Backdoor Profits from Ford's Big Idea
Back in 1848, James Marshall discovered gold in the streams of California. Once word got out, the Gold Rush was on.
Thousands flocked to the cities dotting the coast in the hopes of striking it rich. But for every miner who struck gold, there were hundreds who lost it all. They either went back east empty-handed or were forced to stay because they didn’t even have the money for a ticket home.
But a few enterprising businessmen saw that the real fortune wasn’t buried in the foothills of California’s mountains. It was right at the trailheads and docks where the hopeful miners were arriving in droves. You need tools to dig for gold. And you need supplies to survive in the frontier.
So they sold the food and blankets. They sold the wood and wagons. And they sold the picks and shovels.
And it was these men who really struck gold. They didn’t care if the mines made money. They were getting paid either way. And that’s how the “pick-and-shovel” investment was born.
It Takes Guts
Sure, it’s great to strike proverbial gold by finding the next big thing and buying stock in the company that sells it. But that’s no easy task. And once others realize what’s happening, the stock gets bid up so fast most of us aren’t able to get in and see the real profits.
But even after a new technology hits the market — or any new big thing, for that matter — you can still see some serious gains if you can figure out what makes it possible. You know, the guts of the product.
When the PC revolution was gaining momentum, it was processors and chips. And a tiny $0.11 company was making the very same processors and chips that made personal computers possible. You probably know it now, but back then, it was pretty much under the radar.
That company was Intel. And thanks to its part in making the PC revolution possible, it scored shareholders ludicrous profits.
Then, after the PC market had cooled off, along came the iPhone. Other smartphones soon followed, and the world would never be the same. And again, there were a few small, unknown companies that made it all possible. They supplied the guts that allowed Apple and Samsung to fit so much computing power into such a tiny package.
One of them was ARM Holdings. It brought in cash hand over fist as the smartphone market took off. It didn’t matter whose phone won the battle, because all of them needed ARM's products. And shareholders were well rewarded once again.
Some companies were even able to capitalize on both the PC revolution and the age of smartphones. Qualcomm, for instance, rode the wave of PC sales to ridiculous heights. Then it jumped into the smartphone market and profited once again. And it never made one computer or one phone. It just fulfilled a need and made shareholders rich in the process.
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America’s Longest Love Affair
Here in the U.S., it’s no secret that we love our cars. We spend hours washing and waxing them. We spend millions buying them and taking care of them. We drop thousands of dollars on upgrades to the body, engine, and interior to make them the coolest.
Little kids who love speed grow up to be adults who buy Corvettes. People collect vintage cars. Watch one episode of MTV’s show Cribs, and you’ll see celebrities who’ve singlehandedly dropped millions on a stable of cars and trucks. Never mind that they can only drive one at a time. In fact, click here and check out just one example. This guy's got a car that burns a whole tank of gas in 12 minutes!
The bottom line is: we love our cars. And we love to customize them. But only some of us can really afford to do all that. That doesn’t necessarily stop all of us from trying. But when it comes to buying dinner or a new set of tires, most of us will choose food.
But Ford is about to make it cheaper and easier for anyone to build the car of their dreams. And that plan has the potential to make one particular company gobs of cash. Spoiler alert: it’s not Ford.
While I’m sure it’ll encourage more people to buy Ford vehicles, it’s actually the company making the customization possible that stands to benefit the most. And that’s why I felt the need to start this off with some stories about pick-and-shovel plays.
The Rebirth of 3D Printing
Several years ago, all the tech community could talk about was how 3D printing was going to revolutionize the world. It was going to make things that were never possible a reality, printing everything from industrial parts to human organs.
And the stocks of 3D printing pioneers like 3D Systems (NYSE: DDD) shot up in value. DDD went from around $2 to over $90 before cooling off and coming back down.
It seemed that the end of the hype had come and that 3D printers, while really cool, weren’t really changing that much. Investors who had jumped on board and driven prices up headed for the doors. And 3D printing stocks plummeted.
3D Systems dropped from that high above $90 to around eight bucks. And analysts said 3D printing was done, or at least that it wasn’t going to be as big a thing as they’d thought.
But thanks to Ford’s new plan, that could all change for one 3D-printing company.
You see, Ford’s engineers recently announced their idea to print parts for their fleet of cars, trucks, and SUVs. They want to encourage people to buy new cars. And they want the cars to be Fords. So they’re trying to make it easier and cheaper for folks to build that car of their dreams with 3D-printed parts.
Selling the Picks and Shovels
And they decided to pick one small company’s printers to make it all happen.
Stratasys (NASDAQ: SSYS) makes some of the best 3D printers on the market. But with sales slowing, its stock has been in a steady decline since late 2014. Prices have dropped from all-time highs above $130 to current levels around $20. But that could end up being a good thing for investors who get in on the company now.
You see, back in 2014, SSYS was a $7 billion company. Today, it’s got a market cap just shy of $1 billion. And that makes it pretty attractive to anyone with a handful of cash who’s looking to buy a 3D-printing company.
Up until a few days ago, that didn’t seem very likely. But when Ford announced its new partnership with Stratasys to make one-piece parts for its vehicles, everything changed.
Ford has a market cap of $49.5 billion. That makes it about 50x bigger than SSYS. And it’s got almost $27.5 billion in cash on hand. That means it could buy Stratasys 20x over and still have a bunch of dry powder left over.
And when a big company like Ford partners with a small one like Stratasys, it could signal a future buyout in the making.
If Ford’s plan is successful and adds the revenues it’s hoping for, then it makes sense to buy Stratasys outright and get sole ownership of its technology. Why rent or pay royalties when you can just scoop up the whole company on the cheap?
And SSYS is definitely cheap. After reporting future guidance for a rough year in the 3D printing markets, stock prices have sold off almost 10% in a few days. But if Ford wants to get its hands on Stratasys’ printers and workforce of product developers, it’ll have to pay a premium to the market price. I mean, why would investors sell to Ford if they can get a better offer on the open market?
So, there’s the opportunity. Buy Stratasys at a super-cheap price, and when Ford announces a bid to take over the company, watch the price rise. And as the price rises, watch Ford’s offer price rise as well.
Investors could take home a quick 20% to 50% profit if the sale materializes. And if it doesn’t, they’ll still own shares of the best 3D-printing company on the market — one that’s making strides in finally printing indispensable things like human organs. It won’t lead to immediate profits. But over the long run, it will lead to substantial ones.
And if you’re not of the mind to buy back into 3D printing yet, take the stories and lessons of successful pick-and-shovel investment to heart. And go out there looking not for the next new craze, but the company that makes that craze possible.
To Investing with Integrity (and Intelligence),
Follow me on Twitter @AllBeingsEqual