October Press On Research Issue – The Next GE?
I don’t hype investments. And my biggest fear while the investment newsletter was courting me last year was I would have to hype. Use hyperbole to explain how you’d gain 10,0000% owning XYZ stock in the next three days. Or even outright lie.
But I got lucky.
While I learned a ton of investment newsletters are terrible. And will lie and promise returns they can’t hope to deliver. The investment newsletter I worked for wasn’t one of those.
One of the biggest rules all analysts had to abide by was “Write about the biggest returns you want and the investment time frame you want. But you have to be able to prove the investment thesis and returns out or we can’t use them.” In other words don’t promise what you – or we in that case – can’t deliver.
I was relieved when I found out this was one of the biggest rules analysts had to follow the company. And while I still don’t hype investments. I learned it’s not hype if you can prove your thesis out.
Even though you might think a title of The Next GE? for an issue is hype its not. In the October 2015 Press On Research issue releasing today I prove that this company could become the next GE.
If this still isn’t enticing enough how about an excerpt from the upcoming issue where I lay the groundwork for my thesis. The unfinished excerpt below is from the October 2015 Press On Research issue being sent out to subscribers today.
October 2015 Press On Research Issue
By Jason Rivera
Press On Research Volume 1 Issue 7
The Next GE Pays You A 10% Dividend Now
While We Earn 34.5% In The Next Year
If you’ve studied business and management you’ve read or seen GE from the early 1980’s talked about a huge amount. And have learned how Jack Welch saved the company by introducing a radical concept.
GE was going to number one or two in each business it operated. Or it was going to sell or close down the businesses.
This was a drastic – but necessary decision – because GE had become an inefficient bureaucratic nightmare.
Quoted below from Wikipedia. Emphasis is mine.
“During the early 1980s he was dubbed “Neutron Jack” (in reference to the neutron bomb) for eliminating employees while leaving buildings intact.
In Jack: Straight From The Gut, Welch states that GE had 411,000 employees at the end of 1980, and 299,000 at the end of 1985.
Of the 112,000 who left the payroll, 37,000 were in businesses that GE sold, and 81,000 were reduced in continuing businesses.
In return, GE had increased its market capital tremendously. Welch reduced basic research, and closed or sold off businesses that were under-performing.”
And this changed fortunes for GE shareholders in a huge way going forward During Welch’s tenure from 1981 to 2001 the company’s share value rose 4,000%.
That’s not a typo.
Whether you thought his slash and burn tactics were humane or not; for GE shareholders Jack Welch’s tenure was amazing.
And because of how well GE did during his tenure Mr. Welch is regarded as one of the best business leaders of the 20th century.
But why did this approach work so well?
Because it enforced strict competition standards within GE. It forced every subsidiary to work towards becoming the best company it could be.
GE employees at all subsidiaries knew if they didn’t work towards becoming great. And achieve those goals. That its business may be sold to another company. Downsized. Or shut down.
This led to more innovation. Better productivity. Less bureaucracy and more efficiency at all subsidiaries and GE. And this led to better margins, compounding of value within the company, and higher returns for shareholders.
But Press On Research is about small, safe, undervalued companies, which have management I can trust. And we can’t buy GE from the early 80’s today.
So why am I talking about it in Press On Research?
Because today’s recommendation operates using Jack Welch’s rule of being number one or two in each business unit it operates in. And because of a multi trillion trend within its industry could become the next GE over time.
But before we get to what the company is. I need to tell you what it does.
Investing In Picks and Shovels
“During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans (Levi Strauss) made a nice profit.” Peter Lynch
In the August 2015 Press On Research issue I told you about a great company in the tech sector that works with some of the biggest tech companies in the world.
But it wasn’t a typical tech company…
It didn’t have a social network. Introduce a new game or app. Or even improve graphics or processing speed for games and computers.
It operates in what’s referred to as the picks and shovels part of the technology industry.
What does this mean?
The picks and shovels part of any industry is something that’s necessary to the survival of the industry. But most people don’t think about.
To continue the example from the Peter Lynch quote above; when people flocked to the gold rush they wanted to get rich by focusing on finding gold.
But most people didn’t. And the people who didn’t lost fortunes and became destitute.
The people who made out best during the Gold Rush were people who sold things like tents, jeans, picks, and shovels.
The same thing is happening in today’s tech arena…
Everyone is focusing on the next big app, game, or social network. But most of these ventures fail. And while we have greater social and economic safety nets today than we did in the 1800’s. Vast fortunes are still being lost today chasing the quick cash.
That is unless you’re in the picks and shovels part of the industry. And like (NAME REMOVED) from the August 2015 Press On Research issue. Today’s company operates in that same necessary semiconductor and processor packaging industry.
Handle With Care Part 2
The number one tenant of value investing is buying companies selling at a discount to their intrinsic – or true – value.
This is done so that even when making a mistake in our analysis we still have a good chance of making some money. Or at least not losing much.
Different value investors also incorporate things like profitability. Management trustability. Cash generation. Trends. Etc. into their analysis.
But the biggest thing for value investors after buying a company with a margin of safety is the ability to understand the business the company operates in. And the stability of that industry.
These two concepts are why most value investors keep away from investing in the tech industry. Where valuations are higher than average. And the industry changes at a rapid pace.
The best kinds of businesses are ones that are necessary. Today’s business is.
As with (NAME REMOVED) in August, today’s pick packages microchips and processors for the tech industry. And as I said in the August 2015 Press On Research issue:
Companies manufacturing parts going into computers and other electronics have to make sure the parts work when finished.
Since most of these hardware manufacturers have assembly lines set up only to make chips, processors, and memory. They have to outsource the testing of their products to third parties
Without third-party specialists like our pick today testing and packaging products. The part and product manufactures would have to test them in-house.
This would take money away from R&D for new products.
So not only does outsourcing save the tech giants and manufactures money and time. But it also brought to life an entire specialized packaging, testing, and assembling industry.
Combined this industry does billions of dollars worth of work. And saves the tech giants billions of dollars.
This industry will experience wild swings when giant chip makers like Intel and Micron slow down. But it will remain necessary for the foreseeable future.
This is one of the reasons why I have no problem investing in “tech” for the second time as a strict value investor. But there are a lot more great things about this company.
Today’s pick is a $640 million company. It has better margins than (NAME REMOVED). It could turn into the next GE in time. It’s undervalued by as much as 40% now. Will pay us a 10% dividend while we wait for its shares to rise. And produces and has a ton of cash compared to little debt.
All the above combine to make this an ultra safe investment. None of this considers the huge trend that could explode its shares. And turn the company into the next GE.
But before I tell you what the company is let’s do a quick comparison…
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