We've Been Down this Road Before
Truly Disruptive Technology
Recent 3D Printing IPO Looks Promising
arkets have just put on a show of volatility that has left
many investors bruised and depressed. So I thought it was a good
time to re-run a piece I wrote in September 2008, when markets
were going through their Mortgage Bubble meltdown.
The S&P 500 Index, which had topped 1,600 in late 2007,
was down to 1,100. It would bottom six months later (in March
2009) at 667. And while that historic haircut is nothing like the
relatively benign correction we're going through now, I think the
emotions are likely to be the same. Here's what I had to say:
"You're living through a historic stock market event, one that
will be dissected in texts and articles for as long as people
study the market. Congratulations!
If your grandchildren ever get interested in the stock market
and its history, you have a first-class, first-hand war story to
tell them. It's a tale of greed and fear-the constant poles of
stock market emotion-plus a clash of opinions about the proper
role of government in the market.
It's a classic case of good news and bad news, and there's
been plenty of each.
Suppose you're a classic free-market capitalist, one who
believes that government action in capital markets is a threat to
the exquisite balance between risk and reward. If so, you were
delighted to see that Lehman Brothers was allowed to fail. You
know that bailing out companies that over-leverage themselves and
make excessively risky choices is bad business. By letting Lehman
flop into Chapter 11, you say, the government took a huge step
toward cleaning out the festering toxic debt problem. After all,
as one of our readers wrote to Tim Lutts, "Capitalism without
bankruptcy is like Christianity without hell!"
Of course, if you're a true free-marketer, you're also more
than a little grumpy about some of the other actions the U.S.
government has taken, including bailing out Bear Stearns and AIG,
flooding the markets with liquidity, guaranteeing money market
funds, declaring a temporary halt to short selling in financial
stocks and preparing to buy up huge wodges of bad debt.
If your position is anywhere to the left of the capitalist
high ground, you're appalled that the government is putting in
the most time and money to rescue the corporate greed-heads whose
rapaciousness filled the toxic landfill of bad mortgages that's
creating the problem. You're also fairly miffed that a Get Out of
Jail card is being issued to the clever folks who bundled those
shaky mortgages into bonds and then misrated them, creating the
bogus CDOs that are stinking up the vaults of our financial
giants. Every time a foreclosure terminates a mortgage that
should never have been written, you should be seething.
Personally, I'm pretty much beyond anger.
I know it's the way of the world that the smart and connected
will (almost) always come out of this kind of crisis with a whole
skin while the ignorant and gullible will need a box-full of
Band-Aids. There's no use wishing for jail time-or even a good
Singapore-style caning-for the guilty parties. They were just
doing what the market told them to … and the government allowed
The one lesson I'd like you to learn from all this is very
specific, and it has to do with … Surprise! … growth stock
Individual investors, still bleeding profusely from the
punishment issued by the bear market, are leery as heck of
getting back into the market. I have some important words for
Dear Nervous Investors:
After a yard-dog whipping like the one we've been through,
your instincts will tell you never to go near another stock …
ever. Even after a new bull market begins, you will hold onto
that hard-learned lesson. You will begin to reconsider your
resolve after the market posts some big, tempting gains, but you
But eventually, the temptation will be too much for you.
It may not be until the headlines are trumpeting the glorious
bull market (watch the cover of Time magazine for the story) that
you will finally take the market back to your heart and start
buying. And you will find yourself in exactly the same position
as the over-enthusiastic mortgage writer in the last weeks of the
Think about it! When the last buyer is in the stock market,
there are no new buyers to keep the ball rolling, and the market
is ready to top out. And when the aging bull steps politely aside
and opens the door for the bear, it will be the late buyers who
will hold onto their declining stocks the longest.
(Note: This is the growth stock investor I'm talking about
here. The value investor and the income investor have different
So, if you're going to invest in a way that will save you from
your enthusiasm and your instincts, you need a system. While I am
obviously biased toward Cabot's growth investing system, which
has kept subscribers out of the current fiasco, just about any
system will do, particularly if it takes your fallible human
instincts out of the equation and puts in their place a set of
principles based on market reality. (Note that if the mortgage
brokers had stuck to their system, we wouldn't be in this
I call the system I use for the Cabot China & Emerging
Markets Report the SNaC system, because it requires a positive
Story, supportive fundamental Numbers and a technically
attractive Chart before I make a buy recommendation.
I'm also helped by Cabot's use of trend-following market
indicators to get me into markets when the tide is going my way
and out when the tide is against me. The system regularly saves
me-and my subscribers-from the risks that gut feelings and
hunches can bring.
That's what I'd say to all the jumpy investors out there.
There's not much any of us can do to affect the course of this
historic market meltdown except cross our fingers and stay out of
But we can resolve not to be the victims of market forces any
more. While your 401(k) is being shredded and your IRA is
bleeding, you can take charge of at least part of your own
portfolio. If you have the taste for growth investing, you can
use a system to ride the bull and avoid the bear. Cabot can
Growth investors are always looking for companies with huge
potential, and we have different ways to express that potential.
Sometimes we talk about "huge, mass markets," meaning a large, or
underserved, group of consumers. Sometimes it's the revenue and
earnings growth trends that we point to.
But my favorite label for a growth stock with enormous
potential is to say that it involves a "disruptive technology,"
or just that it has the potential to be "disruptive."
Apple disrupted the computer market in its day. In fact, it
disrupted several markets by the time its growth phase ended.
But disruptive technologies aren't easy to recognize. By
definition they don't fit into any existing model, so they can
seem odd and unlikely. I remember one critic asking, after Apple
introduced the iPad, "but what can you really do with it?"
And some people throw the term around like something trivial,
like talking about a "disruptive" toothbrush technology or a
"disruptive" light bulb. (The disruptive lightbulb would be
Cree's LED bulbs, which last for many years, use less energy and
don't generate heat. But that's not really disruptive, that's
just better. Cree bulbs will still screw into the same sockets as
the old incandescent bulbs and the fatally flawed compact
fluorescent bulbs. A great product with big potential, but not a
My candidate for a genuinely disruptive technology is the
emerging 3D printing industry. 3D printing is known to most
people only as a novelty that will allow home users to create
plastic toys or neat-looking iPhone cases, but for manufacturers,
the technology has rocketed past the novelty phase into a mature
3D printers have often been seen as a way to produce fast
prototypes of products. But newer machines can now create
industrial parts in steel and bronze, construct intricate sand
molds for investment casting and can do large-scale manufacturing
of plastic objects and parts. And they can do so in increasing
So why is this disruptive? It's because traditional
manufacturing involves a web of suppliers for parts and a closely
monitored supply chain that includes delivery and warehousing.
Companies must expend capital to order parts in advance, to have
them delivered and to store enough of them to meet current
demand. It's an art in itself, and has spawned a computer
software sub-industry devoted to supply chain management.
But a 3D printer can short-circuit that entire process. Parts
can be manufactured on site exactly when needed and only as many
as needed. The only lag time is the time it takes the printers
(or printers) to actually do the work. And the design
specifications can be entered directly via computer.
The companies that manufacture 3D printers are also
manufacturers in their own right, producing custom runs of
products in various materials. Manufacturing setup and breakdown
times and costs are much lower with printers, allowing quick
It's almost like what the Xerox copier did for the
paper-publishing world, 3D printers could do for many big firms
in the manufacturing world.
Two of the big kids on the 3D printing block right now are
3D Systems (
. But I have another candidate that I favor. It's
), a Pennsylania-based manufacturer of 3D printers that has a
global footprint and a unique array of products. Last year, about
two-thirds of ExOne's revenue came from manufacturing and just
over one-third from printer sales. But in the first quarter,
printer sales accounted for nearly 60% of revenue. It's still
early in the evolution of this big change in the manufacturing
industry, but ExOne, despite its small size ($34 million in
annual revenue) could be a leader. The company also offers very
specialized laser micro-machining services that command a premium
XONE has only been trading since its IPO in April, but it has
put together a strong chart with no big pullbacks. If the thought
of getting in early on a truly disruptive technology appeals to
you, this may be your chance.
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory