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The boom nobody cares about

The boom nobody cares about

The US housing market is BOOMING.

This past month the number of Americans looking to buy a new house spiked to a three-year high...

Mortgage applications jumped 40%...

And Quicken Loans, the US’s largest mortgage lender, had its best month in 30- ears.

“The phone is ringing off the hook” CEO Jay Farner said in a recent interview.

  • This won’t come as a surprise to regular RiskHedge readers...

In February I explained why buying homebuilder stocks was a near lock to make you money in 2019. Specifically, I recommended buying homebuilder NVR Inc. (NVR).

If you bought NVR in February, nice call. You’re sitting on a 30% gain. Meanwhile the S&P 500 has barely budged, gaining 5%.

If you didn’t buy NVR yet, it’s not too late. This boom has lots of room to run... and my research shows NVR should continue to climb a lot higher.

Longtime readers will remember my housing call wasn’t popular. US housing, as we all know, crashed in 2008 and almost wrecked the global financial system. Many people lost hundreds of thousands of dollars. Some lost their jobs, their houses, their businesses.

The housing crash was perhaps the most financially disruptive event of the century. It caused a whole generation of folks to swear off housing as an investment.

I understand why no one wants to hear about housing. But you should want to hear about housing, because the evidence is overwhelming—it can make you money right now!  

As a refresher, 2018 was a terrible year for housing. Mortgage rates rose significantly for the first time in five years, which made it more expensive to buy a home. Home sales plunged. Lots of analysts warned of another 2008-style real estate meltdown.

This all led to the slaughter of US homebuilding stocks. 2018 was their worst year since the 2008 financial crisis! The US Home Construction ETF (ITB) plunged 32%, as you can see here:

  • But most everyone failed to realize one thing...

Housing affordability is a primary driver of home prices. And housing is still very affordable for most Americans.   

The National Association of Realtors affordability index takes three key metrics—home prices, mortgage rates, and wages—and boils them down into a single number.

This number tells us if average folks can afford a home. When affordability drops too low, the average American simply can't afford to buy. That often forewarns a housing bust.

Here’s the index going back to 1992:

You can see affordability is well above the 30-year average, as shown by the red line.

This is key because every housing bust in the past 50 years happened when affordability was below 120. We’re nowhere near that level today... which tells us the risk of a “bust” is virtually zero.

  • There’s a big, silly myth going around about housing...

Have you heard this “fact?”

Today’s generation of young adults, known as “millennials,” don’t want to own houses like their parents did. Instead they’ll rent for life. This lack of young buyers, the story goes, will put a cap on house prices.

This is nonsense. The data shows it isn’t just false… the total opposite is happening.

Census Bureau figures show the number of households in America just hit an all-time high at 122 million.

At the same time, the number of Americans who own their own home has jumped in the past three years. That’s significant as the rate had been plunging for over a decade.

As for the number of folks renting rather than owning a house, the number has plunged for three years in a row.

In other words, folks are buying houses faster than any time in the past 30 years.

Millennials are waiting longer than their parents to have kids. But once they have kids, they’re buying houses... just like every generation of middle-class Americans before them did.

Pew Research data shows the average age of a first-time home buyer is 31. This year the average millennial will turn... 31!

  • The outlook for housing gets even better...

There’s a shortage of homes in America.

After the 2008 housing bust, tens of millions of vacant homes were for sale. That’s no longer the case. It would take only six months to sell every existing home on the market today, as you can see here:

The seeds of this shortage were sown in 2008. In the boom leading up to the bust, US homebuilders built record numbers of houses. Four million new houses went up in 2004 and 2005 alone—more than any other two year period in US history!

As you know, the market turned south in 2006, demand collapsed, and US homebuilders lost their shirts. America’s largest homebuilder, D.R. Horton (DHI), tanked 86%.

The housing bust seared one thing into homebuilder’s minds: don’t overbuild EVER again.

So for the past decade they’ve been conservative. Census Bureau data shows an average of 1.5 million homes were built each year since 1959. Yet since 2009 just 900,000 homes have been built per year.

  • Now is a great time to buy NVR...

As I’ve explained, NVR is unlike any other US homebuilder. In short, most homebuilders buy raw land then build houses on it. NVR never buys raw land. It only buys developed land, which removes a lot of risk. This unique approach helps it avoid the riskiest part of the housing business.

When I recommended NVR back in February, it was trading at just 13-times earnings—its cheapest level since 2009. Because the stock has jumped 30% since, it’s no longer a “steal.” But it’s still a great buy, and it’s still dirt cheap.

NVR achieved excellent profit growth of 40% last year, and its stock has been on a tear since the start of the year, as you can see here.

Do you own any homebuilders—or other housing stocks? Tell me at stephen@riskhedge.com.

Stephen McBride
Editor – Disruption Investor

Stephen McBride is editor of the popular investment advisory Disruption Investor. Stephen and his team hunt for disruptive stocks that are changing the world and making investors wealthy in the process. Go here to discover Stephen's top "disruptor" stock pick and to try a risk-free subscription.

Reader Mailbag

Disruption Investor subscriber Terry asks about disruptor stock Alteryx (AYX):

“Stephen,

I have been following your newsletter for some time. Based on your recommendation I bought Alteryx and am currently up over 50%.

Is this still a good disruption investment? Are you likely to revisit AYX in the future?”

Terry, happy to hear we made some money together. Alteryx has skyrocketed in the past couple of months. The stock is up over 90% since I wrote about it back in December. Funny story: I wrote that letter in the maternity hospital just before my daughter was born...

Because the stock has shot up so fast, I wouldn’t be surprised to see it pull back 15–20% from here. Having said that, it remains a great long-term buy. Revenue jumped 51% from last year, and there’s no reason to think growth will slow anytime soon.

Why I’m buying Google on the government crackdown

Why I’m buying Google on the government crackdown

Imagine how much money you’d make if half of all people on the planet were your customers...

There are about 7.5 billion people on earth.

On an average day, 3.8 billion internet searches are performed.

92% of those searches—or 3.5 billion—flow through Google (GOOG).

That’s the equivalent of more than half the adult human population passing through Google’s website... every single day!

No other company commands that level of attention.

Not today, not ever.

Thirty times more people stop by Google.com every day than watched the 2019 Super Bowl.

And 1.9 billion people visit YouTube.com every month, which Google owns.

YouTube.com is the second most viewed website on earth.

Number one is Google.com.

Through its domination of online search, Google has grown rich and powerful. It’s the 4th largest company in the world… and has handed investors 1,900% gains since its IPO.

  • Some important people think Google has grown TOO powerful...

As you might have heard, the US Government recently announced it will launch an investigation into “big tech.”

In short, the government is looking into whether Amazon (AMZN), Google, and Facebook (FB) are too powerful and should be broken up.

These are the 3rd … 4th … and 6th largest companies on earth. Combined, they are worth over $2 trillion. They’ve produced gains of 470%, 175%, and 95% over the past five years.

All three stocks tanked when news of the potential government crackdown hit. In recent weeks Google has dropped 20%, Amazon 15%, and Facebook 18%. 

Even if you don’t own these stocks, you should care where they’re headed. Because where they go, the market is likely to follow.

Google, Amazon, and Facebook are colossal companies. Together they make up almost 10% of the S&P 500.

The S&P 500 tracks 500 of America’s biggest public companies. These three tech giants are worth as much as the smallest 193 companies in the S&P!

A smaller stock like Campbell Soup (CPB) could triple—and it wouldn’t move the needle as much as if Amazon rises just 1%.

  • What I’m about to say might surprise you…

But investors are worrying for nothing.

There is little chance the government will break up big American tech firms.

In fact, the total opposite is about to happen.

Washington and big tech are set to become best friends.

I know... this is the total opposite of what you hear on CNBC, CNN, or Fox News.

Let me explain why they’re wrong.

  • It all comes down to the US-China “Trade War.”

“Trade War” is an inaccurate way to describe it. What’s really happening is a “Tech War.”

Last week we discussed how the US government cut off the supply of microchips to Chinese phone maker ZTE, forcing it to shut down.

And if you’ve been reading RiskHedge, you know about the US Government’s blacklisting of Huawei.

Huawei, a giant Chinese tech company, is the world leader in 5G—the new superfast cell-network our phones and computers will soon run on.

President Trump says “The race to 5G is a race America must win.”

In 2018, Singapore-based chipmaker Broadcom (AVGO) tried to acquire American 5G leader Quallcomm (QCOM).

The US government shut the deal down, fearing it would help China gain the “know-how” to make Qualcomm’s cutting-edge 5G chips.

  • The White House sees China’s technological rise as a great threat to America…

President Trump recently invited big tech CEOs to the White House to talk “bold ideas for how we can ensure American dominancein industries of the future.

The meeting centered on how these firms and the government can work together to achieve American dominance in tech. They focused on disruptive areas like artificial Intelligence (AI)… 5G… and advanced manufacturing.

Does that sound like the government wants to break up big tech?

Not long ago, Facebook CEO Zuckerberg stood in front of Congress and warned that breaking up America’s big tech companies would help China.

He’s right. Google, for example, is the undisputed world leader in self-driving cars. It achieved this by investing billions of dollars into developing self-driving tech since 2009.

As regular RiskHedge readers know, this money came from the huge profits generated by Google’s core search and advertising businesses. It has consistently plowed a big chunk of those profits into developing breakthrough technologies. Google is also a world-leader in the crucial areas of artificial intelligence and quantum computing.

In short, Google is America’s greatest tech “incubator.” Breaking it up would ruin that.

  • The US government has a history of breaking up firms it deems “too big”...

It broke up Standard Oil in 1911... AT&T in 1982... and went after Microsoft in the 1990s.

But there’s too much at stake here. MIT forecasts self-driving cars alone are set to unleash $7 trillion in new wealth in the next decade.

Imagine if a Chinese company claims the lion’s share of that?

It would help China surpass the US as the world’s largest economy—a title America has held since 1871.

No matter what you think of President Trump, we can all agree he doesn’t want China closing in on the US while he’s President. He’ll do everything he can to make sure that doesn’t happen.

Which means we should expect more cooperation between Washington and big tech.

  • Okay Stephen, how does this make us money?

As I mentioned, big tech stocks have plunged on worries the US government will break them up.

Big tech will probably get a slap on the wrist. And they’ll have to pay some big fines.

But these companies won’t be broken up as long as we’re in a tech race with China.

After its recent 20% drop, Google (GOOG) is selling at its cheapest valuation since late 2016.

I’ve suggested buying Google several times in this letter. If you’ve been waiting to buy in at lower prices, now’s your chance.

You’ll likely have to wait out some choppiness in the stock price as this “break up big tech” story passes.

But I’m confident that’s all it is—a story.

The US government and big tech need each other.

Do you own any Chinese tech stocks? Tell me at stephen@riskhedge.com.

Stephen McBride
Editor – Disruption Investor

Stephen McBride is editor of the popular investment advisory Disruption Investor. Stephen and his team hunt for disruptive stocks that are changing the world and making investors wealthy in the process. Go here to discover Stephen's top "disruptor" stock pick and to try a risk-free subscription.

Reader Mailbag

RiskHedge Reader Bob L. asks:

Where is the economy going? It’s been a long time since we had a recession and usually during a recession, most stocks drop—even strong ones. How does this fit into your disruption investing strategy?

Thanks for your question, Bob. You can find my full take on preparing for recessions and crashes here. In general, many investors spend too much time worrying over when the next recession or crash will hit, which can blind them to big opportunities to make money now.

Don’t get me wrong—you must have a plan in place for these situations. You should separate your stocks into two groups: ones you’ll hold no matter what, and “fair weather” stocks you plan to sell when markets get stormy. Then you’ll need to follow through on the plan.

If you feel nervous or unsure you’ve prepared correctly, check out my friend Robert Ross’ research. He specializes in safe income, and he’s one of the smartest guys I know at picking stocks that thrive in good and bad times. Robert is holding a safe-income summit that you’re welcome to attend for free. If you’re interested, go here to reserve your spot.

Will America play its trump card in the trade war?

Will America play its trump card in the trade war?

What do an iPhone and Nike sneakers have in common?

Both are made by iconic American companies...

But both are made in China.

American goods used to be made in the good old US of A…

Then cheap labor transformed China into the “world’s factory.”

Today we get 80% of our air-conditioners… 70% of TVs… and 60% of shoes from China.

But there’s one disruptive area that America still dominates…

One that could produce huge stock market profits... OR huge losses... depending on how America’s trade war with China shakes out.

  • Computer chip manufacturing is one of the last great “made in the USA” industries.

As regular RiskHedge readers know, computer chips serve as the “brains” of electronics like your phone and laptop.

These days, chips are no longer just in computers and phones. They’re part of everyday life.

Not long ago there was only a handful of chips inside the average car. Remember when you had to crank a knob by hand to roll your car window up?

Thanks to computer chips, that’s all changed. There are 1,500 computer chips packed into a Tesla Model 3 electric car, according to investment bank UBS.

  • Total spending on chips has surged 15x over the past decade...

American companies control over half of this colossal $469 billion market.

Companies like Intel (INTC)… Qualcomm (QCOM)… and Nvidia (NVDA) dominate in computer chips.

As the use of computer chips has exploded, so too have their revenues.

Since 2009 Intel’s revenue has more than doubled. While Nvidia’s has surged 240%... and Qualcomm’s has jumped 120%.

According to the Semiconductor Industry Association (SIA), computer chips are the US’ third largest export.

No country has been able to challenge America’s superiority in computer chips. The reason is their complexity. Computer chips are one of the most complicated and costly things on earth to develop.

It took American companies decades and hundreds of billions of dollars to master chipmaking. It will likely take another decade, at least, for any other company to catch up.

  • Despite their stranglehold on the market, US chipmakers have a big vulnerability…

According to SIA, they get over 80% of their revenues from other countries.

Worse, more than half comes from China.

China is by far the world’s largest buyer of computer chips. According to “Big 4” accounting firm PWC, it bought almost 60% of all the computer chips America produced last year!

China spent $260 billion on computer chips in 2018. It now spends more on buying chips than it does on oil... which is astounding when you consider it’s also the world’s #1 buyer of oil.

It’s scary how reliant many American chipmakers are on China...

Radio-frequency firm Skyworks Solutions (SWKS) gets 84% of its revenues from China

Chinese companies account for close to two-thirds of 5G leader Qualcomm’s sales.

And graphics chip leader Nvidia (NVDA) gets 44% of its sales from China.

Doing business in China has been great for these companies. It’s been a main source of their tremendous sales growth over the past decade.

But with the “trade war” between the US and China getting worse, worried investors are dumping their stocks, as you can see here:

  • But... this is a MUCH bigger problem for China than for the US.

In short, China’s largest and most important companies have a hopeless dependency on US chips.

As I mentioned last week, smartphone giant Huawei spent $20 billion on US chips alone last year. Almost every phone it makes runs on American chips.

China needs US chips, and the US Government knows it. That’s why Trump is using it to twist China’s arm in trade tasks...

Last summer, the US ordered a ban on chip sales to phone maker ZTE (ZTCOY).

Without access to US chips, ZTE had to shut down production.

When I say “shut down,” I mean literally. Its factories had to stop making phones.

ZTE, which employs over 75,000 people, was dead in the water without US chips.

Its stock plunged 55% in weeks. ZTE was on the verge of going out of business until the White House lifted the ban a couple weeks later.

As you might know, China has its own versions of many big American companies.

Baidu (BIDU) is China’s Google. Alibaba (BABA) is China’s Amazon. China Mobile (CHL) is China’s AT&T.

All three are massive buyers of US chips. The US Government knows it can suffocate them by cutting off supply. Look at how their stocks have crashed lately as trade talks have fallen apart.

  • Chip stocks will continue to fluctuate wildly as long as the trade war drags on.

When a US-China trade deal looked to be headed in the right direction late last year, the US chip ETF (SOXX) shot up 48%.

But since talks fell apart in late April, it’s plunged more than 15%.

With such a huge chunk of their businesses linked to China, little will change until a deal gets signed.

Until then, I’m being cautious with American chip stocks and avoiding the Chinese companies dependent on them altogether.

Why invest in a company that could be crippled at a whim of a politician?

On the other hand... there’s hope this may help the US and China arrive at an agreement sooner than later.

China NEEDS American computer chips. There’s no way around it. The optimistic take is that it has little choice but to “play ball” with America to get trade flowing more freely again.

That’s all for this week.

Are you worried about the recent selloff in the markets? Tell me at stephen@riskhedge.com.

Stephen McBride
Editor – Disruption Investor

Stephen McBride is editor of the popular investment advisory Disruption Investor. Stephen and his team hunt for disruptive stocks that are changing the world and making investors wealthy in the process. Go here to discover Stephen's top "disruptor" stock pick and to try a risk-free subscription.

Reader Mailbag

Disruption Investor subscriber C.W. has a question about plant-based meat company Beyond Meat (BYND). Its stock has shot up 320% since its IPO on May 2.

Stephen, is it too late to get onto the "Impossible Burger" bandwagon? I believe there will be a big shift away from eating animals.

C.W, thanks for your question and for being a Disruption Investor subscriber.

As I mentioned, Beyond Meat’s stock has been on fire. I haven’t done much work on it, but it’s easily one of the most expensive stocks I’ve ever seen.

Right now, it trades for an outrageous 55-times sales. For perspective, Amazon (AMZN), a stock that many consider “overvalued,” sells for 3.7-times sales.

Keep in mind, the food business is notoriously unprofitable. Profit margins are typically in the low single-digits. So it’s unlikely the company will be raking in cash anytime soon.

It’s hard to justify buying any stock for 55-times sales, let alone one that’s in a bad business.

Most importantly, you should know I’m a carnivore. I’ll stick with my real ground beef patty for now!

Two big updates on the 5G rollout in America

Two big updates on the 5G rollout in America

It’s always great to talk with RiskHedge readers face-to-face…

I met a handful of you at the Strategic Investment Conference in Dallas a couple weeks ago.

Although RiskHedge readers tend to be serious investors, most don’t invest for a living.

I met an airplane pilot… a doctor… an aerospace engineer.

And almost everyone asked me the same question:

“What’s going on with 5G?”

Today, I’ll tell you about two big new developments in 5G—and what they mean for your investments.

For a refresher on why 5G is a huge moneymaking opportunity, see here and here.

In short, 5G will supercharge America’s wireless networks. It will give us internet speeds 1,000x faster than today’s.

This will open up a whole new world of disruption.

Think of 5G as a “tool” that will enable tomorrow’s disruptive businesses.

For example, how many of the following do you use?

  • Music streaming services like Spotify
  • YouTube’s video streaming
  • Ride-hailing from Uber
  • Amazon’s online store

The last wireless upgrade—4G—is the driving force behind them all.

4G arrived in the early 2010s and brought us much faster speeds. With that came the ability to do things like watch movies, stream music, or shop from anywhere on your phone.

4G allowed disruptors like Google (GOOG), Amazon (AMZN), and Netflix (NFLX) to flourish. From 2010 to today, their stocks grew 325%, 1,350%, and 3,825%.

5G will be MUCH bigger than 4G.

4G was an upgrade. 5G is a total overhaul. It’s going to enable transformative disruptions like self-driving cars and remote surgery.

  • Quietly, 5G is driving one of the biggest disruptions of 2019...

As you may have heard, the US Government recently banned Chinese telecom giant Huawei from doing business in the US.

I warned you back in February this was likely to happen.

My prediction ruffled some feathers. Huawei reps even contacted me to insist I was wrong!

Huawei is the world’s second-largest phone maker, behind only Samsung. It stands accused of placing secret “backdoors” in its equipment. If true, these backdoors allow the Chinese government to spy on Americans who use Huawei’s gear.

Huawei is a private company. It has no publicly-traded stock. But its ban rocked markets all the same...

You see, Huawei buys a ton of parts from American companies. It bought $20 billion worth of computer chips from US companies last year, according to investment bank Evercore.

US chipmaker Qorvo (QRVO) gets 13% of its revenue from Huawei...

Radio-frequency firm Skyworks Solutions (SWKS) counts Huawei as its third-largest customer...

And facial recognition company Lumentum (LITE) gets almost 20% of its sales from Huawei.

As you can see in this chart, all three stocks tanked on the news.

  • While the Huawei ban is terrible for companies that sell to it, it’s GREAT for companies that compete with it in 5G...

Huawei is the world’s largest maker of 5G infrastructure.

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

But with Huawei all but banned from the Western world, those contracts have been torn up.

As explained awhile back, only two other companies can step up to fill the void:

Nokia (NOK) and Ericsson (ERIC).

You can see in this chart that both stocks jumped when Huawei’s ban was confirmed... and they’ve continued to march higher.

For reasons I explain in my premium service Disruption Investor, buying Ericsson stock is the best way to play this.

  • On another note... how much do you pay for cell phone service?

The average American pays over $80/month to their cell carrier, according to research from Doxo.

If you live in America, I can almost guarantee you use one of four carriers: AT&T (T)… Verizon (VZ)… T-Mobile (TMUS)… or Sprint (S).

These four have the US cell market on lockdown. They own 98% of the $260 billion/year market.

The US government has always been leery of letting phone companies grow too powerful. If too much power concentrates with too few companies, they can take advantage of customers.

When the old AT&T got too big back in the 70s, the government broke it up into seven smaller companies.

The government has also blocked several phone company mergers. In 2011, it shot down AT&T’s attempt to buy T-Mobile.

  • So, many investors were caught off guard when the US government all but approved a merger between Sprint and T-Mobile...

Sprint and T-Mobile are America’s third- and fourth-largest cell companies.

Together, they’ll form a new “supercarrier” with 136 million customers—making it a close third to Verizon with its 155 million customers.

The stocks of all four US cell companies jumped higher on the news. Sprint shot up 25% in a single day.

With this merger, three companies will effectively control the whole US cell market.

Why would the US government allow this?

It all comes back to 5G...

The US government, and the Trump administration in particular, have been adamant that the US be first in 5G. In April Trump said: “The race to 5G is a race America must win.

A 2019, GSM Association report estimates US cell companies will have to spend $100 billion over the next two years to get America 5G ready.

In short, T-Mobile and Sprint didn’t have the cash to build their own 5G networks. So they’re joining forces to build one giant network.

According to one estimate, the merger will boost the number of 5G markets Sprint and T-Mobile can serve by 8x.

  • Think of 5G like gravity…

As we all learned back in school, gravity is an invisible force that pulls objects toward each other.

The earth’s gravity keeps your feet planted on the ground… and makes apples fall from trees.

Like gravity, 5G is a hidden force affecting everything right now.

It’s a key reason why the US government blacklisted Huawei…

It’s why the government made the unusual move to greenlight the Sprint / T-Mobile merger.

And keep in mind, the 5G buildout is still only in first gear. 5G will cause massive disruption as it comes online in the next couple years.

Do you know anyone who has a 5G connection or a new 5G phone yet? Tell me at Stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Scott asks how disruptor stocks will perform when the economy hits the rocks:

Stephen, thanks for sharing your thoughts and observations on the market, especially with disruptors.

How do you see disruptors like Disney (DIS) and Qualcomm (QCOM) doing in the next recession?

Thanks for taking my question, Scott.

Scott, thanks for your kind comment and question.

In short, there is no way to know how individual stocks will perform in the short term if the economy tanks.

You see, when the economy tanks, people get scared. When people get scared, they’re prone to making bad decisions. One bad decision investors make over and over again is indiscriminately selling stocks when they get spooked. This can temporarily suppress the stock prices of both good and bad businesses.

We have no control over how emotional investors will react when markets get choppy. But we do have control over the quality of businesses we buy. We want to own disruptive stocks whose businesses keep humming along no matter what. As I explained here, true disruptors keep increasing sales and profits no matter what’s happening in the markets.

Invest in these disruptors, and you need not worry about short-term swings in stock prices.

The end of the bank

The end of the bank

Notorious stickup man Willy Sutton was once asked: “why rob banks?”

“Because that’s where the money is...” he said.

For pretty much all of America’s history, banks have held a monopoly on all things money.

Need a place to deposit your weekly paycheck?

Better get a bank account.

Want to borrow money?

Go talk to a banker.

Want to pay a bill... write a check... wire money... or get a credit card?

Banks are happy to help. For a fee of course.

  • Thanks to their privileged monopoly position, well-run banks have grown very, very rich...

JPMorgan (JPM), America’s largest bank, has grown profits by 2,000%+ in the last 30 years.

Bank of America (BAC), the second-largest American bank, has seen its profits surge 4,700%.

JP Morgan and Bank of America are the 10th and 13th biggest public companies not just in the US, but on earth.

And as we all know, bankers enjoy some of the biggest salaries around. In 2017 the top five US bank CEOs earned a combined $100 million.

  • But quietly, for the first time ever, banks’ grip on money is slipping away...

Did you know that since 2008, 15,000 bank branches have shut their doors?

By now most Americans know how Amazon (AMZN) has changed shopping forever...

By selling stuff online for cheap, it shut down whole shopping malls and put big stores like Toys R’ Us, Radio Shack, and The Bon Ton out of business.

But what many investors don’t know is a similar revolution is happening in banking.

In many ways, banking is following the same script as retail... only 10 years later.

  • I haven’t stepped foot in a bank in years...

To deposit a check, I snap a picture of it with my phone. The money lands in my account within seconds.

Foot traffic into branches has fallen close to 50% in the past decade. It’s expected to fall another third in the next five years, according to financial research firm CACI.

Just like Amazon disrupted tired old retailers, hungry competitors are picking off businesses that banks used to dominate.

Take money lending for example—a business banks had owned for centuries.

Last year more than half of all mortgages were issued by “non-bank” lenders. That’s up from just 9% in 2009.

In fact, six of the top ten mortgage lenders in the US today are non-banks.

Quicken Loans is both America’s largest mortgage lender and the fastest growing firm in the industry. 

Quicken does not operate branches. Instead it evaluates borrowers using online applications. And it connects with its customers online and by phone.

Quicken is owned by Intuit (INTU)—a powerhouse “autopilot stock” I’ve liked for a long time. Its stock chart is a thing of beauty:

  • The “wealth management” business is slipping away from big banks too...

Swiss bank UBS (UBS) and Wall Street’s Morgan Stanley (MS) are the two largest wealth managers in the world.

They both get roughly half their revenue from managing clients’ money.

But online “robo-advisors” are invading this lucrative business.

Robo-advisors are online platforms that give you automated, computer-driven financial planning services.

They’re typically far cheaper than getting financial advice from a bank.

A robo-advisor might charge 0.25%–0.5% of your assets annually. Wealth manager fees typically start at 1–1.5% of your assets and can go as high as 3%.

Vanguard set up its robo-advisor service in 2018. US investors have already entrusted it with $130 billion. And it’s growing by 10–15% per year.

Vanguard operates completely online. It avoids all the costs and hassle of running physical branches. This allows it to offer the same services as a bank, but for far cheaper.

  • A bank’s physical presence used to be a great asset...

It was how they attracted new customers. Remember when you used to get a free toaster for opening a savings account? Once folks walked in the door, banks could “upsell” expensive banking services.

These days, maintaining marble floors and fancy lobbies is mostly just a waste of money.

Sure, very high net worth individuals may still care about these things. But most Americans just want a fast and convenient way to manage their money.

According to a 2014 Wall Street Journal study, it costs a bank roughly $4 every time you make a transaction in one of its branches.

But the average online transaction costs the bank just 17 cents!

In other words, costs drop 95% when you bank on the internet.

The average bank branch in the US costs roughly $2–4 million to set up. It costs another $200,000–400,000/year to operate, according Mercator Advisory Group.

US bank Wells Fargo (WFC) operates roughly 8,000 branches in America. It costs between $1.6–3.2 billion/year to keep them up and running!

  • The five largest publicly-traded US banks are worth $1.1 TRILLION in market capitalization.

Disruption in banking is still in the early innings. The average guy has no clue this is happening. That’ll change as big name banks that can’t adapt start to die off.

And keep in mind, the $1.1 trillion in wealth won’t vanish. Instead it will change hands. Hundreds of billions will be up for grabs as disruptor stocks shake up banking, just like they did to shopping.

This is a huge moneymaking trend we’ll be covering for a long, long time.

If you’re interested in investing in this trend alongside me, check out a Founder’s subscription to my new research advisory, Disruption Investor. One of my top buys is a big disruptor that in many ways is becoming the “Amazon of Banking.”

Fair warning: tonight is your last chance to claim your Founder’s deal. It gets you in for just $49, instead of the $199 that non-Founders will pay.

The doors shut in just a few hours, so you’ll have to act now if you’re interested. Go here to lock in your Founder’s spot.

Have a great holiday weekend!

Stephen McBride
Editor, Disruption Investor

Reader Mailbag

“Well, you did it again—this time on Uber!

Callin' em as ya see 'em.

It has come to a point where I enjoy your writing. I can’t remember the last time I told someone that. Maybe the early years in 2000 when I was making a killing on oil and gold! You've called it right so many times lately, I can’t remember when you were wrong.

Keep callin' em, I’ll keep readin'. Maybe I’ll make some more money or just not lose money! Can’t sit at the table and play without preserving capital!”
       —RiskHedge reader, Michael S.

Michael, thanks for the nice note. As you alluded to, Uber (UBER) had an unpleasant IPO, dropping as much as 20% in its first two days. It’s clawed back some losses, but for reasons I explained here, I’ll want no part in owning Uber stock.

Why is RiskHedge changing?

Why is RiskHedge changing?

Hello from downtown Dallas, Texas.

My team and I are on the road all week at a gathering of investment professionals. We’ve spent the past couple days chatting with insiders and taking notes. So today we’re doing something a little different...

Instead of the usual weekly essay, below you’ll find an interview between me and RiskHedge Editor-in-Chief Dan Steinhart. In it, we give you a “behind the scenes” look at an exciting change taking place at RiskHedge, and what it means for you.

Talk to you soon,

Stephen McBride
Chief Analyst, RiskHedge

*  *  *  *  *  *  *  *  *  *

Dan Steinhart: Stephen, most readers won’t know this, but we’re coming up on the one-year anniversary of your first RiskHedge Report issue.

Stephen McBride: Yes, I actually wrote it from a coffee shop in Vermont last June. When I hit the send button I had no idea what to expect. A couple people read it and we got two notes of feedback. And one of them was from my mom [laughs].

DS: But folks passed the letter around and readership grew pretty quickly. Over 30,000 investors now read you every week. Why do you think it’s grown so fast?

SM: One thing I like about disruption is most smart investors just “get” the importance of it. They see the world changing faster than ever, and they know the old ways of investing no longer cut it. Not when S&P 500 stocks are dropping like flies, and smaller disruptive companies are rising to replace them, in some cases practically overnight.

DS: You’re saying disruption touches everything.

SM: It touches everything in the markets, yes. Disruption isn’t a niche like energy stocks or corporate bonds. If you aren’t interested in those things, you can choose to ignore them and still earn strong investment returns elsewhere.

But these days, you can’t ignore disruption and expect to do well investing. If you fail to understand the disruptive changes taking place, you’ll be left behind. You’ll end up owning stocks that might seem “safe” to the average guy... but that are actually in great danger of losing 50% of their value or more. And you’ll miss out on great opportunities to earn big, safe profits. Bigger than ordinary stocks can bring you.

DS: You’ve met and talked to a lot of readers. Is there a “typical” RiskHedge reader?

SM: Not really. I just met a reader here in Dallas who is an airplane pilot. But our readers come from all walks of life—doctors, teachers, lawyers, entrepreneurs, CEOs, investment professionals, accountants, retired folks.

If there’s a common thread, it’s that RiskHedge readers are planners. If you’re reading this letter, you’re likely a financially responsible person. You likely spend a good deal of time thinking about your family’s financial future. You’re not the type of person who would leave something so important up to chance.

DS: So you mentioned RiskHedge has really taken off...

SM: Yes, it’s been great. And we’re at the point now where readers are asking me for more and more. Much more than I can provide in a once-a-week, free letter.

RiskHedge reader Peter recently wrote me:

“Stephen, I read your article on Xilinx from December 2018. Very clear and well written. The stock has now reached the initial $130 target. Are you going to update your article soon?”

As readers may remember, I recommended 5G chip maker Xilinx (XLNX) back in December. The stock is up 35% since then. But as Peter said, we haven’t had a chance to revisit Xilinx. Should you take profits, or keep riding it higher?

Frankly, it felt wrong to dedicate a whole second issue to Xilinx when there are so many other important disruptive trends readers need to know about.

DS: As we talk, I’m scrolling through dozens of notes from subscribers asking you to create a portfolio of disruptive stocks. They want clear buy instructions and clear sell instructions, so they know when to lock in profits. They want ongoing guidance.

SM: That’s exactly why I’ve created Disruption Investor.

DS: For folks who don’t know, Disruption Investor is your new premium investing service. Tell us about it.

SM: In Disruption Investor I hunt for stocks that are changing the world. Ones that, according to my research, are primed to hand us big profits as they disrupt whole industries.

DS: We should be clear that you’ll focus on safe, larger disruptive stocks—not small startups.

Right. I won’t be recommending tiny “early-stage disruptor” stocks. That’s my colleague Chris Wood’s expertise. My Disruption Investor team and I hunt for established, safe disruptors.

DS: Give us some examples.

SM: Subscribers can expect the kinds of disruptor stocks I’ve been writing about in the RiskHedge Report. In the last couple months, we’ve collected 115% profits on advertising disruptor The Trade Desk (TTD)... 30% on TV disruptor Disney (DIS)... 83% profits in data disruptor Alteryx...  and 30% in 5G disruptor Qualcomm (QCOM), to name a few.

And keep in mind, that’s with the limited resources of a free, once-a-week letter. Which, as I’m sure readers realize, only allows us to go so “deep.”

DS: Now’s a good time to address what many readers are probably thinking. Your weekly RiskHedge Report has been free, and many people don’t like when something goes from free to not free...

SM: You and I have spent hours talking about how to best address this. I think we came up with something that should make everyone happy.

We’ve decided to give current RiskHedge readers a very special opportunity to claim a “Founder’s Subscription” to Disruption Investor. What this means is they’ll pay just $49 for a whole year—far less than the $199 others will pay.

Our goal with this Founder’s arrangement is to offer a deal that’s so attractive it’s a no-brainer. Given that a Founder’s subscription will cost less than 15 cents a day, I think we achieved that.

Also, I want to be clear that my weekly RiskHedge Report will remain free. I’ll continue to send it to readers every Thursday afternoon.

The big change is Disruption Investor will now be home for all my stock recommendations.

DS: Can you talk about your first Disruption Investor stock recommendation?

SM: Readers should go here to get the full details, but here’s the gist. As you know I’m no fan of Netflix (NFLX) stock. I warned about its problems before it crashed 42% last year. It’s since bounced back, but I still wouldn’t touch it.

My first Disruption Investor recommendation is a little-known company that has Netflix by the throat. Its profits are surging, and it’s rapidly stealing market share from a much, much bigger rival. My research shows its set to hand us big gains of 200%, 300% or more over time.

DS: Readers can review your case for this stock—which you’re calling Netflix’s Worst Nightmare—right here. Anything else they should know?

SM: Just that I really appreciate all the support over the past year, and I’m excited to take this next step. Also, we’re only ever offering Founder’s Subscriptions this one time, and the window to claim one won’t be open long. So anyone who’s interested should go here now to review all the details.

The dumbest thing you can do with your money in 2019

The dumbest thing you can do with your money in 2019

When was the last time you took a cab?

I mean a real yellow taxicab, with a light on the roof and a fare meter running.

I don’t even own a car, and I haven’t climbed into a cab in years.

That’s not because I never go anywhere. I travel all the time for research.

Instead of taking cabs, I “Uber” everywhere.

  • You surely know all about Uber by now... 

Its technology allows anyone with a smartphone to drive their own personal vehicle like a taxi.

900,000 people drive for Uber today. Passengers took five billion Uber rides last year. 

Uber isn’t in the business of owning cars. It doesn’t employ drivers. Instead its “app” connects drivers with people who want a ride.

Uber sets the price of the ride and facilitates the transaction. The driver keeps most of the fare, and Uber takes a 20% cut on average.

“Ubering” is so popular it has become a verb. For now the company is private and doesn’t trade on the stock market. But don’t confuse private with small. Recent estimates value Uber at up to $100 billion.

That puts Uber among America’s largest companies. It’s bigger than coffee giant Starbucks (SBUX) and America’s #1 defense contractor Lockheed Martin (LMT)!

  • Uber’s upcoming IPO is set to be the most hyped financial event of 2019...

After years of anticipation, Uber has filed documents to go public. No date has been set, but the IPO is expected in the next few weeks. It will trade under the ticker UBER.

Uber’s IPO is set to be a COLOSSAL event. It’ll be one of the biggest IPOs since Facebook (FB) went public in 2012. Soon you will be hearing about this everywhere. There’s a good chance they’re talking about Uber on CNBC right now.

An IPO, as you may know, is when a company first sells shares in the public markets. It marks the first time individual investors can buy the stock.

IPOs carry a special allure. Investors dream of “getting in on the ground floor” and riding the stock to 20x–30x profits.

As a RiskHedge reader, you know collecting profits of 20x or better is possible if you identify disruptive stocks early on.

Uber is certainly disruptive. But as I’ll show you, it’s a HORRIBLE investment.

  • Uber burns more cash than any company I’ve ever seen.

It is dangerously unprofitable.

Its IPO documents show it lost $1 billion on $3 billion in sales in just the past three months.                                                    

Now some might say: "Stephen, it's no big deal that Uber makes no money. Amazon made little profit for its first couple of years and it’s been an incredible investment. Its stock has soared 100,000% since its IPO. I want to get in on the ground floor of Uber like many did with Amazon!"

It’s true that early investors in Amazon (AMZN) got rich. It’s also true that Amazon lost money in its first seven years of business. From 1996 to 2002, it burned through around $3 billion.

The thing is… Uber has lost more money in the past nine months than Amazon did in its first seven years!

And Uber isn’t a “new” company. You can forgive young startups for sacrificing profits for growth. Uber has been around for a decade and is still nowhere near profitability.

  • Another popular argument for buying Uber stock goes like this:

Uber will be among the biggest IPOs since Facebook… and Facebook’s stock has shot up 450% since 2012!”

Facebook, as we’ve discussed, is one of the most efficient cash-generating machines America has ever seen.

It makes money selling online ads, which is an extremely profitable business.

At its peak, Facebook was turning $0.50 on every dollar of sales into pure profit. That is off-the-charts incredible. It’s nearly unheard of for a company as big as Facebook.

Uber’s margins are off the charts too. But they’re off-the-charts awful. Uber loses 25 cents on every dollar it brings in. In fact, research from Recode shows Uber loses an average of $1.20 on every ride.

Uber’s problem is the fares it charges aren’t nearly enough to cover its expenses. Roughly 80% of a fare goes toward paying drivers and related expenses.

In other words, almost all its revenue goes right back out the door before it can even pay overhead costs like rent or salaries for its 16,000 employees.

  • As far as I can tell, Uber will never make money.

Money-losing firms often aim to achieve profitability through “scale.”

This means a company keeps growing and growing and selling more and more stuff, until eventually its revenue surpasses expenses.

This worked for Facebook. In its first few years, Facebook actually lost money. By 2009, it was selling enough ads to earn a profit.

It cost Facebook a ton of money to build out its online ad platform. But once it was up and running, it barely cost anything to sell each additional ad. As it sold more and more ads, costs stayed flat and income soared.

Uber’s business model does not afford this luxury. Very few of its costs are “fixed.” Every ride costs it money. As I said, it’s losing roughly $1.20 on every trip.

More trips won’t solve this because costs rise just as fast as revenue.

Uber is trapped in a money-losing spiral it can’t escape.

  • And even if Uber were a decent business, which it is not...

Most of the upside is long gone. Early private investors have claimed it all.

For example, former cyclist Lance Armstrong is an early investor in Uber. He invested $100,000 around 2009 when the company was valued at less than $4 million.

Since then Uber has surged 25,000x in value! If Armstrong held onto his whole $100,000 stake, it’d be worth roughly $2.5 billion today.

As I said, the allure of buying a company when it goes public is getting in on the ground floor.” You buy when a promising company is small and 20x gains (or better) are on the table.

But Uber is already HUGE. As I mentioned, it’s worth $100 billion. It’s already among America’s 100 largest companies.

Uber’s IPO is no ground-floor opportunity. Uber is a giant, overvalued, money-losing enterprise that early investors have already milked dry.

  • To be clear, I love using Uber’s service...

Uber has improved life for millions.

Drivers can make a decent living driving for Uber full time. Hustlers can earn some extra cash on the side by driving part time. Passengers get a cheaper, cleaner, and an overall more pleasant experience than riding in a cab.

It’s a win-win for drivers and customers.

But it’s a LOSE for investors.

Do you know anyone excited to buy the Uber IPO? Tell me about it at Stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Ron writes about my recommendation of Disney (DIS) stock:

“Stephen, Nice call on Disney a few months back. I made me some $ because I listened to you. Thanks!”

Ron, glad to hear you bought Disney before it surged higher on the “big reveal” of Disney+. The stock hit another all-time high on Monday and is up roughly 25% since the start of 2019.

As I mentioned in last week’s note, I expect Disney to head much higher over the next few years. Keep in mind, its stock has shot up a lot in the past couple of weeks, so I wouldn’t be surprised to see it take a breather here.

Disney reports earnings next Wednesday. If the numbers disappoint, it could be a good opportunity to buy in or add to your position at better prices.

The surefire way to make millions in America

The surefire way to make millions in America

Where will you be tomorrow at 6 pm?

If you have kids under the age of 15 like I do, there’s a good chance you’ll be sitting in a movie theater.

Even if you don’t have kids, you’ve likely seen TV commercials for the spectacle that is Avengers Endgame.

America sure loves its superhero movies. Tomorrow’s premiere is set to be the biggest moneymaker yet. Some projections have Avengers Endgame topping $1 billion on opening weekend, which no movie has ever achieved. Overall, it should surpass $2 billion in ticket sales.

A dollar doesn’t go as far as it used to, but two billion dollars is still a lot of money. Netflix (NFLX) doesn’t collect two billion dollars in a whole month, let alone on a single movie!

So who’s milking this cash cow?

In the heist of the decade, Disney (DIS) acquired Marvel Entertainment for $4 billion in 2009.

Since then Marvel superhero movies have collected more than $17 billion.

  • As profitable as this weekend will be, it’s only the second most exciting thing to happen with Disney this month...

Look at this leap Disney’s stock took on April 12:

That’s a 12% one-day gain.

Big, safe stocks like Disney don’t often jump 5% in a day, let alone 12%. Disney isn’t a small, medium, or even large company. It is a GIANT company. It’s the 18th-biggest publicly traded American company—bigger than Coca Cola, McDonald’s, and Wells Fargo.

  • Disney’s leap happened on its “big reveal”...

It announced details of its new streaming service, Disney+, which will compete with Netflix.

If you’ve been reading the RiskHedge Report, you know this has been a long time coming. I’ve been pounding the table to buy Disney stock for this very reason since last July.

My thesis was simple. Netflix pioneered “streaming” 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 last year.

But nothing lasts forever. Disruptive companies go through cycles. Netflix is now what I call a “disruptor in decline.”

You can review my full reasoning here. In short, big media giants like Disney were asleep when Netflix introduced streaming. It took years, but Disney has finally gathered itself and is fighting back.

(But Disney is not Netflix's worst nightmare. There’s a little-known company that has Netflix by the throat. Not 1 in 100 investors know about this stock. Click here to learn more.)

  • Unfortunately for Netflix, it’s not a fair fight.

As we’ve discussed, Disney is far and away the king of producing movies and TV shows people want to watch.

It owns Marvel, which is the most profitable movie franchise in history.

It owns Star Wars, which is the second most profitable movie franchise in history.

It owns Pixar Animation Studios, which continues to pump out moneymaking sequels to hits like Monsters, Inc., The Incredibles, Finding Nemo, and Toy Story.

It owns National Geographic, The Simpsons... not to mention all the traditional characters like Mickey Mouse and Donald Duck.

For Netflix, going up against Disney in a content war is just not a fair fight. It’s like a little league team taking on the New York Yankees.

To start, Disney+ will have 7,500 television shows and 500 movies, including practically every film your children and grandchildren will want to watch.

And Disney’s entire 2019 film slate will stream only on Disney+. It won’t be on Netflix.

So folks who miss Avengers Endgame in theaters will have to subscribe to Disney+ to stream it at home.

The same goes for upcoming Disney hits Toy Story 4 and Frozen 2.

(There's a company that controls a precious resource that is the lifeblood of streaming businesses like Netflix. Without this resource, even Disney is dead in the water. For this reason, this stock is set to DOUBLE every 2 ½ years. Learn more here.)

  • How much would you pay to make your kids happy?

How about $6.99/month?

That’s all Disney+ will cost.

That’s less than half the cost of Netflix’s most popular plan.

Can you imagine how many parents will sign up?

At seven bucks a month, what family with kids under 12 won’t subscribe?

  • Disney has mastered the art of producing profitable blockbusters...

Since 2012, 11 of the 16 highest-grossing movies in the world have been Disney productions.

Six of these 11 were Marvel movies.

Disney has never lost money on a Marvel movie, or even come close. Every superhero flick it produces is a sure bet to make hundreds of millions at a minimum.

You won’t be surprised to learn that six more Marvel movies are in the works.

  • Back in November I put a $170/share price target on Disney...

We’re already halfway there. I see it reaching $170 within 12 months. Within 3–5 years, it could easily double from today’s price of $135.

Streaming gives Disney a whole new way to monetize its movies and TV shows. Disney estimates Disney+ will have between 60–90 million paying subscribers by 2024.

That works out to 12 million new subscribers a year for the next five years. That’s easily achievable. In fact, I predict Disney will beat it. Netflix has added an average of 20 million subscribers a year since 2014. Disney has far better content and costs half as much.

The case for Disney gets even better when you consider that it owns America’s #1 sports network, ESPN. It also owns a controlling stake in the fastest-growing streaming service, Hulu.

My research suggests it can attract another 90 million paying subscribers with these services, too.

Altogether, Disney should be collecting around $16 billion/yr. from streaming by 2024—up from zero today.

Another great thing about streaming is it allows Disney to cut out middlemen and retain more profit. Research from S&P Global Market Intelligence shows Disney collects roughly $7.50/month per ESPN subscriber today. Yet tens of millions of Americans pay cable companies at least fifty bucks to get ESPN in a bundle.

By cutting out the cable company, Disney can keep more money and slash the price of accessing ESPN.

As much as I like Disney, my team and I are studying a different stock that we’re calling the “Netflix Killer” around the office. It’s smaller and less well-known than Disney, with far more upside. Learn more here.

It’s part of a special project we’ve been working on behind the scenes for months.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Alex has a question about my recommendation of Google’s stock.

“First off, your weekly emails are pure gold!

The research is thorough and this piece on Waymo just confirmed how great your emails are.

I have been recommending Google as a stock to buy and hold until you're old enough to give it to your kids or grandkids. That being said, I was wondering if you shouldn't be recommending GOOGL instead of GOOG?

Thanks for everything and have a great weekend!”

Alex, thanks for your question. I’m glad you’re enjoying the letter.

There’s one difference between Google’s Class C shares (GOOG) and its Class A shares (GOOGL). Its Class A shares have voting rights, and its Class C shares do not.

For this reason, GOOGL trades at a slight premium to GOOG. But the two move in tandem. Since April 2014, the correlation between GOOG and GOOGL has been 0.99. 1.0 is a perfect correlation. So for individual investors, there’s no real difference between the two classes.

When a law is a lie

When a law is a lie

Stephen’s note: Today we’re doing something a little different. Instead of our usual weekly essay, RiskHedge CIO Chris Wood is stepping up to explain a foundational key to disruption investing. It relates to an important idea most folks are roughly familiar with but not 1 in 100 truly understand.

*   *   *   *   *

There’s a big lie about disruption going around.

Folks aren’t spreading it intentionally...

Many smart investors I talk to genuinely believe it to be the truth.

As a RiskHedge reader, you’re in the top 1% at understanding disruption and the money-making opportunities it can create.

But if you accept this widespread lie, you’ll likely make the wrong decisions when investing in 5G and other disruptive trends.

In today’s issue, I’ll explain the real truth and why it matters to you.

  • As you likely know, your smartphone is more powerful than an early 90s supercomputer.

And keep in mind, all a supercomputer does is crunch numbers.

Your smartphone can do the job of a whole collection of gadgets.

It’s a phone, camera, camcorder, Walkman, watch, wallet, radio, global map, TV, VCR, and computer all in one.

We have “Moore’s law” to thank for this.

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

This has led to exponential growth in computing power.

As you may know, exponential growth “snowballs” over time. It builds momentum and eventually leads to vertical gains, as you can see here:

For the past few decades, computing power has more or less followed this path.

  • The driving force behind Moore’s law is this:

It holds that the number of transistors that can fit on a computer chip doubles about every two years.

Transistors allow computers to compute. The more transistors you cram onto a chip, the more computing power it has.

Again, for the past 50 years, this has more or less held true. Back in 1965, only 64 transistors fit on the world’s most complex computer chip.

More than 10 billion transistors can fit on today’s chips.

Moore’s law is responsible for many of the giant stock market gains in the past few decades. Leaps in computing power enabled big disruptors like Apple, Microsoft, and Amazon to achieve huge gains like 50,800%, 159,900%, and 111,560%.

And along the way, the companies that make the computer chips have gotten rich, too.

Taiwan Semiconductor, Micron Technology, and Intel achieved gains of 1,014%, 3,256%, and 35,050%.

Conventional wisdom is that Moore’s law will continue to snowball. As progress gets faster and faster, you can understand why many folks think we’re headed for a tech utopia.

  • It’s a great story. But it’s not quite true.

Moore’s law isn’t really a law.

Gravity is a law. Moore’s law is an observation and a forecast.

As I mentioned, since 1965, it has held true.

But here’s the key...

Within the next few years, Moore’s law will break down.

You see, although today’s transistors are microscopic, they still take up physical space.

There’s a limit to how small you can make anything that occupies physical space.

We are now approaching that limit with transistors. So the progress predicted by Moore’s law must slow.

In fact, Moore’s law is already slowing down. Many technologists predict it will totally breakdown between 2022–2025.

Does that mean progress will stop?

Not a chance.

New technologies will pick up where Moore’s law leaves off. There are three exciting computing technologies in development you should know about.

  • 3D computing hits the market later this year.

What does a city do when it runs short on land?

It builds skyscrapers.

By building “up,” you can create real estate with the footprint of a one-story building, but one that holds 100X more people.

Something similar is just getting underway in computing.

You see, the “guts” of computers have always been two dimensional. Flat computer chips sit on a flat motherboard. Nothing moves in 3D. There’s no “up” or “down” inside a computer chip.

That’s now changing. In December, Intel (INTC) introduced its new 3D chip technology. It plans to begin selling it later this year.

Tech reporters are touting it as “how Intel will beat Moore’s law.”

Chips stacked in 3D are far superior to ones placed side by side. Not only can you fit multiples of transistors in the same footprint. You can better integrate all the chip’s functions.

This shortens the distance information needs to travel. And it creates many more pathways for information to flow.

The result will be much more speed and power packed into a small space. Eventually, 3D chips could be 1,000 times faster than existing ones.

  • DNA computing is a bit further off... but its potential is mind-boggling.

DNA, as you know, carries the instructions that enable life.

As incredible as it sounds, DNA can be used for computing. In 1994, a computer scientist at the University of Southern California used DNA to solve a well-known mathematical problem.

One pound of DNA has the capacity to store more information than all the computers ever built.

A thumbnail size DNA computer could theoretically be more powerful than today’s supercomputers.

I won’t get deep into the science here. DNA computing is still very early stage. But several companies, including Microsoft (MSFT), are working to push the technology forward.

  • Quantum computing could be the ultimate disruption.

The science behind quantum computing will bend your mind.

To understand its potential, all you really need to know is this:

The basic unit of conventional computation is the bit.

The more bits a computer has, the more calculations it can perform at once, and the more powerful it is.

With quantum computing, the basic unit of computation is called a quantum bit—or qubit.

Bits behave linearly. To get a 20-bit computer, you might add 2+2+2+2+2+2+2+2+2+2.

Quibits are different. Every quibit doubles computing power.

So, a ten quibit computer could do 2x2x2x2x2x2x2x2x2x2 calculations at once, or 1,024.

A 100 qubit quantum computer could perform over 1,000 billion billion billion simultaneous calculations.

Those numbers are too big for humans to comprehend.

In theory, a small quantum computer could exceed the power of a regular computer the size of the Milky Way galaxy.

With enough computing firepower, a quantum computer could solve any problem.

If we ever achieve far-out goals like controlling the weather, colonizing Mars, or reversing human aging, quantum computing will likely be the driving force.

  • There are no pure-play quantum computing stocks...

They’re all private or have been scooped up by larger companies.

Many of the big tech players are developing quantum computing technology. Microsoft, IBM, Google (GOOG), and Intel are a few.

Google looks to be in the lead.

In March 2018, it unveiled its Bristlecone quantum processor, which the company thinks could achieve “quantum supremacy.”

Quantum supremacy is the “tipping point” for quantum computing. It’s the point when a quantum computer can beat a regular one in a useful task.

So far, scientists haven’t been able to crack this. But once quantum supremacy is reached, progress should take off very quickly.

This is yet another great reason to consider investing in Google—in addition to the others my colleague Stephen McBride has pointed out here and here.

Chris Wood

Chris Wood is editor of Project 5X, RiskHedge’s premium research service dedicated to uncovering small disruptor stocks with 500% upside or better. Project 5X is currently closed to new members. If you’d like to be alerted the next time memberships are available, please write us at support@riskhedge.com.

Reader Mailbag

Last week’s issue on disruption in groceries prompted record feedback. Most readers made it clear they will not be ordering most of their groceries online. Here are some of the notes we received.

Nope. I want to examine carefully (in advance) anything I am going to eat. Even if it is in a box or can. I want to examine the container and read the label before I buy.

Except for investment-related newsletters, I have never bought anything online. Trust me on this part—my wife makes up for it with her online purchases.
      
—RiskHedge reader Michael T.

We do not buy groceries online because we have to be home to receive the delivery. Produce can freeze or spoil in the heat. And I like to check the quality of produce before buying. We live in Canada, and the US has better distribution.
       —RiskHedge reader Zena K.

Thank you for the newsletter. I won’t buy groceries online for several reasons:

1.  I believe it's more expensive.
2.  I don't believe I can use coupons online.
3.  I enjoy shopping at the grocery store. It allows me to spontaneously plan a meal, especially if something is on sale
4.  I like seeing the new products introduced at the store. Seeing them on a flat computer screen isn’t the same.
5.  If I were to shop online, I would have to be there to accept the delivery. Otherwise they’ll be left rotting on my doorstep
6.  I hate when companies ship in Styrofoam coolers. It’s bad for the environment and bad for my wallet (somebody has to pay for the expensive packaging).

       —RiskHedge reader Paul B.

I once ordered groceries online from Thrive. The matzo crackers were crushed due to extremely poor packing. I never complained about it, but I also never ordered from Thrive again.

I would never order fresh produce online. I prefer ripe fruits and veggies, not the flavorless stuff that is picked unripe and gassed. So I tend to shop where produce is from local sources. Also, I pick through the vegetable bins looking for the best specimens. Sometimes I decide not to buy an item on my list because it doesn’t look so good that week.
       —RiskHedge reader Jana H.

Stephen, I enjoyed reading your take on grocery business. Couple comments:

1. I have ordered online, but I still prefer picking up my fresh items.
2. Online ordering lets me choose items at my convenience rather than store hours.

Also, while you mention Kroger as a single brand, the company is actually comprised of several brands across different regions in this country. When I travel, I can go to any of their brands and access my loyalty benefits and still count on consistency and quality.

Could you explore Kroger's national impact total alongside Walmart? I live in the metro Atlanta. We have several tech-based online grocery shopping options.
       —RiskHedge reader Chris C.

Millions of old people socialize at stores. Stores allow us to get some post-dated foods for 40% off. I like having pizza and chili at Costco with my grandchildren.

I manage my finances online. That’s what the internet is for. Don’t take away our shopping fun.
       —RiskHedge reader John P.

Two gorillas are fighting to disrupt your fridge

Two gorillas are fighting to disrupt your fridge

In 1996 the founder of bookstore Borders had a unique idea.

What if, instead of having to shop at the grocery store...

You could pick out food online and have it delivered to your house?

He founded online grocer Webvan, which promised to drop your groceries on your front porch within 30 minutes of ordering.

By 1999 business was booming. Management decided to take advantage of investors' silliness during the dot-com bubble and list Webvan on the stock market.

The stock debuted at $15 on a Friday morning. That afternoon it closed at $24.88–good for a 65% gain in one day.

  • But it didn’t take long for investors to sober up...

Somehow they had forgotten that selling groceries is a ferociously competitive business.

On average, grocers make less than two cents profit on every dollar of revenue.

This is why Webvan lost money on every delivery.

It cost far more to deliver the groceries than Webvan could possibly sell them for. The math just didn’t work.

Investors sprinted for the exits, crashing the stock down to $0.06/share.

Webvan shut its doors for good in 2001 and donated all its remaining food to a food bank.

  • For 25 years, every attempt to disrupt the colossal $1.5 trillion/year US grocery market has failed.

Americans spend more money on groceries than anything besides housing.

But almost none of it happens on the internet.

You can see on this chart that a tiny 2% sliver of total grocery sales in America happens online.

Now consider this: 55% of books are bought online today…

While 30% of electronics purchases take place on the internet.

Amazon’s (AMZN) disruption of retail is one of the stories of the century. As you know, it has driven once-iconic stores like Sears and J.C. Penney to the brink.

And according to leading retail research firm Nielsen, more than 21,000 stores have shut their doors in the past five years.

Along the way early Amazon shareholders have gotten rich on 116,000% gains.

And founder Jeff Bezos has accumulated untold wealth. He’s not only the richest guy in the world—he’s the richest person in modern history.

  • Bezos owes his fortune to the disruption of the giant US retail market...

But did you know that the American grocery market is 3x bigger than ALL of the online retail market? In other words, we spend 3-times more money on groceries than we do buying stuff over the internet.

Yet there’s been virtually no disruption in groceries over the last 60 years.

Most suburban Americans still drive to the grocery store.

We still push a cart up and down the aisles.

We still place our items on a conveyor belt at the register.

It’s pretty much the same as it was in the 1960s.

  • But my research shows the monster grocery market is finally about to be turned on its head...

Until recently, even mighty Amazon has been stumped by groceries.

It rolled out a grocery delivery service Amazon Fresh back in 2007.

Since then Fresh has lost money every year.

After a decade of failing to turn a profit, Amazon folded Fresh in most US cities in 2018.

In 2017 it set down a new path. As you may remember, that’s when Amazon bought the Whole Foods supermarket chain for $13.7 billion.

Whole Foods is the largest natural and organic grocery chain in America. It operates roughly 470 stores around the country.

Acquiring Whole Foods is Amazon’s first step into physical grocery stores.

In the next two years it plans to open 3,000 “Amazon Go” stores in the US, according to Bloomberg.

Amazon Go stores are Amazon’s “checkout-free” stores. They completely remove the time-consuming checkout process.

You walk in… scan your phone to verify who you are… pick up what you want… and walk out.

  • By the end of 2019, Amazon will have a grocery store within 20 miles of 70% of the American population...

This solves the biggest problem with online groceries… delivering fresh produce to skeptical customers.

In a 2019 eMarketer survey, 90% of shoppers said they’d buy groceries online from their current grocery store.

Just 4% said they’d buy from an “online only” grocer.

In other words, people are open to having their groceries delivered…

But they don’t want to have milk and meat shipped to them from some warehouse 50 miles away.

They want to buy groceries from companies with a local physical presence that they trust.

  • America’s biggest grocer is moving online too...

Walmart (WMT) sells roughly one-fifth of all groceries in America.

With 5,300 stores in the US alone, it already has a store within 10 miles of 90% of American households.

Roughly 95% of Walmart’s sales happen in its physical stores. But over the past three years it has plowed $20 billion into efforts to step up its online presence.

That’s helped propel it to become the third-largest online retailer in America… behind only Amazon and eBay.

By the end of this year, same-day grocery delivery from Walmart will be available to 60% of US households.

That’s 195 million people who can choose to have their weekly shopping delivered to their doorsteps.

  • As I mentioned, just 2% of the $1.5-trillion grocery market is online today.

As Walmart and Amazon go all-in, this should jump to around 20%.

That’s 10x growth... and it’s coming much faster than you might expect.

By the end of this year, more than 80% of Americans will have access to online groceries.

My team is doing a special research project to identify who will win these grocery wars.

I’ll have more to say about that soon.

For now, please know this:

  • Many smaller grocery chains are in big trouble.

A study from consulting firm Oliver Wyman found that if just 8% of the grocery market moves online, one-third of all grocery stores will shut their doors.

You see, small grocers tend to be fragile because they survive on razor-thin margins.

The average net profit margin for grocery stores is just 1.9%. As I mentioned earlier, they make less than $0.02 in profit for every dollar of sales.

With such slim margins, even a small dip in sales can ruin their business.

Amazon and Walmart are two of the biggest, most powerful companies on earth. They’re like a couple of 800-pound gorillas marching in on small grocers’ territory.

There are 11 publicly traded grocery stocks in America:

A tidal wave of disruption is about to hit all of them.

Some will end up like Borders, RadioShack, and Toys R Us: bankrupt and in retail heaven.

We're in the early stages of a big shift in the way people buy groceries.

Remember: groceries are the largest consumer market in America…

And the least amount of spending occurs online.

It’s shaping up to be a disruptor’s dream.

I’ll have a lot more to say about this in the coming weeks.

Have you ever ordered groceries online? If not, why not? Tell me at Stephen@RiskHedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

In response to my article on US housing stocks, RiskHedge reader Travis gives us some insight into the Texas home market.

Stephen, I appreciate your weekly RiskHedge emails.

I'm in Austin, Texas. Many homes in my neighborhood never reach the market. They often sell prior to being listed. If they are listed, they usually sell within a few weeks.

Travis, thanks for your reply. When we talked about US housing in early February, many folks were nervous a crash might be around the corner. But as I explained in my letter, the housing market is healthier than most realize.

We got confirmation of this recently. Fresh data show that new home sales are hitting new yearly highs. In February, I recommended we play this by buying homebuilder NVR Inc. (NVR). It’s up 11% since my recommendation, and I expect it to go much higher this year.

Our rare chance to buy the #1 self-driving car stock for practically nothing

Our rare chance to buy the #1 self-driving car stock for practically nothing

Are you invested in self-driving cars yet?

If not, I hope you’ll read this issue carefully.

Because I’m going to show you a unique opportunity to own a crucial piece of this blossoming megatrend...

And it isn’t some risky stock with unproven technology.

It’s a dominant, profitable company that owns the “crown jewel” of the self-driving universe.

And because of a rare situation in the markets, you can buy it today for practically nothing.

  • Self-driving cars aren’t mainstream yet, but they will be very soon...

As you read this, fully robotic self-driving cars are cruising around the suburbs of Phoenix, Arizona. The flat, wide roads and sunny skies there make for ideal driving conditions.

These robocars, as regular RiskHedge readers know, are operated by Google’s subsidiary (GOOG) called “Waymo.”

Waymo’s Arizona robocar service already has hundreds of paying customers. And it’s in testing in another 25 US cities.

  • In the race to perfect self-driving cars, there’s Waymo... then a thousand-mile chasm... and then everyone else.

I’ve shared the following chart with you before because it’s so darn important. It shows Waymo cars have driven more driverless miles than all competitors combined:

This is key because its self-driving cars run on one centralized computer “brain” that learns from every mile driven.

Waymo has run laps around its competitors for several reasons. But its biggest advantage is this: Waymo’s technology can “see” better than anything else out there.

As we discussed recently, true self-driving cars must be able to reliably detect and interpret everything around them.

Waymo has invested billions—likely far more than any of its competitors—to develop this ability. Its biggest breakthrough is the creation of cutting-edge LIDAR, which stands for Light Detection and Ranging.

In short, LIDAR sensors measure distance with laser pulses.

Tiny sensors that resemble a lawn sprinkler are affixed to the roof and front grill of the car.

These sensors then send out roughly 160,000 pulses per second in all directions. These pulses can detect the smallest detail, like a leaf blowing in the wind.

You might call LIDAR Waymo’s “crown jewel.” Insiders agree it’s hands-down the best LIDAR sensor available today.

In fact, this tech is so important that competitor Uber allegedly tried to steal it by hiring away a key Waymo engineer in 2016.

  • Having closely guarded its LIDAR secret technology for years… Waymo is now preparing to sell it to the world.

Early last month, Waymo announced it would start selling its cutting-edge sensors to other companies in non-automotive industries.

LIDAR has dozens of uses. For example, waste management companies are beginning to use it to collect trash and sweep sidewalks.

Grocery giant Walmart (WMT) uses a LIDAR robot to stock the shelves.

And John Deere (DE) equips some of its tractors with LIDAR so they can navigate through crop fields.

In all, LIDAR sales topped $1.7 billion last year. Research from BIS Research estimates it will hit $5.8 billion in four years.

  • This decision is a big deal for Google’s stock...

As regular RiskHedge readers know, Google has quietly pumped billions of dollars into Waymo since 2009.

Google keeps its total investment in Waymo a secret. But my independent research suggests it has invested well over $5 billion. In 2018, Waymo ordered 62,000 Chrysler Pacific minivans, which cost $2.79 billion alone.

With this move, Google is sending a clear signal:

It’s finally “flipping the switch” to start harvesting profits from Waymo.

  • Google is what I call a disruption “incubator” ...

As we’ve discussed, Google has formed a dozen or so disruptive offshoots separate from its core business of internet search.

Waymo is one. Another you likely know well is YouTube. YouTube.com is the second most viewed website on earth, behind only google.com.

In the past three years Google has pumped close to $15 billion into its disruptive offshoots. They all lose money. Together they’ve been a huge drag on Google’s profit. In 2018, they produced a $3.4 billion loss.

  • Google’s “disruption incubation” program is a genius long-term move...

Google was one of the first big American companies to invest in self-driving car research way back in 2009. Now, ten years later, it’s finally about to start reaping the rewards.

But here’s the key that most investors overlook: Ten years is a long time to keep sinking cash into a money-losing program. Especially for a publicly traded company like Google.

As you may know, most investors are obsessively focused on quarterly results. For forty quarters in a row, Google’s commitment to developing self-driving car tech has hurt its financial results. Which has led to the opportunity we have today...

  • Google trades at 25-times earnings—near its lowest valuation since 2015.

If you read last week’s RiskHedge Report, this number might sound familiar.

It’s the same valuation that seller of “basics” Proctor & Gamble (PG) trades for.

As a reminder, P&G is not growing at all.

Google’s sales, on the other hand, have exploded 530% over the past decade.

25-times earnings is a good price for just Google’s extremely profitable core business of internet search. 92 of every 100 internet searches flow through Google.

  • Buying Google at today’s price of $1,215 is like getting Waymo (and YouTube) for free...

Markets are completely overlooking this. Keep in mind, Waymo is transforming from a business that burns billions into one that makes billions.

As I mentioned, Waymo’s LIDAR is the best on the market. My calculations show within three years, it could easily make $2.5 billion a year selling its LIDAR systems alone.

And that’s nothing compared to the huge opportunity is has as it expands its robocar ride-sharing service. Within three years, that should rake in roughly another $10 billion a year.

I recommended buying Google at $1,070/share a couple of months back. Today it’s selling for $1,215/share. I see it hitting $2,000 in the next couple of years.

Are you buying Google? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Philip noticed my recommendation of uranium heavyweight Cameco (CCJ) was mentioned on CNBC.

Stephen,

Your Cameco suggestion got some TV time today on CNBC. The option guys see some unusual activity in the Cameco calls. And they like it.

Thanks for your work.

Philip, thanks for writing in. Uranium doesn’t usually get much play on financial TV. But I expect that will change as April 14 draws closer...

The US Commerce Department recently launched a “Section 232” investigation into whether uranium imports are a national security threat. As a reminder, the US imported 98% of the uranium used in nuclear power plants last year. Around 50% of that came from “hostile” places like Russia and Kazakhstan. Given nuclear energy powers 1 in every 5 American homes, this is a risky position for the US to be in.

The results of the investigation are due to be released on April 14. Once the findings are out, I’ll let you know what they mean for Cameco, our top uranium play.

The dangerous side of “safe” stocks

The dangerous side of “safe” stocks

One of the most important things money can buy is safety.

Would you rather pay $600,000 for a home in a safe neighborhood…

Or $250,000 for an identical home in a more dangerous area?

Even though it might mean stretching your finances and borrowing a ton of money, most American families would choose to live in a safer area.

The financial sacrifice is worth it because feeling unsafe is miserable. It ruins your ability to concentrate. It preoccupies you and stresses you out.

It’s hard to be an effective person when you’re worried your kids aren’t safe.

So we buy cars that win safety awards. We install expensive security systems. We pay the military billions to safeguard the country.

  • And while you might not realize it, there’s a good chance you pay through the nose to keep your money safe, too…

The thought of losing 20% of your nest egg in the market can be scary. For many folks it’s just as gut-wrenching as the thought of a stranger breaking into your house at night.

So investors often pay giant premiums for stocks they believe to be “safe.”

You probably know that fast-growing stocks in exciting industries often command high prices.

But boring, slow-growing stocks are often expensive, too—if they’re perceived as safe.                           

Take Procter & Gamble (PG). It’s a 200-year-old company that’s grown into the 15th largest publicly traded company on earth by selling basic essentials.

Its brands include Gillette razors… Tide laundry detergent… Crest toothpaste… Dawn dish soap, and Bounty paper towels.

No matter what happens in the markets, we’ll always brush our teeth, wash our clothes, and clean the dishes.

Selling necessities is a rock-solid business. From 1982­–­2012, Procter & Gamble grew its sales 28 out of 30 years. This consistency is why P&G has long been considered one of the safest stocks on earth.

  • But you must pay dearly to own P&G stock…

P&G trades for roughly 25X its profits. That’s very expensive for a business that’s seen profits drop 20% over the past decade. For reference, the average S&P 500 company trades for 21X profits.

If you own P&G stock, you’re not paying for growth. You’re not paying for a shot at big profits. You’re paying a steep price for one thing: safety.

For decades, P&G stock has held up its end of the deal.

For example, when the S&P 500 cratered 30% from the Summer of 2007 through the end of 2009, P&G held strong, losing just 1.5%.

  • But regular RiskHedge readers know we’re living in the age of disruption…

As you surely know, online giant Amazon has put dozens of companies out of business in the last few years. Through selling stuff online for low prices, it has disrupted iconic brands like Toys R Us, Sears, Circuit City, and RadioShack into bankruptcy.

In 2000, online sales totaled $27 billion. This year that figure will jump above $550 billion—good for a 20X leap in less than two decades. By claiming a big chunk of this growth, Amazon has propelled its stock over 100,000% since it IPO’ed in 1997.

You can see Amazon’s incredible gains on this chart.

  • While everyone’s been focused on Amazon’s takeover of retail, it has been preparing an even more disruptive assault on “safe” businesses…

Over the past three years, Amazon has launched more than 100 of what it calls “private label” brands.

They are Amazon’s own products, sold under different names.

For example: Its “Presto!” brand sells toilet paper and paper towels. And “Basic Care” sells cough and flu medicine.

Amazon now sells its own diapers… dish soap… laundry detergent… baby wipes… and around 5,000 more everyday items.

There’s not a whole lot of difference between most “essential” items. Crest toothpaste is roughly the same as Aim, which is roughly the same as Colgate. And do you really care if the batteries in your TV remote are Duracell or Energizer… or a “private label” Amazon brand?

Findings from research firm Jumpshot show Amazon already controls 97% of the online battery market. And 94% of online kitchen and dining product purchases happened on Amazon last year.

The key is Americans are buying more and more essentials online. The fastest-growing category on Amazon is food staples—like breakfast cereals. Personal care products like soap and toothpaste are a close second.

Amazon raked in roughly $7.5 billion through selling its private label products last year. Research from investment firm SunTrust suggests this will climb to $25 billion by 2022.

  • Amazon has a “trojan horse” into 100 million American homes…

Over 100 million Americans pay $119/year for Prime membership. Prime is Amazon’s subscription service that gets you free delivery.

Prime members tend to buy a lot of stuff on Amazon. According to leading research firm eMarketer, Prime members spend 5X more than regular customers on Amazon. And one in every two Prime members buys something from Amazon at least once a week!

As part of Prime, Amazon offers a program called “Subscribe & Save.” In short, it lets you create an automatic subscription to thousands of products.

You simply ask Amazon to send you laundry detergent monthly… and a container of it will show up on your front porch at the same time every month.

Amazon has spent billions developing these so-called “frictionless” services. The idea is to make it so quick, easy, convenient, and cheap to get basics through Amazon, you’ll rarely bother going to stores anymore.

  • Amazon’s subscription service has been around for a couple of years. What’s different now is it’s begun to heavily promote its own basic products

Instead of ones made by other companies like P&G.

Log onto Amazon and see for yourself. It now features its own private label products prominently at the top in almost every category.

And if you order by voice—through Amazon’s Alexa device—Amazon automatically sends you Amazon brand products.

Make no mistake… Amazon is marching in on the territory of formerly safe stocks like Procter & Gamble.

My research suggests it will gradually suck the life out of these companies as more and more “essential” purchases move online.

  • I’m not just picking on P&G…

As the 15th largest publicly traded company on earth, it has the most to lose.

But its “safe” peers face the same big problem.

Unilever (UN), which owns household brands like Axe deodorant and Dove skin care, has seen its sales sink below 2001 levels.

Nestle (NSRGY) sells popular products like Poland Springs water and Nescafe coffee. Its business has flatlined since 2005.

All three of these stocks trade for higher than 20x profits.

Their businesses are not growing…

Their stocks are expensive…

And the most disruptive force on the planet—Amazon—is invading their turf.

Does that sound like a safe place to put your money?

That’s it for this week.

Have you tried Subscribe & Save from Amazon? Tell me at Stephen@RiskHedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Ethan has a question about my 5G “landlord” essay.

Hi Stephen,

I'm a subscriber and work in Silicon Valley as a software engineer. I have two questions about Crown Castle (CCI):

1) There seems to be a lot of local opposition to small cell deployments. Do you think it will impact growth?

2) SBA Communications (SBAC) got out of the small cell business back in 2015. Do you know why they made the move? And do you think that reason would be a valid argument to NOT invest in CCI?

Ethan, thanks for your questions.

As I explained a few weeks back, the US government is determined to beat China in the race to develop 5G. Certain state and local governments have slowed down 5G deployment by tangling it up in red tape. But the FCC’s recent passage of its 5G “FAST” has cleared up most of this interference.

SBA sold their small cell business because they weren’t making money on it. As I mentioned, it was taking some local governments 800 days just to process applications for small cell towers. But since the FAST plan took effect, small cell towers are going up 6x faster than before.

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 blo