how to profit in the winner take all market

How to Profit in the Winner Take All Market

1

U.S. Dividend Stock Investing for Canadian Investors


The Industrial Singularity:

How to Invest in the Winner Take

All Market

The past few decades have seen the digital revolution change many aspects

of our lives. What you and I need to take heed of as investors is that the

pace of change is accelerating.

This concept was first brought to the fore by futurist Ray Kurzweil in his

book, The Singularity Is Near. He's a guy you and I should pay attention to.

Of his 147 predictions since the 1990s, he has an astounding 86% accuracy

rate.

No, he's not psychic. He just looks at the world a bit differently than most

people.

In the book, Kurzweil proposed the law of accelerating returns where

technological progress moves ahead at exponential rate. But our human

brains tend to extrapolate the future in a linear sense instead of

exponentially.

Translation: new and more powerful technologies will be with us sooner

than most expect.

In fact, Kurzweil thinks the Singularity – when machines with artificial

intelligence (AI) will pass a valid Turing test and therefore achieve human

intelligence – will occur in 2029. Others like the visionary leader of

Softbank (OTC: SFTBY), Masayoshi Son, think this will happen by 2047.


I don't know if Kurzweil's cybernetic future (humans and machines joining)

will ever come to pass. But one thing is certain: exponential progress is

being made in technology and the rate of advancement is accelerating.

That's why the Pentagon and some very forward companies have hired

science fiction writers to envision for them possible future scenarios. These

scenarios range from the grim for the military - “smart” gun being hacked,

killing civilians – to the mundane, showing how companies may have to

market to artificial intelligences in the future instead of to people directly.

Industrial Singularity

That is the whole idea behind my research project called the Industrial

Singularity. There are industries poised to make investors like you

accumulate wealth in an exponential fashion. But as with many things in

life you have to be in the right places at the right times.

Finding those 'right places at right times' is my task in the effort to grow

your wealth.

Think about what financial history teaches us. . . . .

There were many breakthrough technologies in the past – electricity,

automobiles, airplanes, radio, television. The list could go on and on. The

point I want to emphasize is that with all these technologies there were

initially a lot of companies involved, making cars or flying passengers, etc.

Here's just one example – the “Tronics boom”, which went 1959 to 1962.

It was the dawn of the space age and excitement was everywhere,

including among investors. Every stock even remotely connected to

electronics took off, pardon the pun, like a rocket. The companies had

names like Astron, Dutron, Vulcatron, Transitron, Circuitronics,

Videotronics and Powertron Ultrasonics.


And one stock was particularly dear to me was Supronics – my parents

owned it. But only a precious few electronics companies survived such as

RCA (Radio Corporation of America). It too eventually succumbed and was

bought by GE in 1986.

Even today, think about how many makers of smartphones have already

disappeared. It's my job to “separate the wheat from the chaff” in the new

technologies and make you money. And that's exactly what I plan to do,

using my decades of experience in the investment industry.

Here are just three of those “right places”.

Right Place #1 – Robotics and AI

I believe the first place investors need to be is robotics powered by artificial

intelligence.

When many of us think of robots, we still think of Star Wars friendly pair of

R2-D2 and C-3PO. Or more darkly, of the dangerous androids from the

Terminator movie series.

Well, the future is here and the robots are already among us. Think

driverless cars and drones, speech and image recognition software,

Amazon's Alexa and IBM's Watson.

There are also numerous collaborative robots, known as cobots, that work

alongside humans every day in modern manufacturing facilities.

Researchers at MIT found that robot-human teams were about 85% more

than productive than either humans or robots alone. The robot technology

manager at the Danish Technology Institute, Søren Peter Johansen, says

that automating the simplest 80% of a production process is significantly

cheaper than a fully automated solution. The remaining 20% of the work


will be done by human co-workers.

This teaming up of humans and robots is why forecasts for this niche part

of the robot industry call for growth of more than 40% annually over the

next five years.

Overall, the consultancy PwC forecasts that AI will add $15.7 trillion to the

global economy by 2030.

That's where you and I want to be as investors – in the best companies

involved in a growing sector, reaping exponent gains over that time.

Right Place #2 – Internet of Things

Another 'right' place we need to be is the Internet of Things or more

specifically, the Industrial Internet of Things.

The Internet of Things describes a network of soon-to-be many billions of

“smart” connected physical objects that in the future will encompass every

aspect of our lives. These things will be embedded with sensors, software

and connectivity that will allow these machines to collect and exchange

data not only about themselves, but other machines, objects, infrastructure

and the environment.

By 2025, it is forecast that more 75 billion devices will be connected.

The goal for this huge amount of data generated is to process it into useful

actions that can “command and control” objects to improve the quality of

our everyday lives. Again, we are already see some of this with how 'smart'

our homes, appliances and cars have become.

But the Industrial Internet of Things will be more lucrative than consumer

IoT.


Of course, robotics will be a big part of the IIoT, but there is whole lot more

involved. The falling cost of sensor technology and the ability to use and

analyze previously unknown data (big data) promises to transform the

manufacturing of everything from bottles to cars to just about everything.

That will benefit companies in the semiconductor industry and the

companies that enable communications from all these connected devices.

Major industrial companies all over the world are calling it the Fourth

Industrial Revolution. General Electric (NYSE: GE) says that, by 2020,

revenues generated from the industrial IoT market globally will be about

$225 billion. In comparison, GE forecasts the consumer IoT market will only

generate about $170 billion by then.

Right Place #3 – Nanotechnologies

Another area of interest has to be nanotechnologies. Nanotechnology is

already being used in fields such as:

Medicine – drug delivery as well as diagnostic and therapy techniques.

Electronics – increasing the capabilities of items from circuits to sensors to

lasers.

Energy – the battery that will be in your electric car will likely have

nanomaterials in it. Solar energy is also benefiting from advances in

nanotech solar cells.

Other sectors that could soon benefit from nanotechnologies include: food,

pollution control, clothing and leisure goods such as golf clubs.

And don't be surprised that if tiny 3D-printed batteries, DNA-based

computing and cancer-killing nanoparticles are soon reality. Already on the

horizon are 'smart' contact lenses. Novartis and Google are involved in a

joint effort at the moment. And Samsung is also working on it currently.

There are a myriad of other technologies approaching at Kurzweil's


accelerating, exponential rate. I believe you are as excited by all of these

new technologies as I am. That's why I hope you will stick with me on this

journey into the future as a Growth Stock Advisor reader.

And now for the fun part. This next section I go in detail on my “Top 3

Stocks to Profit from the Winner Take All Market.”

Singularity Recommendation #1: Hyper-Connected Industry

So instead of GE, I wanted a company with a long track record and a

superb, forward-looking management that isn't trying to play catch-up.

I also wanted my recommendation to add to the Growth Stock Advisor

portfolio to be a pure-play Industrial Internet of Things company.

The perfect candidate is Rockwell Automation (NYSE: ROK).

The $21 billion market cap firm is the world's largest company dedicated to

industrial automation and information.

The 113-year old company has operations in over 80 countries and had

fiscal 2016 sales of $5.9 billion.

Industry-wise, Rockwell Automation gets about 50% of its sales from so-

called heavy industry. These include energy, mining, paper, chemicals,

semiconductors, water and wastewater. Another 30% comes from

consumer industries including food and beverage, home and personal care,

and life sciences. Another 15% comes from the transportation industry and

the final 5% is from a scattering of industries.

The slightly larger Control Products & Solutions division accounted for 55%

of sales in 2016. It provides a comprehensive portfolio of intelligent motor

control products and other industrial control products. Most of these

products are marketed under the Allen Bradley brand to customers in the

aforementioned heavy industries.


The Architecture & Software division accounted for the remaining 45% of

sales in 2016. This division has all the elements of Rockwell Automation's

control and information architecture capable of connecting a customer's

entire fabrication operations.

The Integrated Architecture and Logix controllers can perform a vast

number of control and monitoring applications.

Rockwell touts Logix as the only scalable, multi-discipline, information-

enabled control platform in the sector. It helps to solve the very common

problem of a lack of integration between automation control systems and

enterprise resource planning systems (ERPs).

Rockwell reports that 70% of overall sales to its customer base does include

some sort of software. That makes the company more of an industrial

software company than just a provider of hardware.

Rockwell Automation: Why I Like It

There a number of boxes that Rockwell Automation ticked off to have me

recommend the stock to you.

First – the company in the fiscal 2017 first quarter finally saw a return to

positive to real organic growth in its biggest market – the United States.

After four consecutive quarters of decline, organic growth came in at 1.8%.

And not surprising to me, the company experienced double-digit growth in

emerging markets – led by China and India.

The momentum continued into the second quarter, which the company

reported on April 26. Company management cited an improving outlook for

industrial production growth.

Its CEO Blake Moret said, “The macro environment continues to improve,

with projections of industrial production growth rates higher than a quarter


ago.”

Rockwell now expects full-year sales growth of 4.5% to 7.5%, which

compares to last quarter's estimate of a range of 1% to 5%. Its earnings per

share guidance also rose to a range of $6.45 to $6.75 a share, up from the

range of $5.95 to $6.35 a share guidance given last quarter.

Importantly, growth in the company's architecture and software business

soared by 14.2% in the second quarter to $719 million.

I also like the fact that the company's management is not standing still and

continues to keep Rockwell a leader in Industry 4.0.

In fiscal 2016, Rockwell Automation made three acquisitions that further

strengthened its leadership position in the sector.

• The purchase of MAVERICK Technologies added expertise in the

energy, chemical, consumer and life sciences sectors.

• Buying MagneMotion added to its portfolio of innovative motion

control solutions in both the transportation and consumer sectors.

• Acquiring Automation Control Products fit right in with

management's strategy of helping enterprises increase their

competitiveness through connection from the 'smart' factory floor to the

rest of the business. The acquisition will be a part of its Connected

Enterprise (CE) supply chain management system.

The latter – Connected Enterprise – is becoming a true growth driver for

Rockwell. Revenues were only about $200 million in fiscal 2016, but grew

at a double-digit rate. And the latest earnings report shows this growth

may be accelerating.

The company is moving ahead too by forming key partnerships with other


companies. Here are just two examples of that:

Rockwell has teamed up with Microsoft (Nasdaq: MSFT) and integrated

with its business intelligence software and the Azure cloud to provide an

end-to-end system for a 'smart' factory.

In addition, the company has a global collaboration agreement with the

world leader in industrial robots – Japan's Fanuc (OTC: FANUY) to create

integrated manufacturing solutions.

The Future and What Price to Buy

So what does Rockwell Automation's future path look like?

Management's long-term revenue target of 6% to 8% annual growth looks

very doable. And so do the other goals of double-digit earnings per share

growth and return on capital of over 20% long-term.

The why behind my belief is the rapid growth in its software division, which

I expect to surpass the hardware side in revenues in the not-to-distant

future.

I would also not be surprised to see the firm to make a move into the

robotics space, perhaps in a more extensive collaboration with Fanuc.

The company's stock is up nearly 40% over the past year to a new 52-week

high of $165 a share, with most of the gains occurring after the election of

Donald Trump as President.

Its price-to-earnings ratio of around 27 isn't dirt-cheap. But it is more than

reasonable for a company in the forefront of the Industrial Internet of

Things.

I will always tell you to buy a recommended stock, including Rockwell

Automation, on any price weakness (I'd love to buy it at $150). But I would


not be uncomfortable buying the stock all the way up to close to $200 a

share.

Recommendation: Buy ROK up to $200 per share.

The Growth of Cobots: My #2 Top Singularity Stock

I believe cobots represent a huge investment opportunity.

That's because sales of cobots are still a very small part of global industrial

robot sales, perhaps five percent or so.

A recent study from Research and Markets forecast that the global market

for cobots will grow by more than 40% annually over the next five years.

That's the type of growth I like to see when looking for opportunities as

editor of the Growth Stock Advisor.

The study went on to say that leading the way in this cobot revolution will

be the automotive industry.

Annual shipments and sales revenue there for both hardware and software

will grow at a 43% clip through 2022.

So how can you invest into this rapidly growing industry?

One good choice for the most adventurous among is the aforementioned

Japanese robotics company, Yaskawa Electric.

But if you want focus on investing in U.S.-based companies, I narrowed the

choice down to two companies: Teradyne (NYSE: TER) and Cognex

(Nasdaq: CGNX).

My recommendation for Growth Stock Advisor is Cognex, but I did want to


talk a bit about Teradyne and its Universal Robotics division.

Terradyne's Universal Robotics

Universal Robotics is a Danish robotics firm that was purchased by

Teradyne in 2015 for $285 million.

It was the first mover in the cobot space and is the leading collaborative

robots business at the moment.

The company itself believes its technology is two or three years ahead of its

nearest competition. Goldman Sachs estimates Universal Robotics' cobots

have a payback period of only six months, which is ahead of the payback

period for most other competitive cobots currently.

But I suspect its 2-3-year lead has narrowed a bit thanks to recent strides

made by competitors like Yaskawa Electric and ABB (NYSE: ABB).

Its cobots are used in industries ranging from automotive to electronics to

pharmaceuticals and metals. Companies using its cobot technology include

Lear (NYSE: LEA), Johnson & Johnson (NYSE: JNJ) and BMW (OTC:

BMWYY).

The company experienced a growth rate of 62% from 2015 to 2016. And

Universal Robotics' President, Jürgen von Hollen, expects revenue growth

of 50% or greater in 2017.

With this rapid growth at Universal Robotics, you may be wondering why

Teradyne isn't my recommendation choice for the robotics space.

Teradyne is mainly a supplier of automation equipment for test (largely

semiconductors) and industrial applications. Its robotics revenues are just

too small.


Let me use Terradyne’s numbers from the first quarter of 2017 as an

example. Overall sales were $457 million. Of that total, $356 million came

from semiconductor testing. Only $36 million came from the company's

entire industrial automation division.

In other words, Teradyne is much more of a semiconductor-related

company than a robotics one. But nevertheless, it's still a well-run

company.

For my recommendation, I'm looking for a much purer play on robotics.

Cognex and Machine Vision

That's what lead me to Cognex.

For all those cobots to work in conjunction with humans, they need to 'see'

what they're doing and where they're going to avoid hurting their human

co-workers.

Cognex, founded in 1981, is the world's leading supplier of machine vision

products for both manufacturing and industrial identification.

Thanks to the growth of robotics and cobots, machine vision is a $2+ billion

global market.

Cognex offers a wide range of vision products that meet customer needs

across a variety of industries.

Its vision systems combine and seamlessly integrate sensors, cameras,

processors and its proprietary software. Products range from low-cost

presence and measurement sensors to hardware-independent vision

software.

Cognex also offers a range of ID code readers that deliver fast and accurate


reading of both 1-D and 2-D barcodes. These systems are more accurate

than laser-based ones and are easier for people to work with.

This part of Cognex does offer growth opportunities too as more and more

factories and warehouses become automated. They are using bar code

systems to keep track of products flowing through their entire

manufacturing/supply and distribution chain.

About two-thirds of the company's revenue base comes from its vision

products. These include systems, sensors and newer 3D vision products.

Cognex sells its vision systems to most of the big players in the industrial

robotics industry including ABB, Yaskawa Electric and Germany's Kuka AG.

The only exception is Fanuc, which makes its own vision systems.

This translates to Cognex having a 30% share of the vision systems market.

Not surprising then that the company believes the core long-term growth

opportunity for Cognex machine vision is in manufacturing, where its

technology is widely recognized as an essential component of automated

production and quality assurance.

Typical applications for machine vision include detecting defects,

monitoring production lines, guiding assembly robots, and tracking, sorting

and identifying parts such as engine parts and semiconductor wafers.

Outside of manufacturing, customers are also increasingly turning to

machine vision to improve warehousing and distribution efficiency, such as

using ID products in logistics automation for package sorting and

distribution.

Other applications include ensuring that safety seals are present on

pharmaceutical packaging, verifying the fill level on beverage containers,

and high-speed reading of 1-D barcodes on parcels.

I would be remiss if I did not mention that Cognex generates a nice chunk


of its revenue (nearly 30%) from the consumer electronics market, with

Apple (Nasdaq: AAPL) as a key customer.

As companies re-tool for the new iPhone, Cognex should benefit.

Cognex, by the Numbers

Cognex racked up some impressive numbers in 2016:

• Record revenue of $521 million, up 16% from 2015.

• Record net income of $150 million, a jump of 39% over 2015.

• Record earnings per share of $1.72 versus $1.22 in 2015.

Keep in mind that these results occurred in a year that Cognex CEO Robert

Willett described as a “sluggish” year for spending in the industrial sector.

The results were largely due to three industries contributing to the

company's total factory automation revenues – automotive, logistics and


consumer electronics – all growing by double-digits.

Solid gains were also reported in the consumer products and

pharmaceutical sector.

Another factor was rapid growth in Asia. Cognex's factory automation

revenue grew in 2016 by 23%, thanks to the growth in China and South

Korea. And the company is beginning to talk about India as a huge potential

market for them.

As with Rockwell, I like to see companies with a global footprint. For

Cognex, 45% of its 2016 revenues came from Europe. Another 30% came

from the Americas and 25% from Asia. The Greater China region alone

accounted for 12%.

The good news is that the already rapid growth in its factory automation

unit seems to be accelerating. In the fourth quarter of 2016, revenues

jumped by 34% and, in the first quarter of 2017, revenues grew by 42%

year-on-year.

The Future and What Price to Buy

I really like Cognex – and its roughly 80% gross margins.

And I love the fact that it has something that differentiates it from

competitors – its software.

Adding to that are the major macro tailwinds of what I believe to be an

unstoppable move toward automation of many processes using robots and

cobots.

Looking toward the future, I especially like the fact that Cognex snapped up

three companies that specialize in 3D vision. It is these 3D vision products

that will be the enabling technology for cobots.


The three companies acquired were: Germany's EnShape, Spain's AQSense

and Colorado-headquartered Chiaro Technologies.

More such deals may be in Cognex's future too. CEO Willett said earlier this

year, “Our 3D products are gaining a lot of traction. We grew well in excess

of 100% in that business last year.”

And with nearly $750 million in cash and equivalents on its balance sheet,

and only a 10% market share in the sector, deals that bring in more

expertise in 3D vision seem likely.

At what price do I recommend you buy Cognex?

I have no problem buying the stock anywhere under $100 a share. I would

love to see a pullback to the $80 range. But for that to happen, I believe we

would need to see a market pullback.

But with a business this strong and growth prospects so great. I would

purchase CGNX up to $120 a share.

Recommendation: Buy Cognex up to $120 per share.

Singularity Recommendation #3: Harnessing Light

My last Singularity recommendation is a leader in the photonics sector, IPG

Photonics (Nasdaq: IPGP).

But before I delve into the specifics on the company, I think you may be

wondering – so what exactly is photonics?

Here's where my bachelor's degree in physics comes in handy. In simplest

terms, photonics is the science of light.


I want you to think about it for a moment – think about how, since almost

the birth of humankind, light and optics have been there. From primitive

people's fires to whale oil lamps to the electric light bulb to lasers –

humankind's progression has been marked by advancements in the

harnessing of light.

Fleshing out the definition a bit, photonics is the technology of generating

and harnessing light and other forms of radiant energy whose unit is the

photon. Photonics involves cutting edge uses of lasers, optics, fiber optics,

and electro-optical devices in a wide range of applications.

Photonics has taken its place alongside electronics as a critical and rapidly

growing technology of the 21st century. The global photonics market is

forecast to be a $720 billion market by 2020, growing at a compound

annual growth rate of 35%.

Welcome to the Photonics Century

Photonics-based applications are today used in a wide range of industries

from industrial automation to medical diagnostics to scientific research.

Lasers in particular are displacing conventional technologies because they

can do many jobs faster, better and more economically. Finding ways to

make products more efficiently is an absolute must for today's

manufacturers. That's why I strongly believe photonics and lasers are a

must own sector for you and all my other readers.

One sector where photonics has become crucial is communications.

Coherent light beams (lasers) have a high bandwidth and can carry far

more information than radio or microwave frequencies. Fiber optics allow

light carrying data to be piped through cables, replacing old copper cables:

an absolute necessity in today's world of big data, cloud computing and

video streaming.


Another way photonics has entered our everyday lives is solid state

lighting. Light-emitting diodes (LEDs) are a high performance, low-cost,

green alternative to incandescent light bulbs.

Then there is LiDAR (laser radar systems), which is used in the aerospace

industry and is crucial for the future success of autonomous vehicles, those

self-driving cars that are frequently in the news these days.

Other sectors now commonly using photonics include:

• Agriculture – satellite remote sensing and infrared imaging monitor

the progress of crops.

• Internet of Things – a crucial component of Internet of Things devices

are MEMS (micro-electromechanical systems). Via photolithography,

photonics is key in MEMS production.

• Environment – scientists monitor air quality using ultraviolet Doppler

optical absorption spectroscopy (UV-DOAS).

• Biotechnology – optical spectrometers and other optical devices are

used to verify biochemical compositions and monitor biotech processes.

Other applications are also quite common today including: optical data

storage, ultra-fast data switching, cosmetic surgery, gesture recognition,

finger navigation and a host of other sensing applications.

I hope I haven't gone too geek on you, but I just wanted to bring home the

point that photonics is fast becoming the centerpiece technology in the

world we live in today of “smart” systems. Photonics technology has

become ubiquitous.

Photonics has also become a key component in many manufacturing

processes. Think laser welding, drilling and cutting as well as all the


precision measurement applications needed by manufacturers that can be

provided by lasers.

Lasers Evolution

That leads directly to my recommendation - IPG Photonics, a leading

developer and manufacturer of high-performance fiber & diode lasers and

amplifiers for a vast range of industries and applications. Its products are

used in industries such as materials processing, communications, medical

and biotechnology, science and entertainment.

The evolution of lasers in manufacturing is a journey of over half a century.

Its ready adoption by manufacturers is largely due to the fact that lasers

convert common sources of energy into concentrated, directed beams of

energy.

To do this, a laser must have an energy source, a way of coupling that

energy into the laser cavity, and a method of delivering the resulting laser

beam to the workpiece.

The new fiber lasers developed by IPG are vastly superior to the old legacy

industrial lasers in every facet of the process:

• Energy Source: Instead of using energy sources like lamps or even

chemical reactions, fiber lasers use long-lived semiconductor diode lasers

that efficiently convert electricity into light. Not only is the energy

conversion efficiency raised, but frequent servicing and sometimes

environmentally-unfriendly consumables are eliminated.

• Energy Coupling: Conventional laser optical cavities have bulky air or

gas-filled spaces. Large cavities are necessary due to the inefficiency of gas

lasing or the need to insert bulk optical elements within the cavity. Fiber

lasers are very compact because they convert semiconductor diode energy

into useful laser beams within a fiber no thicker than a human hair.


• Laser Beam Delivery: Legacy lasers utilize complex optics to extract

the laser beam and deliver it to the workpiece. External steering optics are

often needed to deflect the laser output onto its target. In contrast, flexible

optical fiber provides a built-in, ideal beam delivery system.

• Mass Production Possible: Both key fiber laser elements –

semiconductor diodes and optical fiber – can easily be mass produced.

Quite a contrast from legacy lasers with their bulky hermetic laser cavities,

their need for precision optical alignments and ultra-flat optical surfaces.

The change is, as the company says, akin to the replacement of vacuum

tubes by transistors.

I believe IPG Photonics' lasers are superior to those of its competitors

because of their unique technology developed over the last 20 years by its

physicist founders – Dr. Valentin Gapontsev and Dr. Igor Samartsev. Their

lasers combine the advantages of semiconductor diodes with the high

amplification and precise beam qualities of specialty optical fibers.

IPG offers, I believe, the best-in-class laser-based systems for high-precision

welding, cutting, marking, drilling, cladding, and other processing of metal,

ceramic, semiconductor and thin films for customers in automotive,

aerospace, railway, energy, electronics, consumer and other industries.

Its range of laser products includes ytterbium, erbium, thulium as well as

Raman and hybrid fiber-crystal lasers. All wattage ranges are there too: low

(1 to 99 watts), medium (100 to 999 watts) and high (1,000+ watts) output

power lasers in wavelengths from 0.3 to 4.5 microns. The lasers can be

continuous wave (CW), quasi-continuous wave (QCW) or pulsed. The

pulsed lasers are available in nanosecond, picosecond and femtosecond

ranges.

Among the well-known companies using IPG products are: Boeing (NYSE:


BA), Lockheed Martin (NYSE: LMT), KLA-Tencor (Nasdaq: KLAC), Toyota

Motor (NYSE: TM), BMW AG (OTC: BMWYY) and Mitsubishi Electric (OTC:

MIELY).

Additionally, the company recently purchased Innovative Laser

Technologies (ILT). This firm has a proven track record producing leading-

edge systems for medical device manufacturers, one of the fastest growing

markets for fine welding and cutting applications. This will greatly aid IPG in

its effort to penetrate the market for medical device applications.

Last May, IPG bought Menara Networks, which is an innovator in optical

transmission modules and systems. This allows IPG to offer more

integrated solutions for the telecommunications industry. In the first

quarter of 2017, sales of its telecom products soared by 221% thanks to

Menara.

IPG Growing Rapidly

The quality of the company's fiber lasers can be seen in its just-reported

record quarterly results, which sent the stock soaring nearly 10%.

Second quarter revenues jumped 46% to $369.4 million, while earnings

came in at $1.91 a share. Wall Street analysts had expected about $1.64

per share in earnings. Leading the way were huge gains for its quasi-

continuous wave lasers and high-power lasers, which showed year-over-

year gains of 82% and 57% respectively.

The results also reflect the adoption of IPG's laser technology in the fastest

growing regions of the world...the emerging markets. Although both North

American and European sales grew 20% in the quarter year-over-year fully

64% of IPG Photonics revenues come from the Asia-Pacific region, with

another 25% coming from Europe, including Russia. Only 10.5% of its

revenues come from North America.


When one breaks down the revenues further, I found two items that stood

out to me. In the second quarter, year-on-year revenue from China almost

doubled, accounting for nearly 50% of the company's revenue. Even more

unusual was that Eastern Europe and Russia accounted for roughly another

18% of revenues. I guess the founders' connections there (the company

was founded in Russia in 1991) are paying off.

Management raised forward guidance for the third quarter revenues from

$350 million to $375 million, well above Wall Street estimates of $318

million. Earnings guidance was raised to $1.70 to $1.90 a share, again

above Wall Street estimates of $1.57 per share.

IPG's Laser-Bright Future

Thanks to innovative product portfolio – last month IPG unveiled the first

120-kilowatt industrial fiber laser – and large patent portfolio, I expect IPG

Photonics to continue to outpace the other companies in the laser systems

and components sector, which is up over 45% so far in 2017.

Another huge advantage over the competition is its vertically integrated

business model, which allows it to control each and every part of its

business from research and development to sales to after sales service. In

this type of business, I want the company to continue to innovate.

So, a purchase like that of OptiGrate, which help IPG develop new ultra-fast

pulsed lasers, is what I want to see. I like the fact that IPG is moving into

new end markets connected to 3D printing, defense electronics and micro-

materials processing in addition to the aforementioned communications

and medical sectors. This will only add to the momentum from trends such

as the miniaturization of electronics and the move of the global auto

industry toward the widespread adoption of fiber lasers.

As I mentioned the stock soared nearly 10% to $166 a share after the


earnings report. Any time a stock soars like that, a pullback is to be

expected. I recommend buying IPGP anywhere from $160 (or lower) up to

$180 a share as I expect its almost exponential growth to continue for the

foreseeable future.

Recommendation: Buy IPGP up to $200.

5 Critical Rules of Investing in the “Industrial Singularity”

I'm often asked how I decide in what sectors and individual companies to

invest into. Or what basic rules I've followed for investing success in my

career in the industry, which began in the 1980s.

To describe my style as simply as possible, much of it is based on the

approach used by the late Sir John Templeton. I urge all of you read the

report on Templeton and his 16 rules for investment success.

I don't have 16 rules for success. But here are five rules I use that I believe

will help you become a more successful investor.

Rule #1 – Look for Value in Quality Stocks

This rule is my version of Templeton's Rule number 5: When buying stocks,

search for bargains among quality stocks.

Often in the search for quality stocks, I turn to technology companies that I

think will be part of the exponential change occurring right now in the

world around us. People will me ask me then – how in the world can you be

a Templeton-style value investor and buy high-flying tech stocks?

The emphasis for me is on the word quality. Here is how Sir John described

quality:

“Quality is a company strongly entrenched as the sales leader in a growing


market. Quality is a company that's the technological leader in a field that

depends on technical innovation. Quality is a strong management team

with a proven track record. Quality is a well-capitalized company that is

among the first into a new market. Quality is a well-known trusted brand

for a high profit margin consumer product.”

As you can see from this quote, Templeton had no problem owning tech

stocks. As I related to you in the special report on John Templeton, as early

as 1959 he was telling clients about companies in Japan such as Panasonic.

But Sir John was also short some tech stocks as the dot-com bubble was

ready to burst.

The key is obviously finding the right tech companies to invest into at the

right price. After all, there are always hundreds of companies that emerge

from a new technology. And stock market history is littered with the

carcasses of the losers.

So to Templeton I add another famed value investor, Warren Buffett. A

quote from 1999 gives useful input when choosing to invest in quality

technology companies. He said, “The key to investing is not assessing how

much an industry is going to affect society, or how much it will grow, but

rather determining the competitive advantage of any given company and,

above all, the durability of that advantage.”

So in today's world, you have to look at more than the pure numbers.

Doing just that means you would have never bought Amazon.com (Nasdaq:

AMZN), which was always losing money in its early years.

You have to find companies that are both disruptive and with management

teams that have the ability to monetize their client base. That's what I have

always tried to do as an investor and editor.

Rule #2 – Stay Invested

This rule is partially taken from one of Templeton's rules: Rule number 11,


where he says “The only way to avoid mistakes is not to invest – which is

the biggest mistake of all.”

My entire career I have believed to always being in the stock market, to at

least some extent, and to always having global exposure. The very best

companies, including tech firms, always have huge worldwide businesses.

Evidence suggests the longer one is invested with global exposure, the

more likely a positive return will result. Research from Fidelity showed that,

over the period 1980-2012, investing in global equities for 12 years or more

produced no negative returns. In comparison, five-year periods produced a

16 per cent chance of a negative return.

Meanwhile, there is risk of jumping in and out of the markets. A few years

ago Fidelity showed that missing out on just the 10 best trading days of the

MSCI World Index over a 10-year period starting from the end of 2002

would have resulted in negative returns of -4.6 per cent. Had an investor

missed the best 20 trading days, then the negative return would have been

a whopping -32.1 per cent.

When I see that type of data, I reminded of Templeton advice to investors:

Invest, don't trade or speculate - “the stock market is not a casino.”

Rule #3 – Avoid Major Drawdowns

It is crucial to try and avoid massive drawdowns. A drawdown is the not-as-

harsh sounding industry term for a loss. If you started with investing

$10,000 and now have $8,000, your broker will say you had a 20%

drawdown.

The key to avoid major drawdowns is simple – don't panic (Templeton Rule

#10). The message is very simple and basic. Yet human nature makes it

hard to follow in practice.

I saw it first hand during the 1987 stock market crash when I was a trading

supervisor at Schwab. People either panicked and sold, locking in losses. Or

they froze in fear – one poor fellow was short S&P 500 puts and literally


lost a bundle before covering his short.

This rule is really pertinent for anyone investing into more volatile sectors,

such as technology or biotechnology.

Those wonderful words of Wall Street wisdom about the power of

compounding your money only work in a shorter time frame if you do not

lose money. Here's an example. . . . .

Let's say you just enjoyed three straight years of 10% gains. Great, right?

But just one year of a 10% loss cuts your compound growth rate by half.

You will then need a whopping 30% return the following year just to get

you back on track.

Here's another example: You've built up your portfolio to $50,000. But then

a year like 2008 hits – the average stock market loss during a recession is

33%. You will need to hit home runs like Babe Ruth just to get back to even

– a gain of 43%. And remember Babe Ruth struck out a lot.

The reality is that after the 2008/09 tumble, it took the average investor

nearly seven years, when adjusted for inflation, to break even.

One way to limit drawdowns is to cut your losses. I personally use a mental

stop of around 10%. If a stock I buy drops about 10%, or slightly more with

a tech stock, I simply tell myself I made a mistake and say goodbye to the

position. Holding on to losing positions for too long is unhealthy for your

financial wellbeing.

Rule #4 – Stay Diversified

Another way to avoid major drawdowns is to be diversified among various

asset classes – US stocks, foreign stocks, bonds, and commodities such as

gold.

This rule is really a combination of two of Templeton's rules: Rule #3 –

remain flexible and open-minded about types of investment; and Rule #7 –


Diversify. In stocks and bonds, as in much else, there is safety in numbers.

I am a firm believer that every investor should diversify, as John Templeton

said “by industry, by risk and by country.” Here is a graphic from Charles

Schwab and Morningstar that illustrates very vividly the point I'm trying to

make.

The best way to remind yourself about the value of diversification is to

keep in mind this Templeton quote: “See the investment world as an ocean

and buy where you get the most value for your money.”

Rule #5 – Use Bull Market Smarts

I found in my years in the markets that the toughest decision is not when to


buy, or when cut a loss, but what to do with a profitable position. Again,

this applies to most people that have been invested in the stock market

over the past several years.

What I have found to be most successful is to let your winners run… but to

always top-slice some of the profits.

Let me give you a simplified example that excludes costs like commissions:

Let's say you bought 100 shares of XYZ stock at $25 a share. A year later

that same stock is now trading at $100 a share. In other words, your $2,500

investment is now worth $10,000.

What I would do is top-slice and sell 25 of your shares, giving you back your

initial $2,500. Then I would just let the remaining 75 stay in your portfolio.

In effect, you are now 'playing with the house's money.” That way too, if

you happen to have bought the next Amazon, you will be able to profit on

the company's rise for years to come.

This lesson was one I learned from personal experience. I did own Amazon

back in 1999, had a tidy profit, and at the first sign of market turbulence

sold the whole position and never bought it back until many years later,

much to my regret.

I hope these five rules of investing that I use faithfully can be of small help

to you in your quest of investing successfully.

The One Thing You Need to Do When the Market Sells Off

It's a scenario that I have seen repeated again and again with every stock

market downturn. At the first sign of distress, mom and pop investors start

heading for the hills.


I've been in the investment business since the 1980s and have been

through every market selloff since 1987. For me a selloff is, as Yogi Berra

said, “It's like déjà vu all over again.”

Even though I'm no longer a professionally licensed advisor, I do have a few

thoughts on this behavior.

First of all, if you're in your 20s, 30s, or 40s, don't worry. The stock market's

long-term track record is undeniable.

But if you in your 50s or 60s, be aware that bear markets can possibly last a

decade or so. Although that is unlikely thanks to active central banks

support for markets. However, I recommended when I was an advisor and

in several articles for Investors Alley to lower your stock allocation in the 2-

3 years on both sides of your planned retirement date.

If a downturn does occur, there is one thing you should do… take a serious

look at your portfolio to see if it is allocated properly. Most likely, a

rebalancing is in order.

Rebalancing Works

Rebalancing a portfolio between stocks, bonds and cash is important and

actually can improve returns.

In 2012, there was a study conducted by Columbia Business School

professor Andrew Ang. He looked at returns from January 1926 through

December 1940. That's a period that included the Great Depression. Here’s

what he found:

a portfolio 100% in stocks returned 81% with dividends reinvested and a

portfolio 100% in government bonds returned 108%. But a portfolio,

rebalanced quarterly, with 60% stocks and 40% bonds returned 146%!

I do not think rebalancing quarterly is necessary – twice a year is sufficient.


This should have you in good shape for any market surprises. And please do

not rebalance in the midst of market volatility. Get your game plan in order

and then put it in place after the dust has settled.

One final point… if you do rebalance in a taxable account, there will be tax

consequences.

How to Reallocate

What exactly do I mean by reallocating or rebalancing your assets?

I use the words of legendary investor Sir John Templeton as a guide. He

said, “to buy when others are despondently selling and to sell when others

are greedily buying.”

This translates to a counter-intuitive action: sell a portion of your winners

and add those funds to lagging categories. But only do so if your

percentages are seriously out of whack.

Here's just a hypothetical simplified example:

A year ago in the stock portion of your portfolio, you had 20% in technology

and biotechnology stocks. And you had 20% in energy and emerging

market stocks.

But let's say tech and biotech got red-hot and they are now 30% of your

portfolio. Meanwhile let's say energy and emerging markets stocks were

ice-cold and down to 10% of your holdings.

You should sell where the greed is – where analysts are saying the “trees

will grow to the sky”- and buy where the panic is and investors are fleeing

en masse.

In other words, bring them back into balance at 20% each. This strategy will

still keep you exposed to the current winning sectors. But it will add to your

exposure to tomorrow's winners.


To summarize, I would like to quote legendary basketball coach, John

Wooden: “If you too engrossed and involved and concerned in regard to

things over which you have no control, it will adversely affect the things

over which you have control.”

A great philosophy for life. But it applies to investing too.

Don't worry about the stock market, you can't control it. But you can

control how you put your money to work for you.

Survival of the Fittest

Welcome to the exponential age, the age of revolutionary new

technologies.

As technologies advance, they often accelerate the progress made on

seemingly unrelated technologies. This makes our advancement into the

future of sectors including manufacturing, agriculture, medicine,

healthcare, education and finance occur at a pace that almost seems

impossible.

But just as the phrase “survival of the fittest” came from Darwin's theory of

human evolution, the same phrase should be applied to companies trying

to survive this new exponential age.

A Kodak Moment

Think about Kodak, which was founded by George Eastman in 1888. A

hundred years after its founding, Kodak was dominant, controlling 85% of

all photo paper worldwide. The future looked picture perfect.

After all, who would think that within three years their entire business

model would be blown up by the arrival of digital cameras, which


seemingly came out of nowhere.

But that's just it – the technology did not just come out of nowhere. Digital

cameras were invented in 1975, but their quality was poor (10,000 pixels).

However, the technology progressed in a linear fashion until it was superior

to film cameras.

Today, technological progress is occurring even faster - on an exponential

rather than linear basis. That should mean one thing to you as an investor –

companies have to be even more aware of new technologies as they are

developed and become extremely nimble in adapting to the new

technologies.

Industry 4.0 - Convergence

The 21 st century will be remembered as when the fourth Industrial

Revolution (also known as Industry 4.0) took place. If you take away

nothing else from me, please remember this one very important point –

the physical and digital worlds will converge over the next decade or so.

Boston Consulting Group says Industry 4.0 is the convergence of the

physical world with the application of nine digital industrial technologies:

advanced robotics, additive manufacturing, augmented reality, simulation,

the cloud, cybersecurity, big data/analytics and horizon/vertical

integration.

The winners will be the companies with managements capable of handling

the convergence of those two seemingly disparate worlds together. That's

a key trait I look for in a company I want to invest in.

But there's a lot more to it than just being aware that changes are

happening or making isolated efforts to transform the company. There

needs to be a comprehensive program of actually making the

transformation to Industry 4.0.


There is a forecast from market intelligence company IDC (International

Data Corporation) that, by 2018, only 30% of manufacturers investing in

digital transformation will be able to maximize the outcome; the rest will

be held back by outdated business models and technologies.” Obviously,

you want to be invested in some of the 30% of companies, not the 70%.

“Eating the World”

Because if companies don't adapt and quickly, they will go the way of the

dinosaur. Cyber-physical systems will be the bedrock of the future world I

see.

One prominent example of exponential change happening as we speak is

how AI is impacting software development. With AI, software is becoming a

system that, in the words of Google CEO Sundar Pichai “automatically

writes itself.”

Software is already disrupting so many global industries. As venture

capitalist Marc Andreessen said in a prescient 2011 essay, “software is

eating the world.”

Think about it. Uber is the biggest taxi company in the world, yet doesn't

own one taxi. Airbnb is now the largest hotel company in the world, yet

doesn't own any property. IT research firm Gartner says that, by 2020, 50%

of new business processes will contain devices connected to the Internet of

Things (IoT).

So I look for companies that are taking concrete actions. Here follows one

example of what I'm talking about.

Digital Twins

Many of today's jet engines use carbon-composite fan blades. That allows


for larger, lighter and more efficient engine. But initially, production yield

was lousy. Only about 20% of the blades came out as expected. No one

expected that carbon-fiber strands could behave in such a variety of ways.

But then engineers decided to attach sensors to the blades, gathering data.

Using this data, engineers were able to build a virtual manufacturing model

and test various scenarios virtually on a computer. These models are called

digital twins.

Already, digital twins are being used by companies to monitor not only jet

engines, but power plants and other important pieces of equipment. The

market potential for digital twins is enormous. For example, there are

265,000 wind turbines that have been installed since 2000.

Another area where these two worlds converge, perhaps the most, is in

additive manufacturing (3D printing). For example, one company is already

using 3D printing to make fuel nozzles for jet engines and gas turbines.

It is the same company using digital twins for jet engine blades (which now

have a production yield of 95%). That company is General Electric.

And despite strong doubts about its future from Wall Street, I believe it will

be a survivor in this exponential technological age. Management gets it. In

fact, GE was the company that coined the term Industrial Internet of Things

(also known as Industry 4.0) a few years ago.

Robot Aircraft Assembly

Another company that has embraced this new cyber-physical world is

Boeing, which has come a long way from its founding in 1916 by William

Boeing.

Think about this – there are a million-plus fasteners in every Boeing 777.

Much of that work today is done by automated drilling and fastening


machines that crawl along the fuselage. Robots have made this work more

efficient, while improving the safety of the aircraft. Keep in mind that

fastening is to the aerospace industry what welding is to the automotive

industry.

Tight software and hardware integration leads to the high degree of

precision and flexibility for this advanced aircraft assembly process called

Fuselage Automated Upright Build (FAUB). And yes, the fuselage remains

upright throughout the whole process since robots can work at any angle.

Boeing management gets it.

Investing for the Future

Of course, GE and Boeing aren't the only companies that understand what

needs to be done to remain competitive in the fourth Industrial Revolution.

But there will be definite winners and losers. Here is another key of what I

look for to find the firms that will be the winners.

If a company wants to be around in say 20 years, it must invest now. It

must build up its digital skills and technologies. That's why GE bought four

more companies last year to strengthen its digital business. And why it says

it will be one of the 10 largest software companies by the end of the

decade.

It's also why the Germany engineering company Siemens (OTC: SIEGY) has

spent $15 billion on U.S. software companies since 2007 and employs more

than 21,000 software engineers.

Using machine learning, Siemens looked to find ways to reduce emissions

from gas turbines by analyzing data from thousands of sensors recording

temperature, pressure, gas flows and other factors. The result was that

nitrogen oxide emissions of its turbines could be cut 15% to 20%.


That's the future. . . embrace it by owning the companies that are

embracing it.

What’s Next?

Now that you’ve read all of my analysis on how to profit from the Industrial

Singularity, what should you do next?

If this was the first report you’ve read, there’s still four more report packed

full of information that you can use to profit and avoid losses as our world

goes through radical digital changes.

Click here to read the rest of your Special Reports.

Also, make sure you watch out for your first monthly issue of Growth Stock

Advisor. It comes out at the beginning of each month.

And, if you ever have any questions for me about the service, don’t hesitate

to email us at [email protected]

© 2017 Investors Alley Corp. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is

prohibited without written permission from Investors Alley Corp., 41 Madison Avenue, 31 st Floor, New York, NY 10010 or

www.investorsalley.com.

For complete terms and conditions governing the use of this publication please visit www.investorsalley.com.

https://www.investorsalley.com/bret-jensens-small-cap-gems-special-reports/

mailto:[email protected]

http://www.investorsalley.com/

http://www.investorsalley.com/

how to profit in the winner take all market

Documents