If you ask someone what would make them happy, most people will say something like, “a lack of worry” or “more money” — either pain avoidance or a generalized faith in wealth. We rarely think hard about the qualities of life that we really value.
We have similar thoughts about our investments. For instance, we want “good management,” though Warren Buffet has said that, “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.” For instance, the vice president of Apple stores became CEO of JCPenney and nearly destroyed it.
Or we say, “The first rule is to never lose money,” which is why your wealth adviser is careful to keep you out of unfamiliar companies that could earn you lots of money — because, at the first modest decline, you will burn up the phone lines in panic. The main rule of wealth advising is to keep your account, which means reducing your sense of panic.
Here’s why you might consider individual companies. Let’s say you have a portfolio of ten stocks. One is down 80 percent, seven are about average, one is up 50 percent and one is up 200 percent. You are way ahead of the market. You will probably beat yourself up about your loser, but your loss is contained: you cannot lose more than 100 percent. Your gains, though, can be extraordinary — what investing legend Peter Lynch called a ten bagger: not just a home run, but a chance to keep running the bases and running up the score — and those enormous gains dwarf the losses.
It may seem strange to consider individual companies when the market has been cratering, but someone is always working to improve the world, and dark times can create good opportunities. Though my favorite stock was recently down from $289 to $206, I bought Nvidia at $22 when most people thought of it as a graphics company, so I’m happy with the return and even with its prospects in artificial intelligence, e-sports, and self-driving cars. You may be happy that you bought Amazon at $10 in 2001 when Internet stocks crashed and most people thought Amazon was a bookseller. The stock was down 23 percent last month, but your $10,000 investment is still worth $161,000.
In this column, I will suggest potential attributes of “perfect companies” and individual stocks that might be worthy investments.
One desirable attribute is the ability to triple or quadruple quickly without excessive additional investment, which is really three attributes. Some companies are too large to triple: Apple, for instance, would have to go from a $1 trillion to $3 trillion market cap, which, despite its devoted following, seems unlikely. Some companies require heavy fixed investments to grow: retailers, for instance, have to build hundreds of stores, which is a slow and expensive process with low margins, but tech companies can often grow quickly by licensing their products or spinning up more cheap servers. Make it once; sell it a million times at a high margin; refine and repeat.
To kick off this column, I attended the Great Investors Best Ideas Conference in Dallas in late October. Lisa Hess, President of SkyTop Capital Management, presented a company called Aumann AG (AUUMF | www.aumann-ag.com)
Here’s the idea: the world is turning to electric vehicles. Old manufacturers are transitioning, and new ones are entering the market. By 2019 Volvo will add electric motors to every vehicle, and by 2025 Volvo will be fully electric. Tesla is a cult. New Chinese EV maker Nio raised $1 billion in September. Even the electric vacuum maker, Dyson, announced an EV factory in Singapore. Essentially, humanity will replace pistons with coiled cables, and Aumann is the German engineering company that makes the best coil winding machines. Aumann says, “Our goal is to be the world market leader for special machinery and production lines for electric powertrains.”
Aumann’s quarterly sales and profits are growing. The last four quarterly profits are: $1.7M, $2.8M, $4.8M, and $5.0M Euros. The company pays about a half percent dividend. Aumann is selling shovels in a gold rush, and one possible exit strategy for shareholders is an acquisition by a major manufacturer. Just as Amazon purchased its warehouse robot supplier and immediately stopped selling to competitors, a large car manufacturer could buy Aumann to establish a competitive advantage.
Aumann went public at 42 Euros in March, 2017, and quickly rose to 91 Euros before declining to 39.80 on October 21, 2018. This is standard behavior for a tech offering. Facebook and Alibaba did the same: big excitement, then a sell-off, and then a steady climb upward as the company develops its business. Since October 21 Aumann is up 15 percent to 45.80 Euros. Note that if you’re in the U.S. you will buy AUUMF in dollars, which, as I write this, is $51.50.
Of course, there is much we cannot know about any company and the future economy, but Aumann looks like a company that has demonstrated an ability to make money, has the potential to participate in a powerful trend, and could provide out-sized returns for your portfolio.
To comment, suggest a perfect company, or ask a question, please email firstname.lastname@example.org
A 1979 graduate of Princeton University, Paul founded Clancy Paul Computers in 1981. After selling the business to a national firm in 1989, Paul has engaged in a variety of business endeavors, ranging from an online photo processing company to a firm that helps nurses diagnose wounds and order proper wound care materials from a patient’s bedside. Several years ago Paul, who lives with his wife and children in Titusville, started the Trenton Digital Initiative to help bring affordable Internet connectivity to financially challenged families.