite and Clash of Clans. If you have teenage sons or nephews, you probably know that millions of kids from here to China play Fortnite.

Tencent’s bread and butter is mobile gaming, like on smartphones. Mobile gaming now makes up 51% of the global gaming market.

That’s all for today. To investing in the profitable fringe,

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

In response to my article about the driverless car revolution, RiskHedge reader Wayne writes:

Stephen, I liked your logic and detail. I have a thought that doesn’t seem to be reflected in the current debate. Was one of your parents required to "give up the keys?"

I remember my dad and that experience so well. Devasting loss of independence. I believe when the Baby Boom generation starts getting the keys taken away—already happening—then self-driving car sales will explode. Grandpa goes out, gets in the car, says "take me to Karen's or Steve's…” And that generation has the resources.

Wayne, thanks for your thoughtful question. I agree. Driverless ride-sharing is going to restore mobility and independence to elderly people who can no longer drive safely. It’ll do the same for teenagers who, statistically, are unsafe drivers. Would you rather buy your 16-year-old son a car, or give him a few bucks to take a Waymo to baseball practice?

This Hated Disruptor Stock Is Coiled for Big Gains

This Hated Disruptor Stock Is Coiled for Big Gains

David Stanley was a convicted felon… and one hell of a salesman.

When Americans were going wild for tech stocks in the late ‘90s, he convinced a group of investors to put $28 million into what they thought was his hot internet startup.

But it was a fraud. Stanley would blow most of the cash on an obscenely lavish “launch party” in Vegas. He paid $16 million to rent out the MGM Grand and hire world-famous bands KISS, The Dixie Chicks, and The Who to perform.

The cops caught up with Stanley and locked him in jail in 2000.

  • Over-the-top tech blowouts were common in the late ‘90s.

Investors got rich and partied as the Nasdaq shot up 380% from 1996-2000. The party stopped when the bubble popped and the Nasdaq cratered 80%+, wiping out millions of retirement accounts:

Source: Yahoo Finance

I’m sure you’ve seen this bubble chart dozens of times. But today I’m going to show you a secret hidden in it that’s key to making big profits in disruptive stocks.

In fact, it’s telling us to buy a specific disruptive stock today, as I’ll show you in a minute.

First, let’s zoom out to get the full picture. Here’s the Nasdaq from 1996 through today:

 Source: Yahoo Finance

  • What does this chart say to you? 

Most folks remember the dot-com bubble for the irrational excitement that gripped markets and drove stocks to absurd levels. And for the stunning sums of cash that poured into silly internet companies like pets.com that were supposed to “change the world” and make investors rich.

But the thing is… the internet really did change the world.

And many internet stocks really did make investors rich.

Do you know that the largest, most powerful companies on earth today are tech firms? Apple, Amazon, Google, Microsoft, Facebook, and Chinese tech giant Tencent are six of the seven biggest publicly traded companies on the planet.

Some of these stocks weren’t around yet during the Nasdaq bubble. But had you bought the ones that were around in the aftermath of the crash, you would’ve made so much money that the gains are almost hard to believe.

Had you bought Apple after the bust around 2001-2004 and held your shares until today, you’d be sitting on a 20,000%+ gain right now.

Amazon would’ve handed you a 30,000%+ gain.

It would’ve been really, really hard to hold these stocks through their big ups and downs over the last 15 years. But if you managed to do it, your $5,000 investment could’ve ballooned into $1.5 million.

  • I’m telling you this because we have a similar set-up today.

It’s important to understand that the late ‘90s Nasdaq runup was not unusual. It followed a script that disruptive stocks follow over and over and over again.

Keep in mind, disruptive companies literally invent the future. Amazon created the online marketplace. Netflix pioneered video streaming. Apple is the reason 85% of Americans have a smartphone.

Because they set out to accomplish things that have never been done before, disruptive stocks are prone to hype and wild exaggeration. Investors get carried away with dreams of riches. Their imaginations run wild and they bid disruptive stocks up to the moon.

This often happens when a new technology is immature and not ready for “prime time.” Reality eventually sets in, the sector crashes, and overeager investors get wiped out.

  • Do you remember the Super-Bowl level hype in 3D printing stocks around six years ago? 

In 2012, The Economist dubbed 3D printing the “third industrial revolution.” Promoters claimed that every American would soon have a 3D printer in his house, just like we have paper printers today. These magical devices would “print” anything we wanted, on demand.

Investors ate it up and plowed billions into 3D printing stocks. 3D Systems (DDD), the largest 3D printing company, exploded to a 900% gain in two years.

Then reality set in:

Source: Yahoo Finance

Looks a lot like the Nasdaq from ‘96–‘00, right?

  • It turned out this version of 3D printing was a gimmick.

Early 3D printers were a huge disappointment. They could make only flimsy plastic trinkets that had little use. When this dawned on investors, the two largest 3D printing stocks plunged 92% and 86%.

BUT—3D printing itself is no gimmick. Set aside the fantasy about a 3D printer in every household, and you’ll realize the technology really is revolutionary.

  • Unlike when promoters were fawning over 3D printing in 2014, some of the world’s largest companies use it today.

Airbus (EADSY), one of the two biggest plane makers, is 3D printing thousands of parts for its planes. Management says these parts are around 50% cheaper to 3D print rather than manufacture the conventional way.

Rival Boeing (BA) 3D prints over 50,000 parts for its planes. Management says it saves $3 million per 787 Dreamliner because these parts are cheaper to make.

Here’s the key to understanding why 3D printing is so important. Conventional manufacturing usually involves stamping, molding, or carving away existing material to create what you want. 3D printing, on the other hand, starts from nothing and layers on material to create an object from scratch.

For this reason, 3D-printed parts are often lighter, more efficient, less expensive, and more precise than anything humans could create before.

Take jet engine maker GE (GE) for example. It has replaced more than 850 parts of a normal aircraft engine with only 12 3D-printed components.

This reduced the engine’s weight by 5%, which saves 20% on fuel costs. The average airline spends 25% of its expenses on fuel, so you can imagine how huge a deal this is.

  • Nike (NKE), car maker Audi (AUDVF), UPS (UPS), and even the US Navy are slashing costs with 3D printing.

Leading research firm Wohlers Associates found the 3D printing market grew to $7.33 billion last year, which is a near doubling from 2014. Yet 3D printing stocks remain 80% below their 2014 highs.

Boston Consulting Group estimates 3D printing will explode to $15 billion by 2020, which is in line with my estimates. I think buying the right 3D printing stocks now is like buying Microsoft or Apple in 2002.

  • My top 3D printing pick is Stratasys (SSYS).

SSYS is one of the largest and oldest companies in the 3D printing space. It has over 18,000 customers around the world including Airbus, Boeing, Lockheed Martin (LMT), NASA, Ford (F) and Volvo (VLVLY).

I like SSYS best for two reasons. One, it holds a 25% market share in industrial 3D printing. Its main competitor 3D Systems only has an 8% market share.

Two, SSYS is on sale. Its price-to-book (P/B) ratio is just 1.2. You rarely see stocks with such huge growth potential trading for so low a price. DDD’s P/B ratio is 4.

SSYS had been stuck in a crushing bear market for most of the last four years. This year, its stock has climbed 27%. I think it has broken out of its downtrend and I expect it to climb much higher in the next 12–18 months.

That’s all for today. I’ll have a lot more to tell you about 3D printing in future issues. Talk to you next week.

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge subscriber Luca writes:

Great article about the trade war and its implications for Airbus. But I wonder: can we be sure that the trade war will go on?

Luca, I expect trade tensions to get worse before they get better. Airbus (EADSY) should do well either way though, as it has been stealing market share from rival Boeing for years now. By the way… Airbus stock just hit an all-time high.

RiskHedge subscriber Harvey asks:

Following on your thesis on DIS, what’s are the odds of AAPL taking out DIS to literally TAKE OVER the services businesses?

I expect the likes of Apple, Amazon, and Facebook to push into the content space over the next few years. It wouldn’t shock me if a bigger company makes a play for Disney which, as you know, is the undisputed king of content.

Oldest Bull Market Ever? Disruption Investors Should Do This Next

Oldest Bull Market Ever? Disruption Investors Should Do This Next

It’s official…

This is now the longest bull market in US stocks ever.

As of yesterday’s close, we’ve been in a bull market for 3,453 straight days.

Which breaks the all-time record formerly held by the 1990–2000 rally.

As I’m sure you remember, that one ended with a historic 80% crash in the Nasdaq that wiped out millions of overeager investors.

  • If you’re troubled by this, you’ll want to read the rest of this letter carefully.

I’m going to give you my blueprint for investing in today’s uncharted waters.

But first… have you been following The Trade Desk (TTD)?

I alerted you to this opportunity in late June. The Trade Desk is a small online advertising company that’s stealing big chunks of business from Facebook (FB) and Google (GOOG).

It just closed a phenomenal quarter, reporting a 54% jump in revenue that sent its stock leaping 37% in one day.


Source: Yahoo Finance

Recall that the online ad industry is an $80-billion-a-year pot of gold. Facebook and Google grew from nothing into two of the most powerful companies on earth by dominating it.

But advertisers are fed up with Facebook and Google’s lack of transparency. You can’t track the performance of individual ads on either platform. This leaves advertisers in the dark about what worked and what didn’t.

The Trade Desk has stepped up to offer a better way, and advertisers are loving it. On the latest earnings call, CEO Jeff Green said spending by the world’s 50 largest advertisers on TTD’s platform soared almost 100% in the past year.

Even better, TTD’s customer retention is world-class. Nineteen out of 20 companies that try it stick with it.

TTD has shot up 188% year-to-date, so I wouldn’t be surprised if it takes a breather soon. But I expect it to soar much higher in the next 2–3 years as it takes more and more revenue from Facebook and Google.

  • Now let’s shift gears and talk about the stock market.

The media is having a field day with “The Longest Bull Market Ever” narrative. It’s front-page news on CNBC, CNN, MSNBC, WSJ, Fox, and every other big American network.

There are dozens of ways to measure a bull market, but let’s play along with the “official” definition, which states that a bull market continues until it is killed by a 20% decline. The S&P 500 hasn’t declined 20% since bottoming in March 2009, roughly 9 ½ years ago.

But here’s something you may not know. In 2011, around the time of the “debt ceiling” crisis, the S&P declined 19.4%. If it had dipped another 0.6%, the bull market would’ve ended there and we wouldn’t be having this conversation.

Or did you know that from May 2015–February 2016 the median US stock fell 25%? Meanwhile the Russell 2000 slipped 26% and popular stocks Amazon and Apple lost 30% of their value.

But because the S&P 500 dipped only 14.2%, this didn’t interrupt the “official” bull market.

  • Do you see how useless the bull market label is? 

“We’re now in the longest bull market ever” sounds important. And it is factually accurate. This makes it perfect to fill airtime for TV networks.

But it is totally irrelevant to making money in the markets.

And you’ve surely heard the claim that, because we’ve never seen a bull market this long before, we’re “due” for a scary bear market that’s right around the corner.

Please don’t listen to this nonsense.

There is zero evidence to support it, and taking it seriously will cost you money. I’ve watched several people in my life sit out the whole bull market since 2009 thanks to scary-sounding but meaningless stories just like this. They’ve missed out on dozens of profitable opportunities because they’re always too nervous to invest.

One of the great investing lessons I’ve learned is there’s always something to be scared of in markets. It’s a false alarm 99.9% of the time. The overwhelming odds are that the “longest bull market ever” will merely be the latest entry on a long list of things that were supposed to topple the market but never did.

Off the top of my head, this list includes:

Obama, Trump, Zika Virus, the Arab Spring, high oil prices, crashing oil prices, rising interest rates, negative interest rates, America’s credit downgrade, the flattening yield curve, Greece, trade wars, and most recently Turkey.

Yet here we are. US markets touched all-time highs this week.

  • I’ll probably get hate mail for this next part, but here goes…

Look at this chart of the S&P index going back to 1900:

Source: JPMorgan Asset Management

A heck of a lot of disruptive events have happened since 1900. Two world wars and dozens of smaller ones. The Great Depression, the 2008 financial crisis, and 18 recessions.

Yet the S&P has risen 100x. And according to Credit Suisse, US stocks have risen an average of 6.5% a year since 1900.

Do you want to bet with the 118-year trend, or against it?

Look, things go horribly wrong in markets from time to time. You must avoid getting caught up in dangerous bubbles like the Nasdaq in 1999 or Japanese stocks in 1989.

But the US stock market is nowhere near a bubble today. Despite what you hear, stocks aren’t even all that expensive. The S&P trades for about 16.5x forward earnings, which is right in line with its 25-year average.

So be smart. Be cautious. Practice proper position sizing and risk management. But don’t obsess over when the next bear market will hit.

For most of the last 118 years US stocks have gone up. Meanwhile great disruptive businesses like Apple (AAPL) and Microsoft (MSFT) and Google (GOOG) and literally hundreds of others have handed investors 10x gains over and over and over again.

With profitable opportunities like this all around us today, it’s illogical to obsess about the tiny slivers in the chart above when stocks go down. The average bear market lasts 10 months and stocks drop 32%. Meanwhile, a great disruptive stock like The Trade Desk can hand us a profit of 37% in a single day, as I showed you earlier.

Are you a stock market bear who hated this issue? Direct your anger to stephen@riskhedge.com.

Reader Mailbag

RiskHedge subscriber Ronald writes:

I am very intrigued about your short write-up on TTD. It is hard for me to believe a small company could compete with those two giants and survive. I also like your story on ASML, now that looks like a fantastic company to invest in.

Thanks Ronald. ASML makes the machines that make next generation computer chips. It recently closed its best quarter ever, with net profit surging 75% since last year. I’m still a buyer at today’s prices.

In response to my article about coal and uranium, (former) RiskHedge subscriber Maureen wrote:

This is awful. I am shocked that you and your company only care about making money. Don’t you have ANY idea what coal does to our planet???? And you’re touting the “benefits” of coal AND uranium?? Please never send me any of this bullsh*t again.

Maureen… this is an investing letter. If you had read my whole essay, you would have known I wasn’t touting coal. Coal is dirty and is being phased out, but it’ll take decades until it is totally replaced. That’s a fact, whether we like it or not.

RiskHedge subscriber Bill writes:

What are your thoughts on using cryptocurrencies as a store of value? Will they replace gold as the go-to non-government currency? 

My colleague Olivier Garret recently wrote a thoughtful article about this. Go here to read it.

That’s all for today. Talk to you next week.

Stephen McBride
Chief Analyst, RiskHedge

Are Cryptocurrencies a Real Threat to Gold?

Are Cryptocurrencies a Real Threat to Gold?

A gold investor recently asked me: Are cryptocurrencies (like bitcoin) a threat to replace gold as a store of value?

As cofounder of disruption research firm RiskHedge and CEO of precious metals storage company the Hard Assets Alliance, I like to think I can offer a unique perspective on this.

Let me start by stating that I am a very strong believer in the blockchain technology that has made most cryptocurrencies possible. Blockchain will transform many industries. And the disruptions it will bring could be as profound as the inception of the World Wide Web.

Investing in blockchain companies that will lead this coming disruption will be very profitable, although picking the winners won’t be easy. However, in my opinion, cryptocurrencies are an entirely different play than gold.

A Monopoly on Money

I believe that cryptocurrencies will eventually replace fiat currencies and become the main way we buy and sell things. But I do not think they will ever become a store of value or an asset like gold. Of course, no one knows for sure at this point. The best we can do is think through possible outcomes.

The reason why I would be very cautious about investing in Bitcoin or any other cryptocurrency is that governments won’t allow decentralized currencies to threaten their own sovereign currencies. Cryptocurrencies are still marginal, so governments stay idle. But if any crypto seriously threatened, say, the USD, its days would be numbered.

Every major government in the world is contemplating the introduction of its own cryptocurrency. So there’s a real chance that all cryptocurrencies, except those issued by a government, will be banned. That will allow governments to harness the blockchain technology while retaining control of money.

The same thing happened with bank notes issued by private bank—they eventually became sovereign currencies.

When governments realized that having a monetary monopoly allowed them to create money out of thin air, they introduced a sovereign fiat currency and outlawed private bank notes.

Get Ready for the Crypto Dollar

The case for sovereign cryptocurrencies is even more compelling. As soon as we have a “crypto dollar,” “crypto renminbi,” or another sovereign currency, governments will be able to get rid of money laundering, tax evasion, and avoid a lot of other problems that come with cash.

Major governments will work together to ensure that they have control over money issuance and tax collection.

Many crypto bugs tell me that governments are already late in the game so they can’t control Bitcoin anymore. I disagree. All the US government has to do is to impose heavy sanctions on any business that uses or accepts bitcoins. No serious company will touch it.

This is exactly how the US successfully imposed FACTA, a US law, on all of the world’s financial institutions.

Cryptocurrencies’ Effect on the Gold Price

Could cryptocurrencies hurt precious metals prices?

Cryptocurrencies have definitely attracted a lot of capital that would have otherwise flowed into other asset classes. A number of precious metals investors have been lured into buying cryptocurrencies—many of them, unfortunately, bought at the worst possible time (late last year).

That said, the relationship between cryptocurrencies and precious metals prices is far from obvious. Late last year, Bitcoin hit all-time highs, but gold also had a reasonably good year, gaining about 11%. So far this year, bitcoin has plunged 54%, while gold has slipped 9%. So it’s hard to tell what impact the crypto craze has had on gold’s price.

What’s more obvious is gold’s close correlation to the US dollar. The recent strength of the USD has hurt precious metals prices. Higher interest rates are also partially to blame. However, no one can predict where both are headed.

One thing I can say for sure is that precious metals are now very cheap as an asset class. Gold is selling for its lowest price in 18-months. And silver hasn't been this cheap since early 2016. For this reason, I’m personally increasing my allocation to both gold and silver. If precious metals prices happen to drop further, I will buy more. Every asset class goes through cycles. Gold is historically cheap right now. It will eventually get more expensive.

In 1980, nobody owned stocks and everybody owned gold. Yet stocks were historically cheap at the time. It didn’t work out well for folks who were obsessed with gold. Now the opposite is true. Everyone is obsessed with overvalued stocks or volatile cryptocurrencies, and nobody wants gold.

One last thing to note: I now have a very large allocation to cash because I expect many asset classes to become cheaper within the next couple of years.

I hope this is helpful and thank you for reading.

The End of the Steering Wheel

The End of the Steering Wheel

Do you know what the biggest car company in America is today?

Its no longer General Motors (GM), which lost $3.8 billion last year.

And it sure as hell isn’t Ford (F), whose stock is crumbling to seven-year lows as you read this:

Source: Yahoo Finance

Electric-car maker Tesla (TSLA) has zoomed past both of these stumbling giants to become America’s most valuable car company.

But Tesla has barely sold any cars. Its colossal $60 billion valuation is based purely on hope and potential.

In 2017 GM sold 10 million cars, 100 times more than Tesla... but the market values GM at only $52 billion.

  • I’ve never seen the media fall in love with a stock like it has with Tesla, which has soared 1,000%+ since 2014.  

Flip on CNBC and there’s a good chance they’re talking about Tesla right now. The financial media is obsessed with founder Elon Musk.

Now picture this headline broadcast all over TV and the internet:

Elon Musk’s Tesla to Launch Fully Driverless Robotic Car Service This Year

Can you imagine the hysteria that would erupt if fully functional, self-driving Teslas were rolled out? The stock would go bananas.

Well, this headline is accurate, except for the Tesla part.

Right now—in August 2018—self-driving cars are driving around Arizona. On the Thursday you receive this letter, a self-driving car will drive a kid to soccer practice.

And before yearend, the company that operates these cars will launch a self-driving rideshare service to the public in Arizona. It’ll operate just like Uber. You press a button on your phone and a robot taxi comes to pick you up.

There will be no driver in the car. It will be driving itself.

  • I’ll repeat: self-driving cars are here right now

The company achieving all this is called Waymo. As I explained in June , it’s a subsidiary of Alphabet (formerly known as Google).

If Waymo were a standalone company, it would be the hottest stock on Wall Street. But because its tucked away inside the world’s third-biggest publicly traded company, the financial media ignores it.

Waymo’s driverless fleet has already covered 8 million miles and continues to amass 1 million miles per month today. As you can see in the chart below, Waymo has been testing driverless cars since 2009. This year, its progress has gone parabolic:


Source: Waymo 

This is key because Waymo cars run on a centralized computer “brain” that learns from every mile driven.

Waymo is absolutely dominating all rivals in self-driving technology. Tesla, Uber, and many others are years behind it.

  • Driverless cars are an existential threat to the car industry as we know it.

I’ve focused a lot of my time and research lately on understanding how self-driving cars will change the world. I’m convinced they’re going to hollow out the car-ownership culture in America and elsewhere.

Think back to when ridesharing services like Uber and Lyft were new. Many experts predicted these services would kill car ownership. That didn’t happen, mostly because of the cost.

Right now I’m living in Dublin, Ireland, and I don’t own a car. When I’m going for meetings, I take several Ubers a day, and the cost often adds up to over $75 a week. When I was living in Auckland, New Zealand, a far more sprawling city, the cost ballooned even higher.

By far the biggest cost of operating any car today is paying the driver. Last year, Uber took in $37 billion in fares. $30 billion—or 81%—went to the drivers. Self-driving cars slash this to zero.

A recent estimate from investment bank UBS arrived at a similar number. It suggests driverless ride-sharing services will be 70% cheaper than Uber.

That’s right in line with what my research shows—after factoring in regulatory costs, which will likely be substantial. Governments will surely wet their beaks by imposing taxes, fees, and regulations. For our own safety, of course.

  • Tens of millions of Americans will ditch their cars in the next few years.

Why pay for car loans, insurance, registration, inspections, repairs, parking, oil, and gas when you can summon a safe, inexpensive driverless car to pick you up anytime you want?

According to the US Census Bureau, 63% of Americans live in urban areas. I think it’s safe to assume at least half the folks who own cars in cities today will ditch them in the coming years.

Did you know that 2017 marked the first year auto sales fell since the financial crisis? I think it’s the beginning of the end of the American car industry as we know it.

Plunging car sales are obviously terrible for automaker stocks. But the disruptive effect of self-driving cars will ripple out to other, less obvious corners of the market.

For example, self-driving cars will cut down on car accidents big time. Today, over 6 million car accidents happen in the US each year. Self-driving cars should ultimately reduce this by around 90%.

This will eat into car sales, as we won’t need to replace totaled cars often. Fewer accidents also means plunging revenue for companies that sell car insurance. Less wear and tear will eat into the revenue of companies that sell auto parts.

Not to mention, fewer speeding tickets means less revenue for local governments.

  • Politics will be an important battleground for Waymo. 

The auto industry is responsible for 4% of US GDP and millions of jobs. In fact, “truck driver” is the most common job in America. Self-driving vehicles put all 4 million American truck-driving jobs in jeopardy.

Its easy to see how this could go bad politically. I can already see the headlines in the Huffington Post: “Greedy Tech Giant Google Puts Profits Before Workers…”

Waymo has smartly gotten out ahead of this by building partnerships that enhance its image. For example, it has partnered with the City Council in Phoenix to provide cheap bus and rail connections to underserved communities and the elderly. It has entered a similar partnership to drive folks to and from Walmart to buy groceries.

This is a genius move by Waymo. Instead of a job killer, it will be seen as the friendly service that takes Grandma to Walmart.

  • Okay Stephen, how do we make money from this? 

At 52 times earnings, Alphabet (Google) is too expensive for us to buy today.

I expect Waymo to achieve rocket ship growth. But Google is a colossal company worth $865 billion.

Analysts at Morgan Stanley value Waymo at $175 billion today. That sounds way too generous to me. My calculations show Waymo is worth around $100 billion. But even if we play along with Morgan Stanley’s big number, Waymo makes up only 20% of Google’s value.

I’d consider buying Google if it dips about 15% to around $1,050/share. This would push its valuation down into a more reasonable range. And it would shrink Google’s market cap enough so big growth in Waymo can move the needle.

  • As you know, my aim in this letter is to help you profit from disruption. 

And just as important, avoid being caught on the wrong side of it.

I’m working a “blacklist” of auto stocks in danger of getting demolished by the self-driving car trend. I’ll share it with you soon.

For now, I can tell you these three sitting ducks will definitely be on the “DO NOT BUY” list:

Ford Motor Co (F), online car seller CarMax Inc (KMX), and insurance company Ally Financial (ALLY).

That’s it for today. Next Thursday, we debut the mailbag. If there’s anything you want to ask about self-driving cars, send me a note at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Introducing the World’s Most Powerful Stock Picker

Introducing the World’s Most Powerful Stock Picker

I’d like you to meet the most powerful stock picker in the world.

His influential words will often crash a stock… or cause it to soar.

In April, he dropped the hammer on Philip Morris (PM), the world’s largest tobacco company. It plunged 25%, as you can see right here:


Source: Yahoo Finance

And back in 2013, his endorsement led to a 114% gain in an index that tracks the stock market of the United Arab Emirates.

He recently made a new disruptive announcement that’s causing billions to flood into an under-the-radar investment. I’ll tell you about that in a moment.

  • First, you should know the world’s most powerful stock picker is not a human. It’s a company called “MSCI.”

MSCI creates and tracks indexes. A stock index, as I’m sure you know, is simply a group of stocks. The S&P 500, the Dow Jones, and the Japanese Nikkei are all indexes.

MSCI dominates the index game. It controls over 190,000 indexes, many of them so ingrained in the markets that we often refer to them without realizing it.

Consider the statement "emerging market stocks gained 1% today.” We’ve all heard this dozens of times. But stop and think what it actually means. There are thousands of emerging market stocks. Which ones in which countries are we talking about?

This statement refers to the MSCI Emerging Markets Index. It’s so ingrained as the accepted benchmark that it’s synonymous with “emerging market stocks.”

  • 12.4 trillion investment dollars worldwide track MSCI indexes.

Many giant pools of money like university endowments, ETFs, and pension funds must own the stocks included in the MSCI index they track. And often, they are prohibited from owning stocks that are not in the index.

As you can imagine, this gives MSCI a lot of power. Earlier, I mentioned how Philip Morris stock plunged in April. This happened when MSCI announced that it will be kicking all tobacco stocks out of its indexes. That’s all it took for poor Philip Morris shareholders to get steamrolled for a 25% loss.

I’ll give you another recent example of MSCI’s stock-picking power. In 2013 the company said it would start including stocks from the countries of the UAE and Qatar in its Emerging Markets (EM) Index. Over 1.9 trillion investment dollars track it.

It didn’t take long for big Wall Street money to start flowing into these small markets. Within 12 months the Qatari stock market had soared 48%... and the UAE skyrocketed 114%.

As you can see, MSCI decisions literally move markets.

  • On June 20, MSCI announced it will add Saudi Arabian stocks to its EM Index starting in May 2019. 

MSCI will allocate 2.6% of its EM index to Saudi Arabian stocks. As I mentioned, $1.9 trillion tracks this index. Which means this decision will cause at least $49.4 billion to flood into the Saudi market in 2019 alone.

The Saudi stock market is tiny. Its total value is about $500 billion. Apple (AAPL) is 2x the size of every publicly traded firm in Saudi Arabia combined. 

  • $50 billion flooding into Saudi Arabia’s market is the equivalent of $780 billion gushing into US stocks. 

All the data tells me this will spark a boom in Saudi stocks. Since 1994, MSCI has promoted 20 countries to its Emerging Market index. The average return leading up to the year of inclusion was 55%.

That italicized part is very important. MSCI made this announcement on June 20. But it won't add Saudi stocks to the index until May 2019, which means the big money that tracks MSCI indexes are starting to pump in billions now.

  • Saudi Arabia is a wealthy country…

It’s the world’s 15th-largest economy, bigger than Canada and even Australia.

It owns 22% of the world’s oil reserves, which is worth an estimated $1.3 trillion. It has $500 billion in foreign currency reserves—more than Germany, France, and the US combinedAnd it controls a massive $230 billion sovereign wealth fund.

In other words, Saudi Arabia is not your typical “emerging” market. Most emerging markets, like China and India, are emerging from poverty. Saudi Arabia is emerging from self-imposed religious seclusion.

After 40 years of keeping its doors mostly shut to out the outside world, Saudi Arabia is finally opening up. It officially opened its stock market to foreign investors three years ago, which paved the way for MSCI’s landmark decision.

  • We’re buying the Saudi Arabia ETF KSA today.

Blackrock created this ETF (KSA) in 2015. KSA is the best performing country ETF this year. It shot up over 19% while US stocks are up 6%.

KSA owns large Saudi companies, including the world’s fourth-largest industrial company and the Middle East’s two largest banks.

There’s currently $275 million invested in KSA. The amount of dollars invested in the fund has shot up 1,700% this year alone. I expect this trend to continue leading up to Saudi Arabia’s MSCI inclusion in May 2019.

KSA pays a decent dividend of 2.02%. It has an expense ratio of 0.74%, which is about average for “country” ETFs. The 75 Saudi stocks it owns are fairly valued; some even tilt toward bargain status. The price-to-earnings ratio of the fund is 17, lower than the S&P 500’s 24.

We’re buying the Saudi Arabia ETF KSA at today's price of $31.

KSA is up 2.7% since the initial announcement on June 20. We haven’t missed anything yet. I’m convinced the big gains are ahead of us. Remember, the 20 countries promoted to MSCI’s Emerging Market Index since 1994 had average returns of 55% in the year leading up to inclusion.

I believe it’s a wise move to get into KSA before tens of billions of investment dollars flood into Saudi Arabia over the next 10 months.

That’s all for today. As a heads up, I’m working on an essay about the death of an important American industry. Few see this coming, but my research shows its going to disrupt up to 3% of American GDP and at least a dozen stocks that many investors wrongly believe to be “safe.” Look for it in your inbox next Thursday afternoon.

Talk soon,

Stephen McBride
stephen@riskhedge.com
Chief Analyst, RiskHedge

How We’ll Flip a Bloodbath into 3x Gains

How We’ll Flip a Bloodbath into 3x Gains

Moneymaking opportunities like this one don’t come around often.

The last time we got this set-up in 2016, it led to 240% gains…

In 2016, America’s coal industry faced devastation. The four largest coal producers had gone bankrupt. The biggest coal ETF (KOL) had plunged 90%.

Regulations enacted by the Obama administration were choking the industry. The market HATED coal, which is the dirtiest of all fossil fuels. Investors dumped coal stocks as if coal would be phased out as an energy source in the near future.

But anyone familiar with the data knew this was an emotionally-driven fantasy. You see, three in 10 American homes and four in 10 global homes are powered by coal.

Cleaner energy like solar and wind will surely eat into this over time. But smart investors knew it would take decades to re-work global power grids to replace coal. Until then, global power plants will continue burning coal by the railcar load.

This reality dawned on the market in early 2016. Coal stocks bottomed and the KOL ETF leapt 242% over the next two years.


Source: Yahoo Finance

  • Today, I want to tell you about a similar but greater opportunity…

It’s in uranium, which you probably know is what fuels nuclear power plants.

Like coal, uranium is an “emotionally charged” resource. Bring it up in conversation and many folks will get all worked up about Chernobyl or Fukushima.

Never mind that nuclear is the safest energy source, according to the World Health Organization. Right now, investing in uranium is one of the best opportunities I’ve seen in my career. We have a realistic shot to make 3-5x our money or more in a few years on the uranium company I’m going to tell you about.

I don’t make this prediction lightly. Between 2003–2007, the price of uranium shot up from $10/lb to $136/lb. Many uranium stocks climbed over 2,000%.

  • But the price of uranium has cratered 85% since 2007…

This has gutted the uranium industry like a fish. Today it costs between $50–$60 for most companies to mine a pound of uranium. But uranium sells for around $25/lb, and it’s been below $50 for over six years.

This has put all but the lowest-cost producers out of business. Ten years ago there were more than 500 uranium companies. Today there are about 40. And many of the survivors are barely hanging on, having lost 90% of their value since 2011.

It’s a complete bloodbath. Just like coal in 2016.

  • But nuclear energy powers one in every five American homes.

It provides 56% of America’s “clean” power. And according to the World Nuclear Association, demand for uranium around the world is steadily growing.

Since 1980, annual demand has climbed 119%. And with 57 new nuclear reactors currently being built, demand is expected to grow by another 23% by 2025.

In other words, not only is nuclear power not going away. It’s growing.

Nuclear use is growing… yet the uranium ETF URA has cratered 90% since 2011.

Nuclear use is growing… yet no company on earth can turn a profit selling uranium at today’s spot market price.

This simply cannot continue. Either 20% of American households will have to shut their lights off, or the price of uranium must rise A LOT.

Like coal in 2016, the market is pricing uranium investments as if nuclear power is going away. I expect this to resolve in a big bull market for uranium.

And a starting gun just fired to kick it off…

  • Imagine turning on the TV and seeing the headline, “Saudi Arabia shuts down all oil production.

Saudi Arabia produces 13% of the world’s oil. Needless to say, this news would be extremely bullish for the price of oil.

Well, the equivalent just happened in the uranium market. The world’s largest uranium producer, Cameco (CCJ), just announced it will keep its flagship McArthur River/Key Lake mine closed down indefinitely.

This isn’t some rinky-dink operation. When it’s up and running, McArthur River/Key Lake supplies around 13% of the world’s uranium. It’s the world’s largest high-grade uranium mine. The quality of the uranium there is 100x better than the global average.

Since the announcement, uranium prices have jumped 12%.

  • I believe Cameco management made a wise decision in shutting down McArthur River.

Why deplete the world’s highest-grade uranium mine for a loss?

By halting production, CCJ is not only stemming its losses. It’s removing 1/8th of the world’s uranium production from the market, which should push up the uranium price.

And CCJ isn’t the only company cutting uranium production. According to leading uranium analysis firm TradeTech, major producers will reduce their output by around 15,000 tons this year.

That’s a giant 25% reduction based on last year’s production. To put it into perspective, it would be like Russia and Saudi Arabia shutting down oil production.

  • According to the Ux Consulting Company, uranium demand will be 87,000 tons this year.

With only around 44,000 tons of new production coming into the market this year, this will create a huge deficit. And eat into utility companies’ stockpiles.

And here’s another important detail. Cameco plans to become an active buyer of uranium. On its quarterly call last week, CEO Tim Gitzel said the company plans to buy around 10 million pounds in the market this year. And 20 million next year.

That’s significant as the amount of available uranium to buy on the spot market each year is only about 25–30 million pounds.

  • I think the uranium price bottomed in November when it hit a 13-year low of $18.

It has edged up 43% since then. Meanwhile, Cameco’s stock is up 38% in less than two years.

Cameco has huge leverage to the uranium price. According to the company, for every $5 rise in the uranium price, its revenue jumps $37 million.

Cameco is the gold standard of the uranium industry. It produced 16% of the world’s uranium last year, and is one of the world’s lowest-cost uranium producers.

As I mentioned, most companies produce uranium for $50–$60 per pound. CCJ does it for around $35 per pound. Its two largest mines are McArthur River/Key Lake and Cigar Lake. Both are located in Canada’s Athabasca Basin, home to the highest-quality uranium in the world.

  • Despite a seven-year depression in uranium, Cameco has a healthy balance sheet.

As you’d expect, CCJ’s revenue and profits have fallen along with the uranium price. But the company has plenty of cash to fund operations until the true bull market in uranium begins.

It has $470 million in the bank, a 190% increase since last year. And it hasn’t taken on debt to survive the uranium downturn. In fact, it has paid down debt since 2013.

To sum up, Cameco has weathered the bloodbath in uranium exceptionally well. It is set up perfectly to cash in as the price of uranium rises. Keep in mind, CCJ shot up over 2,000% in the last uranium bull market.

I’m looking for Cameco to leap 3x–5x in the next few years.

I’ll be in touch next Thursday. As always, feel free to write me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Please Don’t “Buy the Dip” in Netflix

Please Don’t “Buy the Dip” in Netflix

Netflix bulls are living in fantasyland.

As you may have heard, Netflix (NFLX) bombed on earnings results last week. Its stock plunged 14% on news that it fell short of its growth target by one million subscriptions.

In early July I wrote you explaining why Netflix was in big trouble. If you sold NFLX after reading that essay, nice call—you sold on the highs and avoided the bloodbath.

If you still own Netflix… or you’re tempted to “buy the dip”… please don’t.

  • NFLX is a beloved stock market darling… 

It has exploded 8,100%+ in the past 10 years, outperforming even mighty Amazon (AMZN) by more than 3x.

Everyone, including me, thinks Netflix’s video service is great. I’ll happily admit that Netflix is a great business.

But it’s a lousy stock.

The problems start with valuation. Even after plummeting 14%, Netflix is dangerously overpriced. It has a price/earnings (P/E) ratio of 165, compared to the S&P 500’s of 24.

Why have investors bid it up to this absurd price? The argument goes something like this…

Netflix has gained 90 million subscribers in the past four years and will continue adding millions every quarter for years to come. Revenue will skyrocket, which will turn the company into a cash-generating machine, and its stock will “grow into its valuation.”

Using simple math, I’m going to show you why anyone who believes this is living in fantasyland.

  • NFLX has 130 million subscribers today…

57 million of these are in the US, with the other 73 million scattered around the world.

According to the US Census Bureau, there are 126 million households in America. Which means around 45% of US households already have a NFLX subscription.

Big Four accounting firm Deloitte found that 55%, or 70 million, US households subscribe to a streaming service. So even if every streaming household were to subscribe to Netflix, that’s only another 13 million “potential” customers.

That’s a pretty low ceiling from where Netflix currently stands.

  • NFLX is already struggling to acquire new subscribers…

In the first six months of this year, the company spent $456 million on marketing in the US—double what it spent last year. It acquired 2.66 million new subscribers, which works out to a cost of just over $170 per new user.

That’s a huge 160% jump from the $65 cost per new user it enjoyed just two years ago.

Netflix’s standard package costs $10.99/month. At a customer acquisition cost of $170, it takes almost 16 months to break even on a new user. And keep in mind its acquisition costs are rising rapidly.

  • Can international subscriber growth save Netflix?

In the past year, NFLX has added 4x as many international subscribers as US ones. The company expects around 75% of growth to come from international markets. So this is by far the most important segment to watch.

NFLX’s subscriber growth rate has risen at around 17% per year. To continue growing this fast, it must add over 30 million new users next year… 35 million in 2020… and 40 million in 2021.

My research shows it will probably struggle to add even three million new subscribers/year in the saturated US market. Which means nearly all of this growth must come from international markets.

  • As I’ve said before, it all comes down to content.

Remember, Netflix has achieved its incredible growth by blowing up the TV distribution model. It ate the lunch of cable companies that used to be the gatekeepers of what people watch.

But as I’ve explained, distribution isn’t all that important anymore. Thanks to the internet, we can watch practically anything we want anytime we want. Great content is what really matters today.

NFLX has proven it can make good content for a US audience. But to achieve international success, it needs to do so in countries as diverse as France, India, Mexico, and Brazil.

For the most part, TV is a “local” thing. Americans like to watch American shows. Brazilians like to watch Brazilian shows. Which means NFLX must make “local hits” to attract the masses in these countries.

So far, it has failed at this. Frankly I don’t know if it’s even possible for one company to become a content expert across a dozen different countries with a dozen different languages.

But even if it is possible, NFLX doesn’t have the cash to pull it off.

  • NFLX is making around 700 original TV shows this year…

It has spent a jaw-dropping $5.36 billion on content in just the last six months. Its spending on content has grown at an annual rate of 50% in the past five years. Which is significantly faster than the rate at which its sales have grown.

This new content has helped bring in 20 million international subscribers in the past year. But it has come at massive cost. The $5.4 billion it spent developing content in just the past six months dwarfs the $1.3 billion in profit it’ll earn this year.

NFLX has been borrowing to make up the difference. Its debt has exploded from $2.37 billion in 2016 to $8.34 billion today.

  • To be clear, I admire NFLX.

It’s a great company and a (marginally) profitable business. CEO Reed Hastings has made all the right moves in building it into a media juggernaut. I expect he’ll continue to guide the business to growth and profitability.

It’s not his fault that investors have bid NFLX stock to the moon. But that’s the reality.

Today, NFLX trades for $363. Based on its profit forecast of $1.3 billion this year, and the average valuation in its industry, its “fair value” is around $119. The average valuation in its industry, by the way, is 40x earnings. So valuing it this way isn’t exactly conservative.

Still… I’ll entertain the idea that NFLX stock deserves a nice premium. It does have a stellar management team, explosive growth, and has pulled off some incredible accomplishments.

If we’re generous, Netflix is worth maybe… MAYBE… $190–$200 a share.

Problem is, that’s still almost 50% below its current price.

  • When I warned you about NFLX three weeks ago, I also recommended you buy Walt Disney Company (DIS).

Last August, DIS announced it will launch its own streaming service. I’m convinced Disney will crush NFLX to become the #1 streaming service within a few years.

Since we last discussed DIS, it has grown even stronger. On July 19, it closed a deal to buy 21st Century Fox (FOXA). Disney, which already has the world’s best content, now owns even more of America’s favorite programming.

With this deal DIS acquires:

  • Fox’s film studio which has made Oscar winners like Avatar, Titanic and Slumdog Millionaire.
  • The X-Men franchise, Modern Family, National Geographic channel, and The Simpsons.
  • And perhaps most importantly, a 60% controlling stake in America’s second-largest streaming service, Hulu.

Keep in mind, DIS already owns household names like Marvel… Pixar Animations… Star Wars… ESPN… ABC. It has produced the world’s top-selling movie in six of the past seven years.

When “Disneyflix” debuts, it’ll be a no-brainer purchase for most families. And remember, DIS will be pulling all this popular content off NFLX.

DIS is up a bit since I recommended it, but it’s still a great buy at today’s price of $113. I expect it will be a long-term holding for us.

One more thing before I sign off…

  • If I could stamp a warning label on this issue, I would.

Lots of people will read this essay and conclude that Netflix is a good short.

Don’t do it. Don’t short Netflix.

As you can plainly see from its 165 P/E ratio, Netflix stock isn’t driven by fundamentals. It’s driven by the enthusiasm of investors, which is totally unpredictable.

There are much easier and smarter ways to make money in the markets than shorting a stock powered by the lofty dreams of investors. Like owning Disney.

That’s it for today. I’ll be in touch next Thursday. As always, feel free to write me at theriskhedgereport@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

How We’ll “Get Rich Slowly” from the China Trade War

How We’ll “Get Rich Slowly” from the China Trade War

Today’s investment recommendation might surprise you.

If you’ve been reading the RiskHedge Report, you know the world is changing faster and faster.

New industries like crypto have sprung up from nowhere. While iconic American companies like General Electric (GE) have seen their stock prices crater by 60% in the past two years.

My aim in this letter is to help you profit from disruption. And just as important, avoid being caught on the wrong side of it.

  • However, some industries are what I call “undisruptible.”

Take airplane manufacturing, for example. The established players have an iron grip on the market. It’s all but impossible for others to seriously compete with them.

As you might expect, the regulatory hurdles alone are absurdly high. To get a new airplane approved, you have to pass the Federal Aviation Administration's certification process. This takes several years, requires compliance with thousands of regulations, and involves completing about 4,000 documents.

Then there’s the cost and time of developing the aircraft. America’s biggest aircraft maker, Boeing, is developing a new plane right now. It’s not projected to take its first flight until 2025… seven years away.

Upstart companies just don’t have the money, manpower, or time to seriously threaten the entrenched players.

  • “Undisruptible” stocks can be very profitable…

Unlike many of the disruptors I focus on in this letter, these companies won’t typically soar 2x, 3x, or 4x in a short time. Their stocks tend to rise more slowly. But we can still make stacks of cash on them. I call these “get rich slowly” investments.

There’s no better example of this than the two firms which dominate aircraft manufacturing: America’s Boeing (BA) and Europe’s Airbus (EADSY). Between them, they control over 95% of the commercial aircraft market. This duopoly makes more than 19 out of every 20 planes in the sky.

In the last 15 years, Airbus stock has soared 1,735% and Boeing has climbed 1,780%, which crushes the S&P 500’s 240% gain in that time. You can see this outperformance in the below chart.

  • You’ve surely heard about the ongoing trade tensions between America and China…

The US slapped a 25% tax on $34 billion worth of Chinese-made goods. China retaliated with the same penalties on US-made goods, including airplanes.

You see, airplanes are America’s #1 export to China… totaling $16.3 billion last year.

Boeing’s sales to China account for $12 billion of that, which amounts to 13% of the company’s total revenue last year. If China really wants to stick a knife in the US, Boeing is an obvious place to start.

And unlike the US where individual companies like JetBlue or American Airlines decide which planes to buy, in China, a central agency is responsible for airplane purchases. That means any company that falls out of favor with Chinese “authorities” is in big trouble.

Besides Boeing, Airbus is the only other company that can make the planes China needs… and China needs A LOT of planes.

  • China is about to leap ahead of the US to become the world’s most lucrative airplane market.

The International Air Transport Association expects China to surpass America to become the world’s biggest aviation market within three years.

This has been a long time coming. In 1996, 17 of the 20 busiest airports were in America or Europe. Today, that number has slipped to eight. And China now claims four spots in the top 20.

According to Boeing, China will order $1.1 trillion worth of aircraft in the next two decades. And 25% of new airplane orders worldwide will come from Chinese airlines.

  • I expect the Trade War to give Europe’s Airbus a huge boost…

Right now, Boeing and Airbus share a 50/50 split of the Chinese market.

My prediction is the spat between China and the US is the beginning of something much more damaging and much more global.

President Trump is picking trade fights all around the world. He has placed tariffs on imports of timber from Canada. He’s called the European Union a “foe.” All of this tells me we’re entering a new era of protectionism that will hinder trade—especially between big US companies and China.

The Asia-Pacific region is already Airbus’s biggest market, with 40% of new orders coming from there. As trade tensions worsen, I expect Chinese airlines will order the majority of the $1.1 trillion in planes they need from Airbus, not Boeing.

  • Even without the Trade War effect, Airbus is great company to own…

It has consistently pried away market share from the once dominant Boeing. In 1995, Boeing had an 82% market share of the global airplane market. Today it’s 50/50, and the trend favors Airbus. In 9 of the past 11 years, Airbus has received more orders than Boeing.

And here’s an incredible fact. All of these orders have created a backlog for Airbus of around 7,200 aircraft… worth $1.17 trillion. This is the largest backlog of any company in any industry in the world.

Boeing’s $490 billion backlog doesn’t come close.

Airbus’s gigantic backlog represents about 10 years of deliveries, which allows us to see deep into the company’s future sales.

You see, airlines are reluctant to cancel orders they’ve placed with a manufacturer. It’s customary in the industry to put a down payment of 1%–2% up front. If a buyer cancels an order, it loses its down payment. As you can imagine, airplanes aren’t cheap. Even during the financial crisis, cancelations in the industry hit only 3.4%.

So even when a recession hits, EADSY should keep earning cash.

  • Airbus delivered 718 aircraft last year, its best year ever.

This marked 15 straight years of increasing deliveries.

It also achieved its biggest ever profit last year, $3.24 billion. It hit this milestone thanks to rising sales and expanding margins.

Airbus’s 4.3% net profit margin was its highest since 2005. I expect its margins to grow in the coming years as research & development (R&D) costs continue to fall… and production of its newest A350 and A320 aircraft increases.

The company spent $22 billion between 2010 and 2016 on R&D for these aircraft. But those costs are now falling as Airbus shifts from development to production mode. And this gives it a double cost-saving benefit. The more planes it makes, the more the cost of making each one falls. You probably know this phenomenon as the “economics of scale.”

Finally, Airbus has a very healthy cash position of $17.4 billion. It could pay off its debt tomorrow if it wanted to.

I’m buying Airbus at $31 today. It’s a long-term, “get rich slowly” holding for me.

What are your thoughts on Airbus and the trade war?

Let me know at riskhedgereport@riskhedge.com. Your reply could be featured in our new “mailbag” feature that’s coming soon...

Until next Thursday,

Stephen McBride
Chief Analyst – RiskHedge

It’s Time to Buy This Super Profitable “Monopoly Stock”

It’s Time to Buy This Super Profitable “Monopoly Stock”

It’s one of the most profitable businesses in history…

And it’s making gobs and gobs of money right now.

The Central Intelligence Agency is a happy customer of this business. A CIA director said switching to its services is “the best decision we’ve ever made.”

This business generates all of Amazon’s (AMZN) profits. AMZN has soared 3,900% in the past 10 years.

Let me give you one more example before I tell you what this business is. Have you looked at a chart of Microsoft (MSFT) lately? It went practically nowhere for 14 years leading up to 2014.

Then, in 2014, MSFT re-geared to focus on this extremely profitable business. Its stock took off and roared to a 175% gain.

To be clear, I’m NOT recommending you buy AMZN or MSFT today.

Instead, I’m going to tell you about an under-the-radar tech giant that’s fueling AMZN and MSFT's huge stock gains.

  • The super-profitable business I’m talking about is the cloud

“The cloud” is a fuzzy term that everyone’s heard of… yet few know what it really means.

In short, the cloud gives businesses cheap access to powerful supercomputers.

This might sound simple, but it’s actually pretty revolutionary. 

Before the cloud, buying expensive computers was a daunting challenge for any business.

For example, a server that can handle website traffic for a small business costs about $5,000. A site that welcomes millions of visitors might need 50 of them.

That’s $250,000, and we’ve barely scratched the surface.

Where will a business put all these servers? That’s going to cost a couple thousand dollars in rent every month. Plus, you’ll pay a big electricity bill to keep the servers humming 24/7. And then you have to pay employees to maintain them.

As you can imagine, these expenses can cripple a business, especially a smaller one.

  • The cloud can slash these costs by around 30%...

But the real key is this: the cloud allows your average laptop to tap into the superior power of big, centralized computers.

Remember when we used to spend hundreds of dollars buying “memory” for our computers? Or upgrading storage so we had more room to store files?

The cloud effectively makes this way of doing things obsolete. You can now flip on your laptop, connect it to a more powerful computer over the internet… and use its resources instead.

  • Netflix and Airbnb could not have achieved their incredible growth without the cloud…

Netflix had 9.4 million subscribers in 2008. Now it has over 125 million.

Airbnb, an online network that connects property owners with paying guests, has grown even faster. In 2011 it had 1 million “stays.” Last year, it hit 100 million.

That’s 100x growth in seven years.

Both Netflix and Airbnb built their businesses on Amazon’s cloud, called Amazon Web Services (AWS). This helped them sidestep many of the biggest costs rapidly growing tech startups face.

Using AWS, they didn’t need to buy faster computers, or build server centers, or pay employees to keep them up and running.

AWS handles all this. Which means Airbnb can focus most of its time and money on what matters—disrupting the hospitality industry.

Mike Curtis, head of engineering at Airbnb, said, “Why AWS? All of our growth … and we did it with a five-person operations team.” 

Airbnb is worth $31 billion today.

  • More and more companies are switching to the cloud… 

Ride-sharing service Lyft runs 100% on AWS. So does real-estate platform Zillow. Other AWS customers include Kellogg’s, Comcast, and 3M. Even giant firms like Boeing now use Microsoft Azure’s cloud.

I believe most American companies will move to the cloud over the next five years. Leading tech research firm Gartner expects spending on the cloud to grow to $411 billion a year by 2021.

And as money floods into the sector, earnings will shoot up for the companies that provide cloud services. This has already begun: AMZN’s cloud sales grew 43% last year, MSFT’s grew 93%, and IBM’s grew 30%.

These are known as the “Big 3” cloud providers. Combined, their cloud revenues reached $53 billion last year.

  • But I’m not buying their stocks right now.

Don’t get me wrong: I like AMZN and MSFT. They’re great companies, and they’re leaders in the cloud, which is one of the world’s most profitable businesses.

The problem is, their stock prices reflect this. We’d have to pay dearly to own them.

AMZN’s price/earnings ratio is a sky-high 240. MSFT’s is 90. They must execute to perfection to justify these ridiculously expensive valuations.

Maybe they’ll manage to do it, but I’m not willing to bet on it. Instead, I’m buying a different company that has a 98% market share in a crucial part of the cloud business. In fact, anybody who gets involved with the cloud has to buy this company’s products.

  • I’m buying the world’s biggest computer chip maker, Intel (INTC).

Earlier, I mentioned AMZN, MSFT and IBM earned $53 billion in revenue from the cloud revenue last year. Well, INTC supplies the computers and data centers these companies need to power their own clouds.

You see, “the cloud” is just a term for the giant centralized data centers run by these firms. They’ll spend $60 billion on data centers this year alone.

AMZN already has over 400 centers around the world. Each houses up to 80,000 servers. All these servers need computer chips.

As we discussed a few weeks ago, chips are the “brain” that enables computers to “think.” INTC makes almost all the chips inside the servers… including AMZN’s and Google’s. INTC’s Xeon chips are installed in 98% of data centers across the world. The company has almost a complete monopoly on this crucial part of the cloud.

  • INTC’s profits are skyrocketing along with cloud spending…

The company made 30% of its revenue from its data center business last year. That’s $19.1 billion, an increase of 20% in the past two years.

INTC’s shift toward the cloud is deliberate. It has stated that it is “transforming from a PC company to a company that powers the cloud.”

While a separate area of Intel’s business called “client computing” still accounts for 50% of its sales, its data center group generates almost as much profit. In INTC’s latest quarter, the client segment generated a profit of $2.79 billion. Its profit on data centers was $2.6 billion.

INTC’s shift toward the cloud is making it far more profitable. Its net profit margin has climbed from 20% two years ago to 27% today.

  • INTC has an effective monopoly on the computer chips needed to power cloud data centers… 

I expect INTC to capture billions more in profits as money continues pouring into the cloud.

If you’ve been reading The RiskHedge Report, you know that’s not the only reason why I like INTC.

As we talked about a few weeks ago, it also makes the “brain” and “eyes” for Waymo’s self-driving cars. They are zipping around the streets of Phoenix as you read this.

INTC has gained 9% year-to-date (YTD). It sells for just 21x earnings, which is less expensive than the S&P’s average of 24.

INTC is currently trading at $52, which is an excellent entry price. With cloud spending set to explode to over $400 billion a year by 2021, I’m looking for INTC to double over the next two years.

What do you think? Are you ready to buy Intel?

Let me know at riskhedgereport@riskhedge.com. Your reply could be featured in our new “mailbag” feature that’s coming soon...

See you next Thursday,

Stephen McBride
Chief Analyst, RiskHedge

The Market Is Dead Wrong on Netflix

The Market Is Dead Wrong on Netflix

Do you still watch cable TV?

If so, you’re a dying breed.

Last year, half of Americans ages 22–45 watched ZERO hours of cable TV.

And 7.5 million households have cancelled their cable service in the past five years.

Instead of cable, people are switching to services like Netflix that deliver shows over an internet connection.

Today, more than half of American households subscribe to a “streaming” service such as Netflix or Hulu.

  • The media calls this “cord cutting.”

I’m going to tell you why this trend is FAR more disruptive than most people understand.

Cord cutting isn’t just about switching from one way of watching TV to another.

It’s about smashing the near-monopoly cable companies used to have on American programming.

Comcast (CMCSA), for example, is one of the biggest cable companies in the U.S. From 1990–2018, its share price soared over 5,000%. For most of that time, it enjoyed the big profits that come from operating in an industry with few real competitors.

The internet has totally blown up the cable business model. It took a long time; remember how frustrating it was to watch video in the early days of the internet? The blocky videos, the constant buffering.

Today, the internet is fast and reliable enough to deliver high quality video almost everywhere. There’s really no good reason to pay $100/month for cable anymore when Netflix costs $15/month.

In the last few months, investors have been dumping cable stocks. Since January, Comcast has plunged as much as 30%. Charter Communications (CHTR), another big cable company, has dropped 37%.

  • The downfall of cable is releasing billions in stock market wealth… 

And it’s all up for grabs right now.

Most investors assume Netflix will claim the bulk of profits that cable leaves behind.

So far, they’ve been right. Have you seen Netflix’s stock price? Holy cow. It has rocketed 10,000% since 2008, leaving even Amazon in the dust.

Netflix’s accomplishments are impressive. Accumulating 125 million subscribers worldwide is an amazing achievement.

But don’t let its past success fool you.

Netflix is not the future of TV.

It’s about to enter a battle with a powerful rival you know by name.

And I’m convinced Netflix is going to get crushed.

  • Netflix changed how we watch TV, but it didn’t really change what we watch…

You see, Netflix has achieved its incredible growth by wrangling distribution away from cable companies. Instead of watching The Office on cable, people now watch The Office on Netflix.

I don’t believe this edge is sustainable. In a world where you can watch practically anything whenever you want, dominance in distribution is extremely fragile. Just ask cable company management.

Because the internet has opened up a whole world of choice, featuring great content is now far more important than distribution.

Netflix management knows this. They will spend $8 billion developing original shows this year.

That’s more than any other “streamer.” And more than many traditional media firms such as Viacom and Time Warner.

To fund its new shows, Netflix is borrowing huge sums of debt. It currently owes creditors $6.5 billion, which is 93% more than it owed this time last year.

But the fact is, only one of the top 10 most-watched series in America last year was produced by Netflix. Does that sound like a stock that should be trading for 262 times earnings?

  • In August last year, The Walt Disney Company (DIS) announced it will launch its own streaming service…

And it will pull all its content off of Netflix.

This is a big deal.

Disney is the undisputed king of content. It owns Marvel… Pixar Animations… Star Wars… ESPN… ABC.

In six of the past seven years, Disney has produced the world’s top-selling movie.

And here’s a list of the six highest-earning movies so far this year. The green ones in caps are DISNEY PRODUCTIONS:

  1. BLACK PANTHER
  2. AVENGERS INIFINITY WAR
  3. INCREDIBLES 2
  4. Deadpool 2
  5. Jumaji 2
  6. SOLO: A STAR WARS STORY

Disney owns four of the top six movies this year. And it looks like it’s going to acquire 21st Century Fox’s movie assets, too, which include the rights to Deadpool.

  • Picture this: DIS puts a blockbuster like Star Wars or Black Panther on its platform the same day it opens in theaters…

And after a few weeks it’s no longer in theaters. You can’t buy it. You can’t rent it. The only way to watch is to subscribe to “Disney-flix.”

For example, the only place your children or grandchildren will be able to see Toy Story 4 and Frozen 2 may be on the “Disney-flix” app.

Can you imagine how many parents will sign up for this?

Disney has demonstrated an incredible ability to produce movies and shows people want to watch. No competitor comes within 1,000 miles of Disney’s world of content.

Disney’s ownership of iconic franchises like Star Wars and Spider-Man give it something Netflix couldn’t buy even if it had $100 billion to spend on content.

While Netflix is spending billions of dollars to “try out” new shows… DIS already has the best of the best in its arsenal.

This is why I think Netflix has no chance against Disney long-term.

  • DIS’ shift into streaming will make it a lot more profitable…

For example, theaters showing DIS films keep about 40% of the ticket price. Cable companies take a similar cut.

By streaming content directly to the consumer, DIS will cut out the middleman for the first time ever. Which will boost its profits and should push the stock higher.

  • DIS stock is trading at $104 today… 

At a price/earnings (P/E) ratio of just 14, I think it is absurdly underpriced. The S&P 500’s P/E is 25.

It’s hard to find any “cheap” US stocks these days. And even harder to find a stock that’s cheaper than it was five years ago. DIS ticks both boxes.

Compare that to Netflix which, as I said, has a P/E of 262. Investors are pricing Netflix to perfection… while pricing DIS like a company with a dim future.

  • I’m convinced the market has this completely wrong.

I think DIS will crush Netflix to become the #1 streaming service within a few years.

I expect DIS stock to climb much higher. Which is why I’m personally buying it at $104 today. This is a long-term holding for me.

What do you think? Does Disney have what it takes to beat Netflix?

Let me know at riskhedgereport@riskhedge.com.

Until next Thursday,

Stephen McBride
Chief Analyst – RiskHedge

This Little Company Is Stealing Business from Google and Facebook

This Little Company Is Stealing Business from Google and Facebook

Ever get the feeling someone is stalking you on the internet?

Monitoring every word you type... recording each mouse click… and following you around?

  • That’s because you’re being “targeted.” 

You write an email to your golfing buddies. Next thing you know, an ad for a new set of golf clubs is following you around to every website you visit.

This is called targeted advertising. And it’s a HUGE business.

Traditional advertising, like on billboards, is aimed at anyone who happens to see it. Targeted advertising, on the other hand, seeks to zero in on folks who are most likely to buy what you’re selling. In other words, your “target market.”

How do advertisers know what you’re likely to be interested in buying? There’s a whole industry dedicated to monitoring everything you do online.

Companies are constantly gathering data on you. They watch the websites you visit, the podcasts you listen to, and everything you do on social media.

  • This data fuels online advertising…

And last year for the first time ever, advertisers spent more on internet ads than TV ads.

Online advertising has exploded 4X since 2009. The American internet ad industry now rakes in $80 billion a year… as much as the global toy industry.

American internet giants Google (GOOG) and Facebook (FB) dominate online advertising. In fact, they earn almost all their revenue from internet ads: 98% of Facebook’s revenue and 87% of Google’s comes from selling online ads.

Through targeted online advertising, GOOG and FB have grown into two of the largest, most powerful businesses in the world. Google is now the second-biggest publicly traded company in America, behind only Apple. Facebook ranks 8th.

  • Targeted advertising is an extremely profitable business…

For example, FB has a net profit margin of 45%. That means it turned every $1 of sales into $0.45 straight profit. That’s off-the-charts incredible. It’s one of the highest margins I’ve ever seen for a business of Facebook’s size.

GOOG also has a healthy 20% margin. It runs a lot of nonprofitable projects that drag its margins down, like its self-driving car subsidiary Waymo. Still, a 20% net margin is double the average for America’s 500 largest companies.

This is a big reason why both firms trounced the S&P 500 over the past five years. FB soared 705% and GOOG climbed 155%... while the Index has risen 66%.

  • Google and Facebook have disrupted traditional advertising…

Together, they swallowed up 63% of all digital ad spending in America last year. And because they dominate the industry… they set the rules for advertisers.

The digital ad duopoly has banned any “outside” measurement on their platforms. When you buy an ad with FB or GOOG, you can’t track its performance. You can only track the “average” performance across all the ads you buy. So, if you buy 50 ads, you have no way of knowing if 49 of them flopped and one accounted for all the sales.

And you won’t even know how much you paid for each ad. Advertisers are left totally in the dark about what worked and what didn’t.

Big customers are growing tired of this.

The chief marketing officer of Procter & Gamble, America’s biggest ad buyer, said this recently about Google & Facebook:

“We’re wasting too much money on a media supply chain with poor standards… [and] too many players grading their own homework.”

Procter & Gamble cut $200 million of spending with GOOG and FB last year.

  • Advertisers are turning to a company that’s transforming the industry… 

It’s called The Trade Desk (TTD). And its stock has soared 89% since January.

TTD’s goal is to transform the ad industry… so ads can be bought just like stocks.”

The key thing to understand about online advertising is that it is ferociously competitive. Seven million ad “auctions” are held every second. At these auctions, business owners and advertisers buy space on the internet to display their ads.

Buying the right ad space is absolutely crucial. Get it right and your ad will thrive, generating many multiples of what you paid. Get it wrong and your ad will flop and your money goes down the drain.

TTD provides special tools and data to help advertisers make the right ad-buying decisions. Around two-thirds of its clients are American ad agencies.

Unlike on FB and GOOG, TTD’s clients can use their own in-house metrics to track ad performance. The end result is clients buy more effective ads. They get a higher return on investment and avoid blowing money on ads that don’t generate sales.

The most important stat is that TTD has a 95% customer retention rate over four years. This means 19 out of 20 companies that use The Trade Desk stick with it.

That’s outstanding; it even beats Apple’s 92% retention rate.

  • More and more advertisers are switching to TTD…

On the latest investor call, CEO Jeff Green said in the last year new clients spent around $200 million on their platform. Its net profit or “bottom line” also surged by 148% last year.

Aside from its superb customer retention rate, what impresses me most about TTD is its 17% net profit margin. As I alluded to earlier, high margins are the sign of a great business.

And a 17% margin is great for a company that’s only nine years old… and operating in a ferociously competitive industry against none other than GOOG and FB.

  • I’m not recommending TTD today. I don’t want you to “chase” it.

After TTD announced stellar earnings in May, the stock jumped 44% in a single day. And since then it’s up another 19%.

I want to own TTD. And I expect it to continue eating into the GOOG/FB duopoly. The internet ad industry is a giant $80 billion pot of gold, and I expect TTD to claim a larger and larger share of it.

But I’d like to see a pullback of around 15% to $75 per share before buying.

  • I’ll let you know when it’s time to pull the trigger on TTD in the RiskHedge Report.

The RiskHedge Report is this free weekly essay you’re reading right now. Each week I’ll send you research, updates, and specific stock picks so you can profit from my top investment ideas.

If you have any questions, please write me anytime at riskhedgereport@riskhedge.com. I personally read every note that comes in.

Until next Thursday,

Stephen McBride
Chief Analyst – RiskHedge

Here’s Why I Bought Gold this Morning

Here’s Why I Bought Gold this Morning

Editor’s Note: Welcome to issue #2 of the RiskHedge Report, a weekly advisory dedicated to helping you profit from today’s disruptive trends.

Every Thursday you’ll receive a valuable essay from Chief Analyst Stephen McBride. Although this is a free subscription, he won’t hold anything back. You’ll get Stephen’s top investment ideas and find out the exact stocks he’s buying with his own money. If you missed issue #1, you can read it right here.

Below, Stephen explains why he just bought a slug of gold… and you’ll find out about something incredible happening in Arizona…

**************

This morning, I placed an order to buy gold with my broker at $1,275/oz.

As I explained last week, my goal in this letter is to help you profit AND protect yourself from disruption.

Buying gold is in the “protect yourself” category.

Because there are few things more disruptive to your finances than the government stealing your hard-earned savings…

  • This year the U.S government will spend $4.4 trillion.

And as you likely know, the government spends far more dollars than it “earns” by extracting taxes from you. This year it’ll borrow $835 billion to cover the shortfall.

When you add that to its existing debt pile, it owes a staggering $21.5 trillion… making the US by far the most indebted entity in history.

  • Here’s why this matters for me and you right now…

This pile of debt is more than 7x what the government takes in each year. It will never, ever be repaid.

So, instead of repaying its debts, the US government inflates away its obligations by quietly killing the US dollar.

Let’s say it borrows $835 billion this year and promises to pay it back in 10 years. If inflation runs at 2% per year, it only has to pay back the equivalent of $682.2 billion.

While this is a sweet deal for the government, it is bad for you and me. It means our savings are being eaten away. With 2% inflation, $50,000 in the bank will only be worth $45,200 in 5 years.

Which leads us to an important question: If you know your hard-earned savings are decaying every year… why would you hold it all in dollars?

  • This is why I store some of my savings in gold.

Unlike the US dollar, gold is an excellent store of wealth.

In his 1977 study The Golden Constant (updated 2009), Roy Jastram showed just how good gold is at protecting wealth. Jastram looked at inflation records and the gold price going back to 1560 for the UK. And back to 1800 for the US, France, and Germany.

The study found gold held its value not just over decades, but centuries. It protected the value of people’s savings during times when the value of their currencies fell to zero or near zero.

This is because no central banker or politician can “print” gold like they can paper currency.

  • We can separate money into two categories.

There’s money you spend, and money you save.

You should put some of your savings in gold. This is money that would otherwise sit in your bank account and get eaten away by inflation.

Then there are dollars you need for spending… to pay your mortgage and buy groceries. Like it or not, we need US dollars for spending money. You’ll get nothing but a confused look if you try to hand a gold coin to the cashier at your local grocery store.

We need dollars for everyday use, but they’re a terrible place to put your hard-earned savings.

The bottom line is, if you keep all your savings in dollars, you’re trusting your financial future to politicians. That’s like trusting a drunk with your whiskey.

By the government’s own numbers, the value of the dollar has declined by 86% in the past 50 years. This chart from the St. Louis Federal Reserve Bank shows its decline.

Source: St. Louis Fed

Would you own that if it were a stock?

  • This is why I believe you must keep some of your savings in gold…

By holding some of your savings in gold, you’re taking back control of your finances. Politicians can’t “inflate” away the value of gold.

That’s why gold has held its value for thousands of years… while most paper “monies” since the Roman Empire have gone to zero.

In this weekly letter we’re going to cover lots of breakthrough technologies with the potential to make us a lot of money. There are incredible things happening in crypto money, self-driving cars, virtual reality, and clean energy, to name a few.

But to profit from these disruptive trends, first we must protect what we have. We need a reliable store of savings that’ll hold its value before we deploy it into disruptive opportunities. This is why I own gold.

  • Switching gears, something incredible is happening in Arizona… 

Imagine standing on the curb and your taxi pulls up… but there’s no driver inside.

You climb in the back and press the “start ride” button.

The car begins moving.

Sounds futuristic, right?

Well, fully self-driving cars are on US roads today.

  • And it’s because of Waymo… 

Waymo is the self-driving car subsidiary of Alphabet, Google’s parent company.

Their robo-taxis are driving people around Phoenix, Arizona. Bringing kids to soccer practice. And their parents to work.

As Abby, a Waymo user said in an interview: “You hear about how one day cars will drive themselves. Oh, it’s today, right now.” Here’s a picture of Abby and her family with a Waymo car.

Source: Waymo

  • Waymo has been testing its driverless cars for 9 years…

It has travelled 6 million driverless miles on US roads. It would take the average American 300 years to drive that much.

All Waymo’s robo-taxis run on one central “brain.” It learns from every mile driven, and every Waymo car learns from the experiences of every other Waymo car.

Which means Waymo’s driverless cars are already far more experienced on the roads than any human driver could ever be.

Later this year, Waymo will launch the world’s first driverless ride-sharing service. At first, its robot cars will only operate in Arizona where the roads are straight and there’s not much nasty weather.

Pause and take that in. Driverless cars will be hauling Americans around later this year. This is a huge breakthrough that not many people are talking about.

  • To get ready for the launch, Waymo bought 62,000 driverless cars…

The company tested its service with 600 Chrysler Pacifica minivans like the one in the above picture. To support the full launch of their ride-sharing service, they ordered 62,000 cars.

This is a massive investment. For perspective, there are around 14,000 New York City yellow cabs. In the next year, Waymo will have a fleet of robo-taxis that’s 4x bigger.

  • Driverless cars were a fantasy 5 years ago… so how are they on the roads now?

It comes back to what we were talking about last week… computer chips.

To get around safely, a driverless car must see, understand, and react at least as fast as a human can. There can be no delay in its “thinking” whatsoever. Seeing a cyclist an instant too late could be fatal.

This means the car’s computer, its “brain,” must process millions of pieces of information every second.

  • Intel is one of the companies making this possible…

Intel is the world’s largest computer chip maker. It supplies many of the high-powered chips in the “brains” of today’s driverless cars. Waymo has been using Intel chips since 2009.

Last August, Intel went all-in on driverless cars when they bought Mobileye for $15.3 billion. Mobileye makes the cameras, sensors, and software that enable driverless cars to detect what’s around them.

Think of it like this: Intel makes the car’s “brain.” While Mobileye provides the “eyes.”

  • And when Intel combined its technology with Mobileye’s the results were special…

Their new EyeQ5 chip makes the “brain” in every Waymo car 210% more powerful.

With this chip, the robo-taxis will have the power to think and process what’s going on around them as fast as a human driver. And that’s why EyeQ5 is one of only a handful of chips to be awarded the highest classification of auto safety.

Which means cars running on this chip can be on the roads without a human in the driver’s seat as backup. A “fully driverless” car.

Intel is now partnering with Waymo to build the entire system for their new driverless fleet.

While this accounts for only a fraction of Intel sales today, I expect it to grow quickly.

Because right now, self-driving cars make up 0% of the $285-billion-a-year US auto market. But if we fast-forward 10 years, I expect there will be tens of thousands of driverless cars on American roads.

If you think that’s far-fetched, remember Uber didn’t exist 10 years ago. Now there are 4x as many Uber drivers in New York as there are yellow cabs.

Uber, by the way, wants most of its cars to be driverless in a few years.

  • We’re going to talk a lot about self-driving cars in this letter…

And that’s because there’s a lot of money to be made with them.

Today, self-driving cars are where the internet was in the early 1990s. The first websites had just been launched but only a fraction of Americans had internet in their homes.

Investors made truckloads of money over the next 5… 10… 20 years as the internet spread like wildfire.

What do you think about self-driving cars? Would you ride in one? Are you investing in them?

Tell me at riskhedgereport@riskhedge.com.

Until next Thursday,

Stephen McBride
Chief Analyst – RiskHedge

Why I’m Buying a Piece of this $145 Million Machine

Why I’m Buying a Piece of this $145 Million Machine

Editor’s Note: Welcome to issue #1 of the RiskHedge Report, a weekly advisory dedicated to helping you profit from today’s disruptive trends.

Every Thursday you’ll receive a valuable essay from Chief Analyst Stephen McBride. Although this is a free subscription, he won’t hold anything back. You’ll get Stephen’s top investment ideas and find out the exact stocks he’s buying with his own money.

Below you’ll find out about a little-known stock that’s making driverless cars and artificial intelligence possible…

Why I’m Buying a Piece of this $145 Million Machine

Can I let you in on a well-kept secret in tech?

You’ve probably heard how scientists are on the cusp of huge breakthroughs that will transform our world.

For example, soon robot cars will be so safe that you can sleep while they drive you to work.

But the thing is… it’s impossible to build a car this advanced today.

And the reason why is surprisingly simple.

  • We need faster computers…

To get around safely, a driverless car must see, understand, and react as fast as a human. There can be no delay in its “thinking” whatsoever. Seeing a cyclist an instant too late could be fatal.

This means the computers in the car must process millions of pieces of information every second. And that’s something current computers just can’t do.

But the company I’m going to tell you about has the solution…

  • It’s a $145-million system that will build a faster “brain” for new technologies.

After 12 years in development, it’s ready. And the biggest computer chip makers like Intel and Samsung have already ordered 30 of these $145-million machines.

You should see this monster machine. It weighs 220,000 lbs. and takes 6 fully-loaded Boeing planes to haul.

And here’s the thing… only one company in the world can make it.

Let me explain exactly why this machine holds the key to the future…

  • Did you know your phone is more powerful than the NASA computer that sent Neil Armstrong to the moon? 

The computer chip in your phone is 3,500 faster than what NASA had. Computer chips are the “brains” of electronic devices.

Your brain contains 100 billion cells called neurons. They’re tiny switches that allow you to think and remember. Computers also contain billions of “brain cells” called transistors. The more transistors in your computer, the faster it is.

The chips inside NASA’s computer had 2,000 transistors. The chips inside the newest Apple iPhone have 4.3 billion.

Think about that: 4.3 billion on an area the size of your thumbnail. These transistors are so small that they’re just 87 nanometers apart. That’s 87 billionths of a meter.

For decades, engineers have been making faster computers by cramming more and more transistors onto chips. The problem is, current technology has reached its limit.

With the old way of doing things, we can’t fit any more transistors on a chip. Which means computers can’t get any faster.

  • The $145-million machine I mentioned has the only technology proven to make far faster computer chips than we have today.

It’s called an Extreme Ultra Violet (EUV) lithography machine.

Computer chips are made through a process called photolithography. It’s Greek and means “to print with light.”

In short, a powerful light etches patterns into a silicon wafer. That’s what creates transistors. Here’s an image that shows how the EUV light etches the pattern into the silicon.


Source: biomechanicalregulation-lab.org

Current machines can print a “brain cell” into the silicon wafer every 87 nanometers. To give you some perspective, a strand of human hair is about 75,000-nanometers wide.

The EUV machine can print a transistor every 10 nanometers. That means it can put 7,500 on the width of a single strand of hair.

The EUV’s light beam is so precise that it’s equivalent to shining a laser from the earth and hitting a quarter… on the moon. How incredible is that?

Most important, this machine will be able to produce chips that are up to 100-times faster than what we have today.

And that’s going to make driverless cars a reality. Not to mention networks so fast that you’ll be able to download a whole movie in 3 seconds.

  • The company that makes this feat of science is called ASML (ASML).

It’s the only company in the world that’s been able to build the EUV machine.

After years of trying, competitors Nikon and Cannon weren’t able to build their own versions. They failed to develop the EUV light beam needed to etch transistors into the chips every 10 nanometers.

The fact that ASML’s scientists and engineers built a machine that nobody else in the world can speaks to the quality of their team.

  • ASML sold $1.1 billion worth of EUV machines in 2017…

That’s around 10% of their total sales. And they plan to deliver 50 EUV machines in the next two years.

That would add $6 billion to their revenue and account for one third of their sales.

  • And ASML runs a great business…

ASML’s average net profit margin over the past 5 years is 24%. That means for every $1 of sales, $0.24 in profits was available to reinvest in the business.

This is phenomenal, and it even beats some of America’s best businesses like Google… which has a 21.5% margin.

  • The key thing is: ASML has a monopoly on the one machine that’s crucial to continued technological progress.

Self-driving cars are just one of dozens of world-changing technologies that ASML’s chips will enable. I expect ASML’s chips to run the supercomputers that help scientists cure disease… to make true artificial intelligence possible... to bring us more “real” virtual reality.

As I mentioned earlier, companies like Intel and Samsung have ordered 30 machines already. This gives ASML an order backlog that gives us a pretty good idea of its future strong revenue growth.

And as more driverless cars begin to hit the road (they’re already driving around Arizona), this backlog should only grow.

I’m personally buying ASML today and plan to hold it for at least 2 years. The stock is trading at $196 per share and is up 10% this year.

  • I’ll update you on ASML in the RiskHedge Report.

The RiskHedge Report is this free weekly essay you’re reading right now. Each week I’ll send you research and updates on our top investment ideas.

If you’re not yet a subscriber and you’d like to be, please scroll down and enter your email address in the green box below.

And please write me anytime at riskhedgereport@riskhedge.com. I personally read every note that comes in.

I’ll be in touch next week.

Stephen McBride
Chief Analyst, RiskHedge

2018’s Number One Risk

2018’s Number One Risk

To find the market’s biggest weakness, a good place to look is at the most crowded movie theater with the smallest exit.

European bonds.

You’ve probably seen the charts of European high yield floating around, so I won’t reproduce it here. Yields in the low 2s for BB credits. There was also a European corporate issuer that managed to issue BBB bonds at negative yields a few weeks ago. I think that might have been the top.

No shortage of stupid things these days:

  • Bitcoin
  • Litecoin
  • Pizzacoin
  • Canadian real estate
  • Swedish real estate
  • Australian real estate
  • FANG
  • Venture capital

But European bonds are potentially the stupidest. Maybe even stupider than bitcoin!

Although there is nothing stupid about it—the ECB has been buying every bond in sight, and there’s lots of money to be made frontrunning central banks.

Still, it’s possible that we’ve reached the logical limit of emergency monetary policy, and the ECB is going to have to exit sometime in the near future. The question is: how are they going to exit without blowing up the bond market?

And it’s not just the European bond market. The effects have been transmitted to other bond markets as well, like our own. If the ECB exits, or, heaven forbid, the BOJ tries to exit as the same time—and screws it up—there is a potential for a real meltdown.

What would a meltdown look like? Fact: any time ten year yields have backed up 200 basis points, there has been a crisis. You have to go back to 1994 for the last one. And we even had a mini-crisis in 2013, which we called the taper tantrum.

If tens backed up from 2.3% to 4.3%, it would be a crisis of gargantuan proportions.

What is the probability that it will happen?

Disorderlies

It’s tough to think of these things in terms of probabilities. For example, it’s very probable that the ECB will begin its exit next year. But what is the probability that they screw it up?

It’s literally impossible to handicap. You can’t quantify it. But again: crowded theater, small exit, so you know the unwind has the potential to be disorderly if the ECB is careless about how they exit.

Anyone who has seen markets in action (at least, for a decade or more) knows that selling can lead to more selling, which can lead to more selling, otherwise known as a cascading effect. Nobody under 30 knows what this looks like. I actually had a very funny conversation with some high yield guys a few weeks ago. They were laughing at one of their junior traders, who was getting a bit panicked as he watched the index sell off… a point. “This is getting out of control,” he said.

I am not much interested in the bond market until you get tens to 4, investment grade to 7, and high yield to 12. I will turn into High Yield Harry if you get yields out to 12%.

Those sound like impossible levels, but you just have to dream a little bigger, dear readers. Remember: cash is an option to buy something cheaper in the future. If yields do get out to 12%, and you don’t have the cash to take advantage of it, you are going to be kicking your own butt all the way down the street.

How to Play the Rally

It is waaaaay too early to be thinking about this, but if you are going to try and pick a bottom in the throes of a bear market, it is a lot smarter to do it in the high yield market than the stock market.

It’s hard to get hurt too badly when you’re getting paid 12-14% to wait for a bottom. Stocks are a different story. Stocks can go down forever. In 2009, it really seemed like they were going down forever. That is too scary for me.

But I really like buying credit in bear markets and I also like buying converts. Go back and look at high yield and convert mutual funds coming out of bear markets. You’re talking about 30-40% returns, especially on the lower-quality stuff. On a risk-adjusted basis, it’s a lot better than stocks.

In the meantime, there is nothing to do. I am trying to get as close to all cash as I can. As I’ve said a million times before, for the first time in a long time, you are getting paid to hold cash.

It has been a really long freaking time since there was a stock or a bond that looked attractive on a valuation basis. Just because something is going up doesn’t mean it is attractive. The old-timers know: there is a cycle. It may not seem like it, but there is.

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Here’s the Thing About Financial Literacy…

Here’s the Thing About Financial Literacy…

Some people are better with money than others. Is it nature or nurture?

What I mean is: can investing be taught, or does it come naturally?

I’m going to make a very controversial statement. Financial acumen is almost entirely nature. You are born with it.

You were born with your tolerance for risk. It is in your DNA. I would not be surprised if 23andMe found a gene for it someday.

Let me explain.

The Mush

Everyone has heard of “the mush.” This is a person who is wrong about everything. This person bought the highs in Internet stocks in 2000, bought the highs of homebuilders in 2006, bought the highs in gold in 2011, and perhaps is buying the highs in bitcoin now.

This person is very useful. The person who is wrong all the time is just as useful as the person who is right all the time! You simply do the opposite of what he is doing. I know people who subscribe to bad newsletter writers just because they are reliably wrong.

Funny thing about them—they are present in every walk of life, including Chicago MBAs and derivatives traders. Just because you have the credentials, doesn’t mean you are good with money. I have seen my share of traders who are wrong all the time. They do manage to stick around. Wall Street can be a lot more forgiving than you think.

Given that mushes come from all over the place, the only conclusion I can draw is that financial ability is not a learned trait. If it were, you would think all the mushes would be found in financially illiterate places like Norwich, Connecticut. But they are found in equal proportions in Greenwich, Connecticut as Norwich, Connecticut. Financial literacy seems to be no help at all.

Financial Literacy

I am a big proponent of teaching financial literacy in schools. But you have to be realistic—even with all the education in the world, lots of people are going to be bad with money. They will be the ones to buy the timeshares. There is nothing you can do about it.

“Bad with money” seems to imply the tolerance of a higher level of financial risk. There is plenty of that going around these days. Millennials are too scared to invest in the 6-vol S&P 500 but will readily fork over their cash for 150-vol bitcoin. And for sure, there are some people who just need a volatility fix—all these leveraged ETFs exist for a reason.

But there is also such a thing as taking too little financial risk. If you missed out on this whole food fight, shame on you. The peak of financial conservatism is money under the mattress. Some people go there.

Financial literacy should be about:

  • Teaching how the banking system works
  • Teaching how mortgages work
  • Teaching how car loans and credit cards work
  • Teaching the basics of how financial markets work
  • Etc.

Financial literacy should not be about:

  • Giving people a healthy appetite for risk

Traders are born, not made.

Speaking of Financial Risk

As someone who spent part of a career on Wall Street, the one lesson I took from working on a trading desk was just how unsuitable most financial instruments are for average folks.

Even something as plain-vanilla as IWM, the Russell 2000 ETF. I have seen people do things with IWM that you would not believe. And this is a liquid index with 2000 names. The financial markets are for big boys. For everyone else, there is cash in the bank.

I’m going to say something so far out of consensus, someone will punch me in the teeth. Cash in the bank is not the worst thing in the world. Yes, it pays no interest. But for a lot of people, making 0% is superior to losing 10%. It’s not just the mush—lots of people make suboptimal financial decisions.

When you see the 1, 3, and 5 year returns of the Vanguard 500 Index Fund, do you know how many people actually achieve those returns? Very few. Because they buy on the highs and sell on the lows.

The number of investors who hold a fund in good times and bad, dollar cost averaging on the way down as well as on the way up, is very small. For a lot of people, cash sitting in the bank is good.

But that’s a difficult discussion to have, because people want to have their money “working for them.” They think that if it’s in the bank, it’s not “working for them.” This may be true, but most of these people should be a lot more pessimistic about what their returns will be.

The last few years have not made people pessimistic. They think they can get 20% a year out of the stock market, but that is peanuts compared to what they might get out of bitcoin, which is up about 1000% in the last year. This has given people very unrealistic expectations.

You know what I am excited about? I am super excited about 1.66% on 1yr T-bills.

Almost 2% for taking no risk at all. That number keeps going up, as the Fed is almost certainly going to hike next week, and is poised to hike a bunch of times next year.

At the top of the dot-com bubble you could have had 6.5% in a money market mutual fund. Nobody was interested.

 Nobody, except for the folks who were born with it.

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How to Protect All of Your Assets (Including Gold) from Government Seizure

How to Protect All of Your Assets (Including Gold) from Government Seizure

On April 5, 1933, President Franklin D. Roosevelt issued an executive order making private ownership of gold bars and gold coins illegal. The order forced Americans to sell their gold bullion to the Treasury at the then legal price of $20.32.

Gold ownership remained illegal in the US until 1974.

Failure to tender your gold could get you a maximum fine of $10,000 (492 ounces of gold or approximately $625,000 at today’s gold prices) and up to 10 years’ imprisonment.

Franklin’s order was followed by the Gold Reserve Act of 1934. The act lifted the nominal price of gold from $20.67 to $35.

The penalties were exceptionally high to ensure compliance with what was a disguised 42% tax on savers.

Is it possible that our indebted government could force similar measures on gold owners today? We can’t rule it out, but it’s less likely to happen today than it was in the 1930s.

Why the US Is Not Likely to Confiscate Gold Today

Desperate times call for desperate measures. Franklin’s order was justified as a measure to overcome the Great Depression.

Nobody knows how severe the next recession will be and what measures it may call for. However, gold will be less of a target for a few obvious reasons.

First, the US dollar is no longer backed by gold reserves. Second, gold represents a tiny portion of today’s financial assets. For this reason, it’s unlikely to be the prime target for taxation or seizure.

All the gold ever mined is worth about $7.5 trillion as of this writing. Meanwhile, total financial assets make up $294 trillion globally. Why would government focus on gold ownership when gold is a mere 2.5% of total assets today?

There is much larger fish to fry.

However, in times like these, nobody is safe. And there’s no guarantee that gold owners won’t become the targets of desperate governments. When things go sour, anyone who owns tangible assets is a potential target for any form of taxation or confiscation.

Why You Should Use Gold as a Hedge

What can investors do to protect all of their assets from the risk of government seizure?

First, you have to understand how government seizes assets from citizens—and what actions may not be politically acceptable even in desperate times.

Outright default on insolvent pension funds would be political suicide. No sane politician would ever campaign for that. However, a progressive default through debt monetization (e.g. quantitative easing) would be more likely.

This means that the dollar is almost certain to lose its value against hard assets like gold.

There are more reasons why investing in precious metals is safer than hoarding cash.

Cash is convenient and essential, but holding large sums in cash exposes you to a bigger risk of seizure and devaluation.

Bail-ins of bank accounts with savings that exceed the FDIC insurance level ($250,000) will be more politically legitimate than taxing those who have no savings. Most voters simply won’t feel sorry for the rich.

That’s why gold is a much safer store of value in the long run despite the risk of seizure.

How to Minimize the Gold Seizure Risk

This risk can be minimized, too.

If it ever happens again, it will likely be focused on domestic holdings—as it was in 1933.

The untouchable billionaires and politicians have their assets tucked away in foreign trusts and will make sure they are kept safe there. The US government will save itself the trouble and chase domestic holdings instead.

The middle class and small entrepreneurs will once again be the prime targets of government seizure and taxation.

To avoid this, I’d recommend investors storing their metals in a safe foreign jurisdiction like Switzerland or Singapore. In international vaults, you can store physical gold bullion, such as gold bars, Gold American Eagle coins, and Canadian Maple Leaf coins.

With your gold stored abroad, you may have some time to react.

If you feel the threat is product specific, you can liquidate those products and diversify into other precious metals products. Another option would be to take delivery before such a legislation comes into effect.

However, no risk can be fully eliminated. There is no perfect solution. Nonetheless, diversification can be an essential element of an overall protection strategy against an increasingly uncertain future.

Why I Founded the Hard Assets Alliance

This is the reason I founded the Hard Assets Alliance. I wanted to offer my customers a transparent and secure platform to buy, store, and sell physical precious metals globally with minimum hassle.

What was once a mere idea in my head has now become the most convenient and innovative precious metals platform for private investors on the market.

Our customers have permanent access to the most liquid market when they want to buy or sell. They can request delivery of their allocated metals at any time.

We offer global vaulting options, which some clients choose to diversify, and provide an added layer of protection in the event of government failure or confiscation.

Hard Assets Alliance is not a bank, and your metals are not on our balance sheet. The metals are yours and yours alone.

Free ebook: Investing in Precious Metals 101: How to Buy and Store Physical Gold Bullion or Silver

Learn how to make asset correlation work for you, how to buy gold (plus how much you need), and which type of gold makes for the safest investment. You’ll also get tips for finding a dealer you can trust and discover what professional storage offers that the banking system can’t.

It’s the definitive guide for investors new to the precious metals market. Get it now.

All the Reasons Cryptocurrencies Will Never Replace Gold as Your Financial Hedge

All the Reasons Cryptocurrencies Will Never Replace Gold as Your Financial Hedge

The cryptocurrency craze continues.

Having seen the astounding rise in Bitcoin’s value, those who remained on the sidelines are now kicking themselves for not buying it when it was first released. Surely, they’d be millionaires by now.

But is the meteoric rise of Bitcoin and other cryptocurrencies really an indication of true value?

It seems that more and more people justify investing in cryptocurrencies—even at current record prices—by claiming that they’re an effective hedge against the instability of fiat currencies.

But is it true?

Sure, a fiat money system where central banks can and do literally print money at will has its weaknesses. That’s why hard assets like gold are so popular among smart investors: as real stores of value, they provide a safety net against currency depreciation and economic collapse.

However, it’s doubtful that the same applies to cryptocurrencies. Despite what the crypto-evangelists will tell you, digital tokens will never and can never replace physical gold bullion as your financial hedge.

Here are six reasons why.

#1: Cryptocurrencies Are More Similar to a Fiat Money System Than You Think.

The definition of “fiat money” is a currency that is legal tender but not backed by a physical commodity.

Since the United States abandoned the gold standard in the 1970s, this has been the case with all major currencies, including the US dollar.

Ever since then, US money supply has kept increasing, and so has the national debt. In contrast, the dollar’s purchasing power has been on the decline.

 Take a look at this historical gold price chart.

The huge spike in gold prices started right around the time when the Bretton Woods agreement collapsed in 1971 and US paper dollars couldn’t be converted to gold anymore. A clear sign of the decline in the dollar’s purchasing power since the move into a pure fiat money system.

It’s clear that cryptocurrencies partially fit the definition of fiat money. They may not be legal tender yet, but they’re also not backed by any sort of physical commodity. And while total supply is artificially constrained, that constraint is just... well, artificial.

You can’t compare that to the physical constraint on gold’s supply.

Some countries are also exploring the idea of introducing government-backed cryptocurrencies, which would take them one step closer toward fiat-currency status.

As Russia, India, and Estonia are considering their own digital money, Dubai has already taken it one step further. In September, the kingdom announced that it has signed a deal to launch its own blockchain-based currency known as emCash.

So ask yourself, how can you effectively hedge against a fiat money system with another type of fiat money?

#2: Gold Has Always Had and Will Always Have an Accessible Liquid Market.

An asset is only valuable if other people are willing to trade it in return for goods, services, or other assets.

Gold is one of the most liquid assets in existence. You can convert it into cash on the spot, and its value is not bound by national borders. Gold is gold—anywhere you travel in the world, you can exchange gold for whatever the local currency is.

The same cannot be said about cryptocurrencies. While they’re being accepted in more and more places, broad, mainstream acceptance is still a long way off.

What makes gold so valuable and liquid is the immense size of its market. The larger the market for an asset, the more liquid it is. According to the World Gold Council, the total value of all gold ever mined is about $7.8 trillion.

By comparison, the total size of the cryptocurrency market stands at about $161 billion as of this writing—and that market cap is split among 1,170 different cryptocurrencies.

That’s a long shot from becoming as liquid and widely accepted as gold.

#3: The Majority of Cryptocurrencies Will Be Wiped Out.

Many Wall Street veterans compare the current rise of cryptocurrencies to the Internet in the early 1990s.

Most stocks that had risen in the first wave of the Internet craze were wiped out after the burst of the dot-com bubble in 2000. The crash, in turn, gave rise to more sustainable Internet companies like Google and Amazon, which thrive to this day.

The same will probably happen with cryptocurrencies. Most of them will get wiped out in the first serious correction. Only a few will become the standard, and nobody knows which ones at this point.

And if major countries like the US jump in and create their own digital currency, they will likely make competing “private” currencies illegal. This is no different from how privately issued banknotes are illegal (although they were legal during the Free Banking Era of 1837–1863).

So while it’s likely that cryptocurrencies will still be around years from now, the question is, which ones? There is no need for such guesswork when it comes to gold.

#4: Lack of Security Undermines Cryptocurrencies’ Effectiveness.

Security is a major drawback facing the cryptocurrency community. It seems that every other month, there is some news of a major hack involving a Bitcoin exchange.

In the past few months, the relatively new cryptocurrency Ether has been a target for hackers. The combined total amount stolen has almost reached $82 million.

Bitcoin, of course, has been the largest target. Based on current prices, just one robbery that took place in 2011 resulted in the hackers taking hold of over $3.7 billion worth of bitcoin—a staggering figure. With security issues surrounding cryptocurrencies still not fully rectified, their capability as an effective hedge is compromised.

When was the last time you heard of a gold depository being robbed? Not to mention the fact that most depositories have full insurance coverage.

#5: Hype and Speculation Continue to Drive Cryptocurrencies’ Value.

Since the beginning of the year, the value of Bitcoin has more than quadrupled—a tremendous spike in value that has sent investors rushing to invest in cryptocurrencies. But could this be nothing more than a market bubble?

One of the world’s most successful hedge fund managers, Ray Dalio of Bridgewater Associates, certainly seems to think so.

In September 2017, he told CNBC, “It's not an effective storehold of wealth because it has volatility to it, unlike gold. Bitcoin is a highly speculative market. Bitcoin is a bubble.”

The spike in Bitcoin prices seems to only lend credence to this view. With such an extreme degree of volatility, cryptocurrencies’ value as a hedge is questionable. Most people buy them for the sole reason of selling them later at higher prices.

This is pure speculation, not hedging.

#6: Cryptocurrencies Do Not Have Gold’s History as a Store of Value.

Cryptocurrencies have been around for less than a decade, whereas gold has been a store of value for thousands of years. Because of this long history, we know for a fact that stocks and bonds have low or negative correlations with gold, particularly during periods of economic recession. This makes gold a powerful hedge.

What little data we have on cryptocurrencies does not show the same. Consider this year alone: while the US stock market continues to run record highs, the same goes for Bitcoin.

It’s true that gold has also gone up, but the correlation has been very low and, during times of recessions, tends to swing to the negative side, as you can see in the graph below.

Since 2010, there have been 15 times where the S&P 500 has seen drops of 5% or more. Out of those 15 stock market downturns, Bitcoin has been down for 10 of them.

How is that a good hedge?

Free ebook: Investing in Precious Metals 101: How to Buy and Store Physical Gold and Silver

Learn how to make asset correlation work for you, how to buy metal  (plus how much you need), and which type of gold makes for the safest  investment. You’ll also get tips for finding a dealer you can trust and  discover what professional storage offers that the banking system can’t.

It’s the definitive guide for investors new to the precious metals market. Get it now.

Is Indexing Wrecking the Markets?

Is Indexing Wrecking the Markets?

On the grand scene of financial innovations, the exchange-traded fund was fairly innocuous at first. It took a good 15 years of slow realization for people to figure out how disruptive they would ultimately be. “Exchange-traded fund” isn’t even a very good name, since closed-end funds were also exchange-traded.

And the ETF wrapper still isn’t the ideal investment vehicle, at least for the purposes of traditional active management. For active strategies, the open-end fund structure is still superior.

I’d argue that the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

After spending a career in indexes in some capacity, I am no longer much of a stock-picker. All my ideas are top-down. I like oil. I like France. Instead of finding an oil stock or a French stock I buy all oil stocks or all French stocks. Seems easier—what if I bought the wrong oil stock or the wrong French stock? I’m happy to take the average.

Finance is funny. There are a lot of things in the capital markets that make sense when a few people do it, but not when everybody does it. The thing about buying all oil companies is that you are buying the bad ones as well as the good ones—and driving all of their valuations higher.

Back in 2004 at Lehman, we observed that correlations among stocks in the same sector were increasing, at least on an intraday basis. Think about it: if oil goes up, companies like Chevron, ExxonMobil, and ConocoPhillips should all go up—on a micro, minute-by-minute basis. So, you could still make money in the long term by picking the best integrated oil major, but day trading them against each other became useless.

Fast forward to 2017, and the stock market is a sea of baskets trading against baskets. A lot of people have learned their lesson—the only thing that works is buy and hold. Which I think is a good thing!

But a lot of people still find it hard to stick to buy and hold.

Anyway, there are now more indices than stocks. Some people say this is a bit ridiculous. Well, back in the mutual fund boom, there were more mutual funds than stocks, and everything turned out fine. Is indexing causing distortions? Is it wrecking the markets?

Maybe a little. But even then, the argument is very nuanced.

Commodity Indexing

A few months ago, I wrote a rather controversial piece at Bloomberg View talking about the last time people got really excited about indexing.

It was the mid-2000s. People stopped looking at gold, oil, and corn idiosyncratically, and started looking at them as a blob—as part of an asset class. In some respects, commodities do respond to the same macro factors. If the dollar goes down, most commodities will go up. And so, commodity indexing was born.

Commodity indexes had been around for some time (like the GSCI, or Goldman Sachs Commodity Index), but few people allocated money to them. What changed?

The major investment banks began to offer swaps and structured products that mimicked the price of the GSCI, and other commodity indexes. Money plowed into these strategies, and the prices of commodities rose in unison. Not too dissimilar to what has been going on in stocks—with the S&P 500.

But people failed to consider that hot money can flow out as well as in. One of the less-talked about aspects of the financial crisis is that the commodity bubble unwind was especially vicious. Almost nobody talks about commodity index swaps anymore—the whole strategy has been discredited.

Will stock indexing someday be discredited?

The Philosophy of Indexing

The whole point of an ETF or index is that you can buy a bunch of stocks or bonds which are more or less alike, or share similar characteristics. You don’t have to go to the trouble of picking individual stocks or bonds, which can be time-consuming.

So let me ask you a question: do all US stocks share similar characteristics?

Well, they are all in the US (duh), and are subject to the same political and economic forces. But that’s where it ends. You can’t get more different companies than Amazon and Newmont Mining. Or Goldman Sachs and US Steel.

So why put them all in the same basket?

I’m driving at something here—My theory is that indexing is most useful on narrowly-defined groups of stocks and less useful on the really big blobs.

The worst offenders are total market indices, EAFE, and of course, the world index. Why would anyone get long the planet? I happen to be very bearish on the planet. Cybersecurity stocks, on the other hand, make more sense.

Plowing a bunch of money into “the market” simply because it is “going up” is not smart.

Once more, with feeling—putting all of your money in SPY is not going to cut it. Because someday, everyone will want all of their money out of SPY… at the same time.

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Infographic: The Everything Bubble Is Ready to Pop

Infographic: The Everything Bubble Is Ready to Pop

It wasn’t always this way. We never used to get a giant, speculative bubble every 7–8 years. We really didn’t.

In 2000, we had the dot-com bubble.

In 2007, we had the housing bubble.

In 2017, we have the everything bubble.

I did not coin the term “the everything bubble.” I do not know who did. Apologies (and much respect) to the person I stole it from.

Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously.

And the infographic below that my colleagues at Mauldin Economics created paints the picture best.

I don’t usually predict downturns, but this time I bet my reputation that a downturn is coming. And soon.

When there’s nothing left but systemic risk, everyone’s portfolio is on the line. To that end, I’ve put together a FREE actionable special, Investing in the Age of the Everything Bubble, in which I discuss ways to prepare for the coming bloodbath (download here).


Grab Jared Dillian’s Exclusive Special Report, Investing in the Age of the Everything Bubble

As a Wall Street veteran and former Lehman Brothers head of ETF trading, Jared Dillian has traded through two bear markets.

Now, he’s staking his reputation on a call that a downturn is coming. And soon.

In this special report, you will learn how to properly position your portfolio for the coming bloodbath. Claim your FREE copy now.

Hackers, Bitcoins & Fleas

Hackers, Bitcoins & Fleas

Right before I sat down to write this 10th Man, I read a New York Times article about how people are getting their identities stolen via their phone number.

The one thing all these people had in common? They were vocal on social media about investing in bitcoin. They got hacked—and their bitcoins disappeared. In some cases, seven figures’ worth.

That seems less secure than having gold or cash in your safe at home, buried in your backyard, or in a safe deposit box. It seems less secure than buying an expensive watch and insuring it.

I thought the whole point of bitcoin was security, right?

There are a lot of facets to bitcoin.

Capital Controls

I tweeted out The New York Times article, and then somebody quote-tweeted me:

Yes, if you are living in Venezuela and you have all your money in bolivars, you are pretty unhappy. And if you were living in Cyprus and had your money in banks during the bail-in, you are pretty unhappy.

Would bitcoin have solved your problems? Possibly.

Certainly in Cyprus’ case, other things would have solved your problems, too—like gold!

Admittedly, gold may be no help in Venezuela because the rule of law has broken down and there is no way to defend it. So yes, in Venezuela, bitcoin may have helped.

You know what else would have helped? Getting out of the country! If you are sitting in Venezuela with all your bitcoin, you are still pretty unhappy. It sucks there.

People spend a lot of time trying to figure out how to protect their wealth from inflation, expropriation, and so on. There are a million ways to skin this cat… piles of cash, gold, diamonds, jewelry, other hard assets, and now bitcoin.

Each of these ways has advantages and disadvantages. (But never tell a bitcoin promoter that bitcoin has disadvantages.)

The main advantage of bitcoin is that you can easily move money across national borders. Try doing that with cash. Bitcoin just sits in your digital wallet, and when you settle in your new country, you sell it and convert it into currency. Theoretically, you could move your entire liquid net worth in this fashion.

It’s an open secret that Chinese people have been busy smurfing as much wealth as they can out of the country with bitcoin. I bet that if China could figure out a way to stop it, they would.

But let’s talk about the disadvantages.

Uber Shady

I am not a technophobe, but I am not a technophile, either. Bitcoin seems hard. I certainly don’t claim to know enough about technology to guarantee the security of my bitcoin.

So far in bitcoin’s short history, we’ve had an exchange get hacked, and widespread hacking of digital wallets. You could protect your bitcoin by having a “hardware wallet,” an external hard drive that’s not connected to the web, but that kind of defeats the purpose. You’re then no better off than you were with gold.

Not to mention the fact that bitcoin is used for a lot of shady stuff, like trafficking of all manner of contraband on the dark web. Hey, I’m all for personal liberty and anonymous financial transactions, but as my grandmother used to say, “you lay down with dogs, you get fleas.”

You might remember discussions from a year or two ago about how Larry Summers (and others) want to eliminate cash, because cash facilitates criminal activity. Yes, it does—but nowhere near to the extent of bitcoin!

If I were to guess, I’d say that the volume of criminal activity facilitated by bitcoin could be orders of magnitude bigger than the criminal activity facilitated by cash.

Which is why, one day, bitcoin will be made illegal.

A bitcoin enthusiast will say making it illegal doesn’t really do anything. The government can’t stop bitcoin.

This is true with lots of things, like drugs. Drugs are everywhere, but they are still illegal. Once you make something illegal, you drive it underground, and you delegitimize it.

So while it would be exceedingly rare for anyone to be caught and prosecuted for using illegal bitcoin, dreams of it becoming an “alternate currency” would be shattered. Then it really would only be for criminals.

None of this sounds like anything I want to be a part of. The government can ban gold, but I can’t see the federal government going door-to-door and searching for gold like they did in the 1930s.

And besides… before it even got to that point, you should have left the country!

Run!

The foolproof way to protect your wealth is to leave for a jurisdiction that will treat it with more respect. There were reports that the number of people renouncing their citizenship increased under Obama. It will be interesting to see what happens under Trump.

The point is to get out before the walls go up. That’s unlikely to happen in the United States, with its stable democracy and strong institutions. But it never hurts to be a little paranoid—Venezuela only took a couple of decades to go from stable democracy to communist basket case.

It’s good to have a plan. It’s no fun coming up with a plan when everyone else is trying to come up with a plan at the same time.

Back in the 2000s, I had a thing for Greece. I watched The Bourne Identity, and at the end of the movie, Matt Damon finds Franka Potente renting bicycles on some remote Greek island, completely off the grid.

That sounded pretty attractive to me. I even remember looking up some Greek real estate at my desk at Lehman Brothers. It was 2003. Bear markets make you think of some crazy stuff.

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The Everything Bubble

The Everything Bubble

It wasn’t always this way. We never used to get a giant, speculative bubble every 7-8 years. We really didn’t.

In 2000, we had the dot-com bubble.

In 2007, we had the housing bubble.

In 2017, we have the everything bubble.

I did not coin the term “the everything bubble.” I do not know who did. Apologies (and much respect) to the person I stole it from.

Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously, like:

  1. Real estate in Canada, Australia, and Sweden
  2. Real estate in California
  3. Cryptocurrencies
  4. FANG, plus Tesla and a few others
  5. Corporate credit
  6. EM sovereign credit
  7. Autos
  8. Indexing
  9. Dramatic television series
  10. Sports
  11. Animated movies

For the last few, I am just screwing around… though they are also bubbles.

I don’t like going around and calling things bubbles. It’s a good way to lose credibility (especially if you started in 2013).

I haven’t been exactly bullish over the last year. But I have refrained from calling it stupid, because it could always get stupider.

But now, I’m not sure how much more stupid things will get.

Initial Coin Offerings

I think what pushed me over the edge was bitcoin.

First, let’s define what a bubble is. A bubble is not simply a matter of overvaluation. It has to be accompanied by an obsession or preoccupation with an asset class.

When you see people making haystacks of cash all out of proportion to their intelligence or work ethic?

Bubble!

That is kind of what is happening right now in cryptocurrencies.

Am I some kind of Luddite? No.

Do I see the potential of blockchain? Yes.

But when I see people behaving this way—literally throwing money at each other—you’re probably closer to the end than the beginning.

People are comparing bitcoin to tulip bulbs. I think those comparisons are apt. But at least with tulips, you had something tangible—a plant.

Someone asked me last week how I thought bitcoin and the others would perform in a bear market. Would they go up, like gold?

I think the opposite would happen. Regardless of bitcoin’s supposedly safe-haven status, right now it’s acting like a risk asset—a risk asset with a lot more beta.

If we get a bear market in stocks, we get a bear market in bitcoin (or vice versa).

And if we get a bear market in stocks or bitcoin, we are probably getting a bear market in credit.

And if we get a bear market in credit, we are probably getting a bear market in real estate.

It is all connected.

Basically, in the age of peak indexing, the only thing left is systematic risk.

Wax On, Wax Off

A market that is just systematic (non-diversifiable) risk is impossible to trade. You can be risk-on (long stocks), or risk-off (short stocks), but there are virtually no benefits to diversification.

Look at S&P 500 index funds. In the old days, you would say you were diversified if you owned one—you owned 500 stocks! 

Does anybody really think that they are diversified by owning an index fund today?

No. You own the same 500 stocks that everyone else owns. Again, there is nothing left but systematic risk.

And this is borne out by experience—professional stock-pickers are getting schooled. You are either long FANG, or you aren’t. This has compelled a lot of people to say that active managers are stupid.

But do you think it’s more likely that:

a) a bunch of smart people became stupid, or
b) that the environment suddenly changed?

If you’re one of those smart people, do you completely abandon your process and just buy FANG?

Or do you stick with what has worked your entire career in the likelihood that it will one day work again?

This time is (probably) not different.

Bear Markets

A lot of bears get sweaty palms about the possibility of a bear market. Hey, you can’t have capitalism without downturns. You have to purge the speculative excesses. The longer you go without a purge, the bigger it is going to be.

As much as I think a bear market would be fun to trade, I do not wish it on anyone. Most people are no good at trading a bear market.

A wise man once told me that bear markets don’t just destroy the bulls’ capital… they don’t just destroy the bears’ capital… they destroy everyone’s capital.

I have been through this a couple of times. Even when I think I am perfectly positioned for it, I still seem to find a way to lose money.

Also, nowadays, we have no idea what kind of malignant political forces will be unleashed if we have a real, hard-landing recession…

Does it all get pinned on Trump? Probably.

Does it push the left further left? Probably.

Does it increase the chance of real instability in 2020? Yup.

And people underestimate the ferocity of bear markets, because they can’t see second and third-order effects. The stock market doesn’t go down 20% in a vacuum. We have no idea what is going to happen when stocks go down 20%. Nothing good, I imagine.

So you should not be wishing for a bear market. You should be wishing that this goes on forever.

I have been making bearish noises for a while, but I haven’t been willing to stake my reputation on it.

I am now willing to stake my reputation on it.

I think we’re very close to a downturn. I will be surprised if this doesn’t come to pass within 6-12 months. If it doesn’t, I suppose you can call me out, if you like doing that sort of thing.

One more comment: it will probably be the fastest downturn in history, owing to the degree of leverage and speculation. Proper preparation prevents poor performance.

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Meet Jared Dillian, former Wall Street trader, fearless contrarian, and maybe  the most original investment analyst and writer today. His weekly  newsletter, The 10th Man, will not just make you a better investor—it’s  also truly addictive. Get it free in your inbox every Thursday.

The Greatest Threat to Property and Due Process in America Today

The Greatest Threat to Property and Due Process in America Today

As long as you obey the law, the law should respect your liberty and property. Well, that’s what common sense would have you believe. In America today, this is not the case. Every year, law enforcement agencies take billions in cash and assets from citizens who haven’t been convicted of a crime.

This is possible because of the civil asset forfeiture law.

Forfeiture was started in the 1980s to assist law enforcement’s efforts in the “War on Drugs.” Since 1986, revenue realized from forfeiture by the Department of Justice (DOJ) has grown by 4,700%. In 2014 alone, the DOJ took in $4.5 billion. That’s not counting revenue from the states.

Unlike criminal forfeiture, civil forfeiture lets law enforcement seize property from citizens who have neither been charged nor convicted of a crime. Due to a lower standard of proof, 87% of forfeitures are now civil.

To understand this threat, let’s look at how it works.

Guilty Until Proven Innocent

To seize your property under civil forfeiture, law enforcement needs only probable cause that your property was somehow involved in illegal activity. Millions of dollars in cash and assets have been taken from citizens without arrest for even minor reasons.

Unlike criminal forfeiture, in civil forfeiture, the burden of proof is on the owner—not the government. In reality, this law carries the presumption of guilt until proven innocent. The law is stacked against owners, and most cases never go to court.

Civil forfeiture rests on the idea that the property itself, not the owner, has violated the law. As a result, when forfeiture cases go to court, they have strange titles like United States v. One Pearl Necklace.

As the accused is an item of property, not a person, the property owner has no right to legal counsel and becomes a third-party claimant. If the owner cannot afford the legal costs to plead their property is innocent, too bad. The plot thickens when we look at how the law is applied.

In Philadelphia, half of civil forfeitures were for less than $200. It’s a similar story in other states. This is a far-cry from the law’s basic intent of tackling wealthy criminals. As above, low forfeiture amounts and high legal costs means that 88% of cases don't go to court.

For cases of $20,000 or more, many people are forced to settle out of court due to high legal costs.

While the law itself is open to abuse, it gets worse when we track how the money is used.

Conflict of Interest

Use of civil forfeiture has been taken way beyond its power to seize assets. It also showers the very agencies that use it with financial perks.

Half of US states share up to 100% of forfeited assets with the local agencies who seize them. A 2015 report by the Washington Post found that 500 local departments and task forces got 20% or more of their annual budgets from civil forfeiture gains.

At the state level, revenues are up by 136% in the past few years. From 2001–2014, the DOJ and Treasury together took in $29 billion from civil forfeitures.

These perverse incentives are magnified by a program called equitable sharing. It allows States with tight forfeiture laws to bypass them by using federal seizure laws. The local agencies reward their federal friends with a share of the spoils.

Between 2000–2013, the DOJ paid local agencies $4.7 billion under the equitable sharing program. Twenty-five percent of these funds were used to pay salaries, with over 55% going toward “other” unnamed spending.

While state and local agencies can physically seize your property, federal agencies have far greater reach.

Flash-Freeze

Under the umbrella of civil forfeiture, the IRS has frozen the accounts of many small business owners.

From 2005–2012, the IRS seized $242 million from “structuring” violations. Bank deposits of $10,000 or more must be reported. If a person makes several deposits below that amount with the intent to avoid reporting, that is structuring.

Rather than review a case of suspected structuring, the IRS uses a “freeze first, ask later” policy. There have been several cases where the IRS seizes the bank account of a business without warning. This leaves the business unable to pay staff and suppliers.

Many businesses have valid, decades-long patterns of multiple deposits under $10,000. Yet, more than 100 multi-agency task forces now trawl through bank reports for signs of “suspicious activity.” In 2014 alone, banks filed more than 700,000 suspicious activity reports to comply with the Bank Secrecy Act.

Today, the IRS can freeze or seize a bank account if it finds what they deem “suspicious patterns.”

Civil forfeiture abuse is a growing risk to ordinary Americans, especially those with assets. The good news is there are steps you can take to protect your wealth against potential seizure.

How to Mitigate This Risk

These steps involve using legal structures like trusts and life insurance policies to shield your assets. If set up correctly, these instruments can also be used to legally minimize income and estate taxes.

Stephen McBride
Chief Analyst, RiskHedge

America’s Lawyers Want Your Money—Here’s What to Do

America’s Lawyers Want Your Money—Here’s What to Do

There are now over 1.2 million lawyers in America. That’s one practicing lawyer for every 266 people, and triple the number in the 1970s. The US is home to 70% of the world’s lawyers, and has three times as many per capita as the UK. An onerous consequence of hyper-minting law degrees is the litigious culture we have incubated.

Litigation costs account for 1.7% of US GDP—that’s 2.6 times higher than the EU average. A 2015 study by Clements & Co. found that 55% of US respondents said their firm was the target of at least five lawsuits in the previous 12 months. Most US companies spend between one and five million dollars on litigation per year, excluding settlements. In the majority of developed nations, that figure is $500,000 or less.

Another reason for the litigious culture is the use of contingency-fee lawyers. The practice is banned in Spain, France, Australia, and parts of Canada, but alive and well in the US. This acts as a huge motivation for excessive litigation, often leading to absurd lawsuits.

Crazy lawsuits, like these filed against Subway and Starbucks, can make for a head-shaking read and a good laugh. However, given the number of foolish legal claims that are thrown at small businesses, it’s not funny.

In 2008, the tort liability cost for small businesses totaled $105 billion, around 11% of their total revenue. Of this amount, one-third wasn’t covered by insurance and was paid out-of-pocket. So, why are lawyers honing in on small businesses?

Legal Extortion

Firms with annual revenue under one million dollars are hit with 57% of all lawsuits. Lawyers know that many of the cases are petty and will fail in court. They also know that many small businesses will be forced to settle due to high legal and opportunity costs.

The National Federation of Independent Business estimates that the average cost to fight a lawsuit is $100,000 (versus $5,000 to settle). An out-of-court deal can run to about 10% of the average small business owner’s earnings. Still, it is often an easier and cheaper option with less emotional stress and wasted time.

Lawyers use a legal loophole to game the system with silly lawsuits in the hope of reaping settlements. The loophole lets a claim be filed for up to 21 days and then withdrawn without any financial penalties to the lawyers. This is just another version of the “throwing mud at the wall to see what sticks” ploy.

While lawyers are tossing mud for fun, the impact on the victims is anything but.

This lawsuit against a small restaurant in Portland, Oregon is a good example. A woman filed a lawsuit for $100,000 against Enzo’s restaurant for “humiliation.” The case was settled for an undisclosed amount.

Perhaps the best example of the ruinous effects of empty claims hails from Washington, DC. In 2005, Roy Pearson, an administrative law judge, filed a $54 million claim against a dry cleaner for losing his pants. The owners, the Chungs, decided to fight the case. They won, but the damage was already done. The Chungs were forced to close two of their three stores due to the financial and emotional toll of the case.

Even where no fault is found, frivolous claims can ruin the livelihoods of those tangled in the mess. Not content with targeting small businesses, lawyers have also marked high net worth individuals (HNWIs) as easy prey.

Prime Targets

A survey by ACE Private Risk Services found that 82% of HNWIs that responded thought their wealth made them attractive targets for lawsuits.

Jeffrey O’Hara—a partner at Clyde & Co.—said, “If the defendant is wealthy, this increases the potential for being hit with a suit. A situation that otherwise might have been viewed as a ‘nuisance event’ by the victim is now seen as offering a potential windfall.”

Kevin Dunne, a partner at Sedgwick LLP, cited this case where a HNWI was singled out: Five male teens were horsing around when four of them got in a car and drove off. The last boy jumped on the car fender, fell off, and suffered a brain injury.

“Although all of them were essentially culpable for the accident, the plaintiff’s attorney only went after the rich father of one teenager.” The family’s insurance provided only $2 million in personal injury protection. Adds Mr. Dunne, “We settled for many millions of dollars more than the insurance they had.”

The survey also showed that HNWIs were aware of the threat but misjudged the litigation risks. Over half believed their liability was capped at about $5 million. Yet, the survey showed that recent personal injury settlements have been 3–10 times that amount.

The steep numbers are due to excessive punitive damages awarded in the US. Under Federal law, punitive damages must not exceed 10 times that of compensatory damages. However, in practice, they are often much higher. Punitive damages are non-existent in Europe; in Japan, the practice is banned.

Without a radical overhaul, the legal system looks ripe for ongoing abuse by lawyers. Here are some steps you can take to blunt the risk of frivolous lawsuits.