Author Archives: Sven Carlin

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Is There A Second Chance For 3D Printing?


  • 3D printing stocks are back to the pre-3D printing stock boom.
  • The future of 3D printing looks too good to be true.
  • Microsoft is an example of how it is also a good idea to wait and invest only when the trend is really confirmed.

Introduction

3D printing isn’t currently in fashion in the investing world, but it serves as a perfect example of how investors’ excitement about uncertain future prospects can fuel an incredible stock boom that quickly fades as fundamentals don’t support the excitement.

The most widely known 3D printing stocks are 3D Systems Corporation (NYSE: DDD) and Stratasys (NASDAQ: SSYS) which have a current market capitalization of $1.8 billion and $1.2 billion respectively. Both stocks were booming in 2013, with DDD surging 800% and SSYS 500%, only to fall below their 2011 levels in February 2016 and then surge again. Investors who invested in 2011 and sold in 2013 made great profits, but those who invested around the peak, when the biggest volumes we’re traded, saw huge losses.

Figure 1 3D printing stocks
Figure 1: 3D printing stocks in the last 5 years. Source: Yahoo Finance.

Since May, there has been a new but familiar player in the 3D printing industry. HP Inc. (NYSE: HPQ), the hardware part of the recent HP split, announced its first two 3D printers. The market’s reaction to this unveiling has been minimal which only makes the 3D printing story more interesting.

3D printing will certainly be a part of our future and money will be made on it, but the most important thing is not to overpay. Peter Lynch, who we discussed recently, suggests: “When even the analysts are bored, it’s time to start buying.” As we don’t see any Wall Street Journal 3D printing headlines or Cramer screaming about it, this seems like a great time to take a look at what 3D printing is and see if it is or will ever be a good, low risk – high return investing opportunity.

Overview of 3D Printing 

3D printing is also known as additive manufacturing. It turns digital 3D models into solid objects by building them up in layers.

The technology is not new. It was invented in the 1980s and has been mostly used for rapid prototyping. Recently, the industry has evolved and aims to cut out supply chains by producing all the required manufacturing items at the place where you need it via a 3D printer. The stages of 3D printing development haven’t been as smooth as Christopher Barnatt predicted, but we can see in the graph below the areas where 3D printing will most likely grow in the future.

figure 2 explain the future
Figure 3: 3D printing market segment adoption curves. Source: Explaining The Future.

3D Printing:  The Current Situation

The current situation in 3D printing isn’t stellar as both DDD and SYSS have seen their revenues decline. This could be due to the fact that general business investments have been down in the last few quarters or because 3D printing is not yet what it was expected to be.

In comparison to 2014, revenues didn’t decline much in 2015. Revenues were stable for DDD with a 3% decline in 2015, while revenues declined 8% for SYSS in 2015. Both companies see the current slump as a temporary decline and hope that sooner or later their businesses will thrive. The big reported trailing losses both companies have are due to goodwill impairments as their growth scenarios didn’t materialize.

The new player, HP, plans to revive its business with 3D printers and create a world without waste, warehouses and inventory. You can watch a nice video of what HP sees for the future here.

Conclusion

We have already witnessed one 3D printing investment boom and will probably witness more of them in the future as the 3D printing story seems plausible. However, even if the 3D printing industry gains the kind of traction we believe it can, we don’t know when that will translate into positive returns. The only thing that we can state with certainty is that 3D printing offers a 100 bagger opportunity if the world really adopts 3D printing like the companies believe it will, but you could also lose all of your investment if it doesn’t and the manufacturing world remains as it is.

It’s likely the world will change, as it always has. This would result in another boom in 3D printing stocks. Don’t forget that in the 1990s when PCs were already a pretty normal thing, there was still the possibility to buy Microsoft and have a 20 bagger return over the following 25 years. For reference, MSFT’s price in January 1993 was $2.80 and it is currently is $58.3.

figure 3 msft
Figure 3: MSFT stock price. Source: Google Finance.

Maybe it’s a good idea to wait until things really get traction, but as everything moves much faster these days, maybe it will be too late to make profitable investments if you wait.

If you invested in 3D printing back in 2013 you should definitely think about investing now because the story hasn’t changed, only now the stocks are much cheaper. If you are new to 3D printing, you might want to expose yourself to it with a small part of your portfolio. That way, if you lose, you don’t lose much, but if you win, you win big.

The safest way to take advantage of the next 3D printing boom might be to invest into a company like HPQ which is already an industry-leading and profitable company, and is currently undervalued.

Subscribers to Retirement Revival, a newsletter by Investiv’s Thomas Moore, were issued a recommendation to buy shares in HPQ on January 22, 2016 at $10.41 per share. Today the stock trades at $14.48, a gain of 39% in only 8 months.

In addition to identifying deeply undervalued companies which pay abnormally high dividend yields, like HPQ, subscribers also receive a second income opportunity every month. To learn more about a subscription to Investiv’s Retirement Revival click here.

 

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If You’re Thinking About Global Diversification, You Should Read This


  • The developed world is depending, and will continue to depend, more and more on the developing world.
  • The focus of productivity and GDP growth is in Asia.
  • The U.S. is the only country with trade deficits since 1976.

Introduction

Nobody knows where the market will go in the next week, month, or year, but what can give investors an edge is to look at macro trends that are bound to influence economies and returns on investments.

In this article we are going to analyze productivity and trade balances among the most important global economic powers, and try to derive a long term trend from it in order to improve the international exposure in our portfolios.

Productivity

Productivity is essential for economic development in the long term, and in the short term is only beaten by credit. But as credit has its cycles in the long term, productivity is what determines if a country is a success or not because credit can only be used up to a point. Productivity is the mechanism through which societies progress.

The issue with productivity is that it is stuck globally. This is because productivity is falling in the U.S. and Japan, slowing down in China, and countries like India still don’t manage to compensate for the declines of these superpowers. However, the trend is clear.

figure 1 productivity
Figure 1: Labor productivity growth rates. Source: Conference Board.

The trend shows how the largest global productivity and GDP growth comes from Asia with some bright spots in Africa. As Africa is still undiscovered as an investment opportunity and complicated to invest in, it is good to focus on Asia for international long term diversification.

Higher productivity means that people are achieving more with their own means, education and capital, which improves economics and living standards. This further improves education and healthcare which creates an upward spiral. As Asian countries have a low baseline, there is plenty of room and time for them to develop and grow.

Jim Rogers, co-founder of the famous Quantum Fund with George Soros, is heavily invested in Vietnam. Of course, such an investment is difficult to make as it has many capital constraints at the moment, but it shows you where smart money is going.

A country that is easier to invest in is India, which had a GDP growth rate of 7.3% and productivity growth of 5.2% in 2015. The fact that productivity growth in the U.S. was 0.7% in 2015 and GDP growth was at 2.4% means that GDP growth isn’t exclusively influenced by long term, healthy productivity increases, as is the case in India, but is also greatly influenced by debt. We all know that debt works in cycles, so sooner or later we will see some deleveraging take place that will send the U.S. into a recession, hopefully later than sooner so that we can still enjoy this bull market for a while longer. The situation is the same in Europe; productivity grew at 0.9% while GDP grew at 2.0% in 2015.

Balance of Trade

Among other factors like productivity and credit cycles, the balance of trade (BOT) is a very important factor for assessing the health of an economy. The BOT is often shunned by economist as one country has had a BOT deficit for 41 years and things seem to still go pretty well there. We are of course talking about the U.S. which saw its last trade surplus in 1976.

figure 2 U.s. balance of trade
Figure 2: U.S. BOT. Source: Trading Economics.

This means one thing: the U.S. is spending more than it is producing which is not news, but is good to have in mind when deciding where to go with your global investments.

Other countries—like the U.K., Canada and Brazil—also have BOT deficits, but they have evened out in the long term with past surpluses, with things being a little bit worse for the U.K.

figure 3 canada
Figure 3: Canada BOT. Source: Trading Economics.

Europe, China and Japan have a surplus in their trade balances.

figure 4 EU balance of trade
Figure 4: Europe BOT. Source: Trading Economics.

BOTs show only one side of the equation where usually net investments cover for the trade deficit. But the current account for the U.S. is also negative.

figure 5 current account
Figure 5: U.S. current account. Source: Trading Economics.

Conclusion

The world will be a very different place in 20 years as global trade, productivity and economic growth shifts from the western world toward Asia. With countries like India and Indonesia reminding us of what China was 20 years ago, we should not be surprised if such a scenario replicates itself in those and other emerging countries.

This doesn’t mean that we should be completely invested in emerging markets, but if we have to choose between a company that has sales only in the U.S. and a company that is selling globally for the same valuation, we ought to go for the global one as global macroeconomic long term trends are clear and unavoidable.

The good news is that emerging markets growth is what will push the currently stuck developed economies forward as increases in global demand will be good for everyone.

 

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How Dangerous Is Common Retirement Advice?


  • Things are much different than they were 10 or 20 years ago but everyone seems to follow the same retirement investing advice.
  • As retirees are in need of more security they are now forced into more risk as bonds have become riskier than stocks while also giving a lower yield.
  • If you’re looking for security, cash may be your best bet.

Introduction

You’ve likely heard the advice that as you get closer to retirement you should move toward having a bigger chunk of your portfolio in bonds rather than stocks. Most retirement funds are structured in that way. Vanguard Target Retirement Funds allocate 90% of assets in equities and 10% in bonds if you are going to retire between 2058 and 2062, thus 45 years from now. For those with 20 years until retirement, the division is 80/20. The ratio is 75/25 for those with 15 years, 65/35 for those with 10, 60/40 for those with only 5 years, and 50/50 for those of retirement age. For those in retirement, the division is 64% in bonds and 36% in equities if you’re younger than age 73, and 70% in bonds and 30% in equities if you’re older than 73. You can see this represented in figure 1 below.

figure 1 vanguard asset allocation
Figure 1: Vanguard Target Retirement Fund asset allocation per age group. Source: Vanguard.

The example above follows the standard and traditional retirement advice issued by the majority of financial institutions and retirement specialists. In this article we are going to analyze if that advice still holds up in the current financial environment, what the risks related to it are, and finally, what can be done differently.

Don’t forget that it is a given in the financial world that if an advisor gives the wrong advice but the advice is the same as what the majority does, there will be no negative implications for the advisor’s career if and when things turn for the worse. On the other hand, if you point out risks but nothing happens, your financial career is in jeopardy. Think of the movie The Big Short and the guys shorting A rated credit institutions.

What Has Changed In The Last Two Decades? Bonds.

The common advice outlined above comes from an environment that was significantly different than the one we have today. The first major difference is that yields have gone down and bond prices have gone up in the last 20 years.

figure 2 bond yields
Figure 2: Thirty-year treasury yield. Source: FRED.

The current yield on 30-year treasuries is 2.24%, which is a record low. What is significant is that yields have been declining since 1981 and before that yields had only been increasing.

The declining yields trend pushed bond prices upwards. The net asset value of the iShares 20+ Year Treasury Bond ETF (TLT) has gone from $103 at the end of 2013 to the current price of $140. This means that if yields go back to the levels they were at the end of 2013, of around 4%, the value of 20+ bonds will decline by 29%. It would take more than 10 years for the increase in yields to cover for the decline in value. So, by being long bonds, you are risking a loss of 30% for a yield of 2.24%.

Yes, bond prices can go higher if the U.S. becomes like Japan or Europe where negative interest rates are the new normal, but with the FED contemplating interest rate increases and an employment rate of 4.9%, which is half of Europe’s rate, we could say that the chances are more in favor of higher yields.

The retirement strategy that was formed a long time ago didn’t have to account for global negative interest rates, treasuries yields below 2.5% and the fact that bond yields could jump up or decline 50% in a matter of a year.

figure 3 volatility
Figure 3: Thirty-year treasury yield volatility in the last 5 years. Source: FRED.

What Has Changed In The Last Two Decades? Stocks.

Stocks are in the same asset bubble as bonds. Low bond yields push investors to seek better yields elsewhere. The S&P 500 has a PE ratio of 25.23 which implies a yield from stocks of 3.96% which is, the same as with bonds, the highest level ever reached if we exclude the 2000 tech bubble and the depressed earnings in 2009.

figure 4 s&P 500 multipl
Figure 4: S&P 500 PE ratio. Source: Multpl.

The Shiller PE ratio, which takes into account 10-year earnings averages in order to eliminate cyclical influences, is even worse and at 27.08.

figure 5 shiller
Figure 5: Shiller PE ratio. Source: Multpl.

To put it simply, if bond yields go to 4% and we attach the historical stock premium of 2.29% for stocks, the expected yield from stocks would be 6.29%. With current earnings, it would imply a PE ratio of 15.97 and an S&P 500 value of 1,380, or a decline of 37% from current values. This means that for the current S&P 500 earnings yield of 3.96%, you are risking 37% of your stocks portfolio if the FED reaches its 2% inflation target.

Conclusion

Given the risk versus reward outlined above for both bonds and stocks, one clearly has to be prudent with their savings, especially for those close to retirement. Many retirees watched their retirement savings get cut in half during the last financial crisis and unfortunately it looks like many will go down the same road again because they follow the same old rules without questioning them.

Low yields force investors to hold a greater percentage of their savings in assets that produce some form of yield in order to reach a satisfying retirement income, but if you look at risk as a function of price and not volatility you see that those assets become more and more risky as their prices go up and yield goes down. As we described in our article about Carl Icahn, smart investors continue to warn us about the long-term negative effects of low interest rates as they threaten to bankrupt pension funds and retirement incomes. Those low interest rates force people to save more as they will need more money to retire safely.

The main point of this article is to make investors think and to show them the risks they are running by just following the old investment dogmas in a different world. If you are close to retirement, assess your future needs, assess the risks you are currently exposed to and create a portfolio that you can sleep well with no matter what happens.

An asset that is pretty safe but that no financial advisor will ever recommend because you do not get any commission on it, is cash. Something to think about in this new world.

There is one additional strategy, which happens to be one of our favorites, where the bulk of your retirement savings sits safely in cash, yet still allows you to earn high double digit yields on your capital. Click here to learn more.