The Secret Behind Disruptive Technology Investing
This Technology is Winning
A “disruptive technology” is defined as a new way of doing things that disrupts or overturns the traditional business methods and practices.
From the longbow to the steam engine to railroads and the Internet, history is a full of instances where new, sometimes even minor innovations completely changed the world.
Fortunes are won and lost; new industries thrive, while old ones die out.
So for investors, it pays to keep an eye on how disruptive technologies are changing the world. Problem is, it's not always as easy as just picking the newest disruptive technology and then jumping in...
It was pretty easy to see the Internet was going to change the world. But making money on Internet stocks was a whole different ball game.
Fortunately, the emergence of wealth-building disruptive technologies follows a very predictable path. And if you know it, you can make a lot of money. Here's an example that sums it up perfectly...
On August 14, 1998, a company called Global Crossing went public at $19 a share. That valued the company at around $3.8 billion.
Global Crossing's plan was to build the very backbone of the Internet. It laid high-speed fiber optic cable across the Atlantic and Pacific Oceans. It would eventually connect four continents, 27 countries, and 200 cities.
The potential of leasing space on its vast network to telecom companies seemed like a great idea, and by February 16, 2000, Global Crossing stock hit $61.82, valuing the company at nearly $47 billion.
Only it wasn't a great idea at all. Global Crossing spent something like $20 billion on its network and had $14 billion in debt. And there wasn't enough revenue coming in.
The stock was trading for a measly six pennies a share when it filed for bankruptcy in February 2002. That $47 billion valuation had fallen to around $70 million.
Stage 2: Where the REAL Money is Made
It almost always happens this way with new disruptive technologies.
The potential is clearly huge, and there's a ton of money to be made. So the companies involved take a “growth at any cost” approach — investing way too much money. But investors are often willing to overlook bad fundamentals because the opportunity seems so huge.
It's very much like a bubble...
The problem is a variation of Moore's Law: the costs of a new disruptive technology can be prohibitive. The first movers always overpay, and they almost always fail.
Global Crossing built the first global high-speed network. They spent like drunken sailors and went bankrupt. But the network is still there.
The assets of Global Crossing were bought out of bankruptcy by ST Telemedia for $750 million after all the bondholders and shareholders had been shafted. It went public again in January 2004, and in 2011, Level 3 Communications bought it for $3 billion.
Now, sure, you could have made a lot of money with Global Crossing during its bubble stage. But it wasn't a stable business at that time. It wasn't until the second stage of Internet growth that companies actually became viable.
And this pattern usually repeats itself with every emerging disruptive technology. So if you know how the pattern goes, you'll be able to buy these stocks at the right time and be in position to make a lot of money...
It's Happening Now
Disruptive technologies create entirely new markets. But they also permanently change old and established markets. This is an important distinction because when you have both — wild success and failure — you can make the most money.
Apple Computers is good example of this. Not only did Apple create the smartphone and tablet markets, but the company also crushed competitors like Blackberry maker Research in Motion and the top makers of laptop computers, Dell and Hewlett-Packard.
Right now, solar power is entering Stage 2.
Solar panel prices have dropped 70% since 2006. Now, solar power costs around $0.22 per kilowatt, and electricity from your power company is around $0.15 per kilowatt. It won't take more than a couple years for the price to be roughly equivalent.
And people want solar panels on their homes. The consumer market for solar is growing even faster than the commercial.
And speaking of commercial adoption, utilities are actually spending money on campaigns to discourage people from adopting solar power!
That tells you something important: utilities see the threat from cost-effective solar power, and they are frightened by it. They probably know very well what happened in Germany last summer...
The Day Power Prices Went Negative
On June 16, 2013, the wholesale price of electrical power in Germany went negative. That's right — utilities had to pay to get their power on the grid.
51 gigawatts (GW) were being produced that day, 29 GW coming from wind and solar power. But the German grid could only handle 45 GW. Natural gas and coal power plants had to cut back so much that they were running at 10% of capacity.
Wholesale power prices in Germany have been cut in half since 2008, and so have the stock prices of utility companies. Bloomberg estimates that one German power company, RWE, is losing money on 30%-40% of its conventional power stations.
Bloomberg calls wind and solar an “existential threat” to conventional German utilities.
This will soon happen to U.S. utility companies, which sold $400 billion worth of electricity in 2012. That's why big investors are moving in.
Warren Buffett, for example, has already invested $15 billion solar and wind power here in the U.S. And he recently said, "There's another $15 billion ready to go, as far as I'm concerned."
What You Should Do
It's pretty simple: you need to be invested in solar. My favorite solar panel maker is a Chinese company that is a big supplier to SolarCity (NASDAQ: SCTY).
As I see it, SolarCity is leading the charge into the residential market, and that's a great place to be.
Right now, this solar panel maker is trading around $11 a share with a forward P/E of 8. Even better, I'm using a special strategy to help a group of investors own these shares for free.
The company is Trina Solar (NYSE: TSL). Over the last three months, we've taken $1.55 per share in cash using this special strategy, and I expect to take another $1.55 in cash over the next three months.
That's $3.10 in cash from an $11 stock in six months. And because we're taking in cash from owning these shares, we are actually lowering our risk.
Until next time,
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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