Nuclear Weapons and Contrary Opinion
Big Profits in Amazon.com
My Favorite Stock
We get three newspapers delivered to our office every day, the
Wall Street Journal, the New York Times and Investor's Business
Daily. Last Friday, every one of these papers, above the fold,
had a picture of Israeli Prime Minister Benjamin Netanyahu,
drawing a red line on a cartoon bomb, symbolizing the threat of
an Iranian nuclear weapon.
Unless you've been living in a cave, you saw one as well.
The fact that these three newspapers used similar photos tells
me one thing.
The level of worry about Iranian nuclear power has reached the
state where an extreme level of attention is being focused on the
problem. Therefore, I can conclude the problem is very likely to
be solved. And therefore it's not something I need to worry
Now, this might seem a cavalier, flip, irresponsible attitude.
I understand. But it's an attitude born from years of studying
the stock market, and in particular from years of noticing that
it's not the things people worry about that cause trouble, it's
the things people aren't worrying about, and that they therefore
aren't prepared to cope with.
If everyone's being thoroughly screened before they board
commercial airlines, there's probably greater danger in charter
airplanes, or in ultralight aircraft, like the fellow who got
arrested here in Salem for flying his paraglider on September 11.
(He wasn't breaking any laws-there are no laws governing
paragliders-but he had to pay $50 in court costs.)
If everyone's getting flu shots, the flu will not be a major
problem. The problem will be one that's not expected, like
beriberi (I like saying beriberi) or excessive exposure to
supposedly healthy things like Purrell hand sanitizer or
And if everyone's worried about the Fiscal Cliff, the problem
will come from elsewhere, perhaps a Brazilian bank that loaded up
on sugar cane futures or a strike by New York City subway drivers
(anything is possible!).
In a broad sense, this is contrary opinion, the idea that when
the vast majority of people agree on something, they are usually
wrong. Contrary opinion is not necessarily a guide to action, but
it is definitely a guide to thinking.
So, knowing that there's little use in worrying about Iran's
nuclear capability, what do I worry about? Well, things that I
can have an impact on, like my diet, the tire pressure in my car,
the stocks in my (and your) portfolio, and stocks that can be
really big winners. More on that below.
Speaking of big winners, today I want to start with a reprint
of a Cabot Stock of the Month recommendation I wrote back on
March 13, 1998, more than 14 years ago.
Earth's Biggest Bookstore
"Six years ago this month, a little company called America
Online came public, to no great fanfare. A year later, it was
running a distant third in the online services industry,
trailing deep-pocketed competitors Compuserve (H&R Block)
and Prodigy (Sears). But the company focused like a laser beam
on its business (unlike the others). It was led by a visionary
founder (unlike the others). And it gave away millions of free
disks, all in an effort to build the biggest membership base.
One year later, it had succeeded in taking a commanding spot as
king of the hill, a position it has reinforced ever since.
Better yet, for investors, its stock has multiplied six times
since it gained that number one spot. Obviously, being number
one is much better than being number two.
"And that's why we like Amazon.com! Named for the biggest
river in the world, today it's "The Biggest Bookstore in the
World. " It has built a loyal following of users, who return
often to its website to buy more books. This year it will begin
to sell these customers music CDs as well. And beyond that. . .
. .the sky's the limit, because while America Online succeeded
by selling information, Amazon.com is selling real stuff, and
Internet commerce is still in its infancy. "
[This was twelve years ago, mind you. Amazon's total
revenues the quarter before had been just $66 million; earnings
were nowhere to be seen and many experts believed that Amazon
would be crushed by the giant bookselling experts Borders and
Barnes & Noble. Going on in my recommendation, I focused on
the inefficiencies of the bookselling industry.]
"The book retailing industry may be characterized by slow
growth, but it's a huge business! U.S. sales should hit $30
billion in 2000, while world sales should hit $90 billion.
There are approximately 50,000 publishers feeding this market!
At anyone time there are some 1.5 million titles in print in
the U.S. The average super store stocks fewer than 10% of these
titles. And it often overstocks, as it has no perfect way to
gauge demand for a book. Overstocks lead to returns, which cost
money. And then there's the traditional, and significant,
investment in buildings, parking lots, inventory and
"Amazon.com, by contrast, has minimal inventory. Yet it
boasts over 2.5 million titles available, representing every
book in print plus a million out of print. Its bricks and
mortar are limited to a spartan corporate headquarters and two
distribution centers, where distributors like Ingram drop off
orders daily, Amazon packages the books, and shippers like USPS
and Federal Express pick up their loads. Most books are
available at 20%, 30% and 40% off their list price! Yes,
competitors like Barnes & Noble and Bertelsmann are to be
reckoned with, but we don't think they'll catch Amazon. They're
run by book people, not computer people, and Amazon has a big
"Today a lot of people still have never used the Internet.
Even more have never bought anything on line. But that's
changing fast. In 1996, for example, the company's customers
were concentrated among the Internet-savvy, illustrated by the
fact that the top-selling book for the year was Creating Killer
Web Sites. But in 1997, the top four books were Into Thin Air,
Cold Mountain, The Perfect Storm and Angela's Ashes. We still
sense a masculine weighting to the audience, but it's obvious
the readership is broadening fast.
"Skeptics will tell you the stock is pricey, selling at
fourteen times sales and still losing money. And they'd be
right … if the company made no progress from here. But every
day thousands more people access the Internet and buy stuff. To
date, Amazon has captured less than a half of a percent of the
U.S. retail book market. The demographic overlap between
frequent book buyers and Internet users is high, so we see an
immense opportunity for growth in a true mass market. And we
think Jeff Bezos, Internet salesman, will achieve it.
"In short, Amazon's success depends on three factors:
• its ability to extend its brand position
• its ability to provide its customers with outstanding value
and a superior shopping experience
• its ability to achieve sufficient sales volume to realize
economies of scale."
"For the quarter ended December 31, revenues grew 676% to
$66 million, while the loss was $9.3 million, or $.39 per
share, up from a loss of $.10 a share the year before. Yet
that's acceptable. As explained above, Amazon is following the
America Online model, building a customer base first and
worrying about profitability second. Some analysts expect the
firm to show its first annual profit in 1999. (They didn't
arrive until 2002!) AOL is owned by 173 mutual funds, while
Amazon is owned by just 15. The company has no debt. Of 24
million shares, management owns 65%. Founder Jeff Bezos is
hanging on to some 40%!"
That investment of March 1998 worked out pretty well. We sold
in January, 2000 for a profit of 900%. Doing even better was
Cabot Market Letter, which had recommended the stock two months
earlier, in January, 1998, and also sold in January 2000, for a
profit of 1,291%. That was an awesome sale, because the stock was
a huge loser in market selling that followed, falling 95% from
top to bottom!
Of course, Amazon eventually recovered (and it's done very
well since), while Borders is bankrupt and Barnes &
Noble-despite the success of the Nook-may follow it.
So why do I bring this up today?
Because of a potential parallel. Amazon.com paralleled
Online in several ways, and a favorite company of mine today
parallels Amazon.com in several ways.
the young electric car company run by Elon Musk, and here's what
First, Tesla is losing money, just as Amazon did.
Second, its founder is a visionary leader, in the mold of Jeff
Third, it's taking on very large competitors in a large and
very established-one might say sclerotic-industry.
Fourth, it's attempting to succeed in this industry-and to
revolutionize it-by doing virtually everything differently.
Tesla is not using gasoline engines. After a century of
development, the improvements to be made from gasoline engines
Tesla is using batteries, which not only enable superior
acceleration and recapture energy upon deceleration but
also-because the flat battery is on the floor creates a low
center of gravity-enable better handling and more spacious
These batteries promise no tailpipe emissions. They provide
far superior mileage per unit of energy. And they enable better
aerodynamics as well; Tesla's latest offering-the Model S-which
seats five adults and two children, is so well designed it has a
lower coefficient of drag than any production car on the road
today-even the Toyota Prius.
And to date, the cars coming off the line are perfect. Musk is
intent that his customers find absolutely no reason to complain
about the quality of the product. And to date none have.
Furthermore, the reviews from media, both automotive and
mainstream, have been glowing.
Performance-wise, the one shortcoming is the lack of unlimited
range that we view gasoline-powered cars as having. But Tesla is
working on that (it's installing a network of chargers in
California), and I for one would trade the ritual of stopping to
fuel up with gasoline (especially in winter) for a nightly ritual
of quickly plugging in my garage, just as I plug in my iPhone
Tesla is doing it differently on the marketing side, as
Instead of selling cars through independent or franchised
dealers, they're selling them through stores, overseen by the
same guy who designed Apple's stores!
Now, there are differences between Amazon back in 1998 and
Amazon was growing very fast, while Tesla is not.
Amazon's stock was shooting higher, while Tesla's is not.
And Tesla has a government loan to pay back, while Amazon did
But that was a different time, when investors were shoveling
money into promising stocks, rather than keeping it under the
And the automotive industry is far more complex than the
bookselling industry, so ramping up production takes more
Still, I think Tesla has the potential to revolutionize the
automotive industry, and thus I think TSLA has the potential to
be as big a winner as AMZN was more than a decade ago, and that's
why it's one of the stocks in the portfolio of Cabot Stock of the
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory