The Technology Revolution Will Not be Livestreamed
When I was growing up, we had an unusual number of family friends who worked as mathematicians (perhaps not that unusual, given my dad was an engineer for a time).
Many of these geniuses would become multi-millionaires in their later years. But it wasn’t because they went to work on Wall Street or had 160 IQs — many of them were college professors who considered themselves morons at investing.
Instead, they got rich because they bought shares in their favorite computing company at the time. That firm, Sun Microsystems, would eventually become one of the biggest dot-com companies of its generation.
Today, a similar phenomenon is happening on Main Street. Regular investors are jumping in on investments like Tesla (NASDAQ:TSLA), Nvidia (NASDAQ:NVDA) and Bitcoin (CCC:BTC-USD) years before Wall Street analysts realize what’s going on. Call it luck or bravado — these early-stage investors buying the tech they know are the ones making 30x gains.
This week, my colleague Luke Lango released his list of seven hypergrowth stocks that look a lot like Sun Microsystems did back in the day. If you haven’t had a chance to watch his presentation yet, I’d highly recommend you take a look.
The Golden Rule of Fallen Angel Moonshots
Buying these companies however, needs to be done at the right price. An investor who bought Amazon (NASDAQ:AMZN) shares during its 1999 peak would have taken fifteen years to break even.
Luke neatly steps over this hurdle with his Early Stage Investor strategy. If you’re buying in early enough, even market crashes can’t derail your portfolio. On the other hand, I use my Golden Rule strategy to dig for ultra-low-priced stocks with enormous potential. Either way, we’re both reducing our entry price for maximum returns.
Today, I’ll expand a bit on my Golden Rule: how to find hidden value gems in former hotshot industries.
Finding Value in Not-So-Hotshot Industries
Most tech cycles follow a similar trajectory:
- Innovation Trigger. An initial idea (say, electric vehicles in 2009) suddenly becomes the talk of the town. VC capital gets on board.
- Peak of Inflated Expectations. The mania reaches a crescendo. Continuing the EV example, you have names like Detroit Electric, Fisker (NYSE:FSR), Tesla, BYD and Lightning GT all competing.
- Trough of Disillusionment. Most startups fail, leaving only a handful of companies (Tesla, BYD) standing.
- Slope of Enlightenment. The technology develops to gain mainstream acceptance and wider adoption. People start buying the product and survivors of phase 3 thrive.
Many novice investors make the mistake of buying in during Phase 2, the Peak of Inflated Expectations. These are the ones you’ll see jumping in on the hottest trends just as the smart money is cashing out. Lucid (NASDAQ:LCID) at $65… GameStop (NYSE:GME) at $480… Tilray (NASDAQ:TLRY) at $67… the list goes on and on.
Experienced analysts will avoid investing at that phase. Instead, Luke’s Early Stage Investor focuses on Innovation Trigger investments — themes like quantum computing and gene-editing cancer drugs still 3-5 years away.
Meanwhile, my Moonshots tend to focus on Phase-3’s Trough of Disillusionment. These are investments like Tesla in 2018 — former high-flyers that investors can buy for cheap before a second breakout.
I’m not going to argue which is a superior investment method: both Phase-1 and Phase-3 say “buy” when the rest of the market is stricken by fear, uncertainty and doubt. But to help you figure out which style is for you, here are three of my favorite Phase-3 investments in fallen angel industries.
3 Stocks to Pick Up From the Trough of Disillusionment
It’s relatively easy to identify industries in the Trough of Disillusionment — look at (formerly) hot tech trends where people have given up. And from the stocks available, investors should naturally pick the best.
Top 3D Printing Stock: Desktop Metal (DM)
I’m sure you remember the hype around 3D printing back in 2014. 3D Systems (NYSE:DDD) and its competitor Stratasys (NASDAQ:SSYS) reached ten-billion-dollar valuations before shedding over 90% of their values.
However 3D printing technology has continued to slowly improve. And the best machinery now produces quality that can rival forging and casting in many industrial applications.
And the maker of some of the highest-end printers? Desktop Metal (NYSE:DM).
Founded five years ago, Desktop Metal is one of the fastest startups to reach a $1 billion unicorn valuation ever. And for good reason.
Not only was co-founder Dr. Ely Sachs the inventor of binder jet printing. And not only did he purportedly coined the term “3D printing.” The company’s products are also top-notch. Rather than focus on the hobbyist segment (i.e., cheap plastic printers), DM turned its attention solely toward the higher-end world of industrial production.
Its recent acquisition of rival ExOne however, gives some cause for concern. Though DM’s press release spoke of “increasing customer choice and offering an unmatched product portfolio,” ExOne’s cheaper printers aren’t particularly profitable (Gross margins have collapsed from 36% in 2019 to 22% today).
Instead, the acquisition was likely to acquire ExOne’s notoriously aggressive sales team. And while it’s certainly an excellent way to jumpstart sales, it also generates baggage with regards to integrating disparate cultures.
Still, Desktop Metal remains my favorite Moonshot in 3D printing. Its $7 price sits well below its SPAC listing, and analysts expect its 270% annual growth rate will turn the firm EBITDA-positive by 2023.
Top Marijuana Stock: POSaBIT (POSAF)
Investors who bought Sundial (NASDAQ:SNDL) or Tilray last February are probably feeling quite disillusioned by now. Shares of Canadian-based weed growers have fallen 80% as legalization efforts in the U.S. Congress have stalled.
That’s left the door open for firms like POSaBIT (OTCMKTS:POSAF) to climb out of the Trough of Disillusionment. POSAF trades in Canada and OTC, so it doesn’t face the same restrictions that its U.S. listed peers do. And because the marijuana industry has burned investors before, POSaBIT is trading for cheap: shares are available for less than a dollar.
Regular Moonshot readers might already be familiar with POSaBIT, but here’s a summary for those new to the firm.
Federal banking regulators penalize banks and other depository institutions for working with cannabis businesses, so sellers use local credit unions or deal entirely in cash.
Enter POSaBIT, a point-of-sale system that allows retailers to accept a full suite of payments. Founded by former tech executives hailing from Microsoft and others, it’s a system that streamlines finances for the cannabis industry.
POSaBIT is growing fast: the firm has doubled revenues every year since 2017. And growth is expected to continue, as 70% of the marijuana industry still operates on a cash-only basis.
The firm will have to work quickly to establish itself, though. In April, the House of Representatives passed the SAFE Banking Act, a bill that permits banks to do business with cannabis firms without penalty. POSaBIT must gain enough scale before that bill’s passage through the Senate. If the firm’s experienced management team can pull that off, POSaBIT will look much like other top point-of-sale companies: highly profitable with wide competitive moats.
Top Virtual Reality Stock: Matterport (MTTR)
Pity the investor who bought the promise of virtual reality. Ever since VPL Research built the first VR headsets in the mid-1980s, researchers have struggled to create a comfortably usable product. A combination of graphical processing limitations, motion sickness issues and other complications meant that even Facebook (NASDAQ:FB) — which has poured billions into VR project Oculus — has still failed to crack the VR nut.
The disillusionment has proved a windfall for value stockpickers. That’s because after getting hyped up to $28 last year, VR firm Matterport (NASDAQ:MTTR) is now reasonably priced again at $14.
Matterport isn’t your typical VR company. Rather than tackle the low-margin world of hardware (i.e., headsets), the firm has decided to concentrate on software. In other words, it’s helping people build a virtual reality world rather than display it.
Consider homebuying. If you’ve gone house hunting or apartment shopping recently, there’s a good chance you’ve come across a 3D tour online. These digital dollhouses let you click through rooms and let you see 360-degree views from your desktop computer.
Who makes these models? You guessed it — Matterport. Though competitors can also take 360-degree panoramas, Matterport’s software is one of the few that can stitch these photos together into a single, seamless tour. From a technological standpoint, it’s lightyears ahead of the competition.
MTTR’s technology hasn’t gone unnoticed. Matterport now sells to insurance companies looking to model claims and to engineering firms that need to digitize existing properties for their CAD programs. Many also point to Matterport’s growing digital library as a source of value. Analysts anticipate the firm will maintain >60% revenue growth through 2023.
The firm is also reasonably priced for a startup. Its $3.4 billion valuation puts it at a 28x price-to-sales ratio, less than half of other high-flying tech firms like Snowflake (NYSE:SNOW) or Cloudflare (NYSE:NET). Thank the Trough of Disillusionment for sinking shares of MTTR to such depths.
Just How Contrarian Are You?
In 2017, researchers at the Finnish University of Oulu wrote a fascinating study linking personality traits to investment styles.
They found that small-cap growth investors were those who “do things their own way without much regard for routines or rules.” Meanwhile, value investors tended to be more sociable and sentimental — these investors tend to gain an insider’s edge by forming connections with the management and company.
But what about people who are both independent and able to connect?
These are the investors who will gravitate to Trough of Disillusionment companies. Not only will these investors find stunning high-growth companies in the space. Their contrarian nature also gives them the guts to buy in for cheap when the markets are screaming otherwise.
Being contrarian isn’t easy — you need to ignore companies at their Peak of Inflated Expectations just as everyone else is losing their heads. But investors who can keep their cool when the heat is on have a wide world of 30x stocks to choose from.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.