As an investor, can you think of anything better than shares of disruptive companies? I mean, if you’ve been holding Macy’s (NYSE: M) stock, well, watching it fall 50% this year has been kinda rough. But if you’ve been in Amazon (NASDAQ: AMZN), you’re up 50%. And you also get the perverse joy of watching Jeff Bezos run circles around the other CEOs.
And can there be anything better than riding Netflix to nearly a 100% gain while more and more Americans ditch their cable TV service?
It’s Comcast in my area. And it consistently gets rated one of the most hated companies in the country. The thing is, Comcast knows it is doomed. That’s why it bought Universal Studios from GE (NYSE: GE) back in 2011. Now it just needs to make some decent movies. I swear, it seems like Disney (NYSE: DIS) is the only company that can make a decent film these days.
Speaking of GE, that’s another company that’s getting its butt kicked by rapid change and innovation. GE made a big push into oil services right before oil prices crashed. Drillers have innovated so quickly to increase efficiency and cut costs to maximize their investment that oil services companies can’t make as much money. This one Permian driller I like, Laredo Petroleum (NYSE: LPI), is doubling the length of its wells, which will save a ton of money. Profits at GE’s power business have been cut in half.
The pace of disruption in the energy market has been fascinating to watch and difficult to predict.
Innovate or Die
Fracking opened up an incredible amount of natural gas here in the U.S. That innovation basically killed coal. There are a couple ironies here. One is that perhaps the biggest natural gas company, Chesapeake, was perfectly positioned to dominate. But it overspent for gas leases, not realizing that there was so much natural gas that prices would be crushed. It was so bad that Chesapeake went through bankruptcy and its founder drove his car into a bridge abutment.
Then there is the fact that the biggest natural gas reserve, the Marcellus Shale, sits under the Appalachian Mountains, right in the heart of coal country. But even today, when the outlook for coal could not be any more certain, many out-of-work coal miners can’t see the reality.
Bloomberg recently had a heartbreaking story about out-of-work coal miners who refused to take part in retraining programs because they believe the president can bring coal back. Sad!
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Coal is not coming back. If you don’t believe me, look at the companies that use the most coal: utilities. They’ve been buying natural gas turbines from GE for the last 10 years to take advantage of the cost benefits of natural gas. They aren’t just going to switch and go back to coal.
The biggest favor you can do for people who are being disrupted is tell them the truth. Let them cut their losses and move on before things get totally out of hand and they’re taking disability, getting hooked on OxyContin, and binge-watching Judge Judy every day.
Who’s Getting Disrupted Now?
The problem is, it’s not always easy to figure out who’s getting disrupted. Right now, a lot of investors think Tesla (NASDAQ: TSLA) is disrupting the auto industry. They think because Tesla was first to market with an electric car that has the cool factor, all the other carmakers will be scrambling for market share.
I think it’s highly likely that Tesla is actually disrupting itself. I mean, Tesla put the electric car on the map. We see them every day. And many of us probably realize we will own an electric car within the next decade. But will it really be a Tesla? If I were a betting man, and I am, I’d put my money on Toyota or Ford or GM or Daimler to leverage their supply chains and manufacturing knowhow to dominate a market that Tesla pioneered.
I can easily imagine Tesla investors riding that stock a lot lower before they get it. But when people get really invested in an idea, it can be hard to change their minds. At least until they’ve lost a lot of money…
For the last 18 months, I’ve watched Wall Street show how stubborn it can be. They continue to buy shares in a sector that is being disrupted. Demand for these companies’ products is falling. Revenues are falling, too. Profits are barely growing. These stocks are at all-time highs, and Wall Street keeps buying…
The worst part is if you have a 401(k), you probably own some of these stocks and don’t even know it. You can ditch these stocks now and not suffer the big decline that’s coming.
I have a special report coming out tomorrow that will tell you which sector you need to avoid… and also the one stock that can make you a lot of loot as these stocks get whacked.
While you’re waiting for that, check out the recent episode of our Investing After Hours podcast, where I talk about some of these risks.
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
