We're less than a week into my $100,000 real-money portfolio
undertaking, and we've already seen plenty of excitement.
I committed more than $12,000 to my first pick,
Ford Motor (
F
)
, which jumped nicely in the days after
my initial analysis
. If you had the chance to get in ahead of me (I make all of my
trades 48 hours after I tell you about it), then you got a nice
little bump, asshares have been on the upswing.
Then I introduced my second pick,
Alcoa (
AA
)
, which I told you about Wednesday.
(Many of my loyal readers have signed-up to get these articles
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Now to today's pick...
Steel has played a major role in the globaleconomy for more than a
century. It's the most important material in cars, planes,
household appliances and scores of other products.
Yet steel also has a major shortcoming: it's heavy. Car makers
bemoan the fact that today's technology-laden autos can exceed two
tons. Jumbo jets need huge amounts of thrust just to get airborne,
and makers of wind turbines know that you need a stiff wind before
heavy blades will start to rotate.
Fortunately, there's a solution for these problems.
It's a material that is up to 10 times stronger than steel, but is
also far lighter in weight. I'm talking about carbon fiber, which
was an exotic material 20 years ago, drifted into the more advanced
industrial applications over the last decade, and is now on the
cusp of becoming a mainstream, everyday material.
The key factor is cost. Back in the 1990s, making carbon fiber was
an expensive process because engineers couldn't figure out how to
shape the material and then cure it in high volumes at a reasonable
cost. Through trial and error, recipes were tweaked, curing ovens
were refined and carbon fiber suddenly became a feasible choice for
many industrial designers.
Consider these data points:
• BMW, among other automakers, is expected to
roll out a range of new cars in the next three years that will come
with carbon fiber doors, bumpers, trunk lids and chassis. These
light-weight vehicles will deliver superior fueleconomy and
improved handling dynamics.
•
Boeing (
BA
)
is using massive amounts of carbon fiber in its new 787 Dreamliner
plane. Its partners, which make jet engines for the plane, can dial
in more efficient designs thanks to thousands of pounds that have
been shed.
• Wind turbine manufacturers have replaced steel
with carbon fiber, and the current generation of turbine designs
now spins more freely than the previous steel-based blades.
In the years ahead, look for carbon fiber to find a home in place
of concrete and steel in new high-rise buildings. The fact that it
is extremely strong but not especially stiff makes it an ideal
material for buildings in earthquake-prone regions. Civil engineers
are looking at using carbon fiber in underwater sewers, since the
material is not prone to corrosion.
Today's portfolio investment will have a big part in all of this...
Indeed, carbon fiber is finding a home in an expanding number of
applications, simply because it is becoming cheaper and cheaper to
make. But it can't yet compete with steel on acost basis , as we
learned in the most recent economic downturn. Demand for carbon
fiber had been rising in the middle of the last decade because
companies were willing to spend more to take advantage of the
material's beneficial qualities. But the slowdown of 2008 and 2009
led many designers to scrap plans for further use.
You can see that trend in the results of carbon fiber maker
Zoltek (Nasdaq: ZOLT)
, today's $100,000 Real-Money portfolio investment. From fiscal
(September 2006) to fiscal 2008, sales doubled, from $92 million to
$186 million. The economic slowdown really hurt demand, and sales
fell to $128 million by fiscal 2010.
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Yet demand for carbon fiber is rebounding: Zoltek's sales grew 18%
in fiscal 2011 to $152 million, and sales could top $180 million in
thefiscal year that ends this coming September.
I base that assumption on the most recent trends. In the fiscal
fourth-quarter of 2011 (ended September), sales surged 39% from a
year earlier to $43 million. Simply maintaining a $45 million
quarterly sales rate gets you to $180 million for the full year.
How realistic is that? I'll let founder andCEO Zsolt Rumy explain:
"We are seeing significant expansion in our sector of the wind
energymarket -- using our carbon fibers in the construction of the
world's biggest and most efficient wind turbines... We are actively
executing our plans tocapitalize on several important opportunities
to support this expansion in 2012 and 2013," said Rumy in a
statement in late November.
I
encourage you to read
the company's
10-K
filing from early December. In the10-K , the company discusses a
half-dozen other burgeoning opportunities beyond the wind
turbinemarket .
It's important to note that Zoltek has a large amount of unused
manufacturing capacity (thanks to a previous ill-timed expansion),
and higher salesvolume wouldyield significant gains in terms
ofprofit margins. Right now, Zoltek looks to be moderately
profitable in fiscal 2012, perhaps earning around $0.25 a share.
Yet with further sales gains,EPS could grow sharply, perhaps
reaching $1 a share by fiscal 2014.Shares , trading under $8, don't
begin to reflect that kind ofearnings potential.
The downside protection -->
Meanwhile, most investors assume the sales strength seen in the
most recent quarter will have proven to be the exception to the
rule, and they anticipate more choppy quarters ahead. That's why
this company, with amarket value of $264 million, trades below
tangiblebook value of $281 million. Said another way, if you wanted
to build a carbon fiber business from scratch today, you'd do it
cheaper by simply buying this company. The stock is at 94% of
tangiblebook value now, and could easily fall to 80% or 85% of
tangible book if Zoltek delivers a weak quarter. Investors need to
be prepared for such a possibility. But in my view, that is the
likely extent of the downside.
The upside triggers-->
I really like the risk/reward set-up here. If sales pull back from
that recent lofty pace,shares are supported by that tangiblebook
value . Yet if sales in the December and March quarters simply
match the September results, then I think this stock can quickly
move up to the low teens.
We'll get a clear read on the latest business trends in about three
weeks when fiscal first-quarter results are released. I want to own
this stock ahead of that event, because I think investors would
really warm to Zoltek if it can deliver a second straight quarter
of solid results.
Action to Take -->
Two trading days after you read this (Monday, Jan. 9), I will be
buying 1,000shares (worth roughly $7,500) for my $100,000
portfolio.
Here's the Latest Snapshot of my $100,000 Real-Money
Portfolio...
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-- David Sterman
P.S. -- If you're enjoying the ride, there's more to come. Now
that we have a few slots filled in the portfolio, I'll begin
bringing you periodic updates on my holdings in addition to new
investments. Make sure you don't miss a thing by signing up to have
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David Sterman does not hold positions in any securities
mentioned in this article. StreetAuthority owns shares of F in one
or more if its "real money" portfolios.