Financial Toolbox: Invest In What You Know Best
Andy Snyder
There’s a simple trick that virtually guarantees success in the stock market. Follow it and you’ll grow immensely wealthy. Your portfolio will far exceed the averages. And you’ll retire early, young and healthy.
All you have to do, of course, is know more than everybody else.
Heck, know more than half the folks out there and you’ll be pondering names for your new yacht in no time.
Hopefully you know we’re writing with our tongue in our cheek. Nobody knows everything… and when it comes to predicting the fortunes of individual stocks, unless you’re on the company’s payroll, it’s downright impossible to be an expert.
That’s why it’s vital you do everything you can to put the odds in your favor.
The first step in that equation is to never invest in something you don’t understand. If you’re plunking your money down on some company with a complex product or a hard-to-follow business plan, you’ll likely have a big loss to write off come Tax Day.
Again, if you don’t understand, the guy who does will gladly take your money.
That’s why investing legend Peter Lynch says, “Never invest in any idea you can’t illustrate with a crayon.”
It’s quite simplistic, but we can’t argue the logic.
The mutual fund maven’s pragmatic approach to investing was built on the philosophy that knowledge is money… that if we know more than the next guy – because of where we work, the products we use, etc. – we have a distinct advantage.
Now, we’re not simply going to buy shares of a big-box hardware store because it’s where we bought a flapper valve for our toilet last week. And we’re not going to buy shares of Ford because its tag is on the truck in the driveway.
No. But we are going to have a bit of fun and start our research by focusing on the companies and products we know best.
We’ll use our unique knowledge of the industries and sectors to get a feel for these firms and earn outsized returns because of our “insider” knowledge.
We know when products are going out of style. We know when competition is creeping in the back door. We know when buyers are ravenous for their products.
These are the products we know best… and therefore the ones that make some of the smartest investments.
In this report, we’ll introduce you to three stocks that are a great way to start building your portfolio and will set the tone for our overall investment strategy moving forward.
Let’s not wait another second.
Stock Market Alchemy
This is the great American success story.
It’s the stuff dreams are made of for kids… investors… and entrepreneurs.
This company is turning junk into gold. It’s turning pennies into dollars. And it’s the epitome of buying low and selling high.
As I researched the company that earned a place on Forbes’ “America’s Best Small Companies” list nine years in a row and was dubbed the world’s best “remarketing company,” I couldn’t help but think of what trickles out of every young kid’s wild imagination at the first sight of a junkyard.
Yes, a junkyard. They’re crazy places. The stories in those tall piles of steel… the industry that goes into it all… junkyards tell a grand tale.
For Willis Johnson, though, a junkyard wasn’t a place to get rid of old, worthless metal. It was a platform to build a fortune. And now it’s your turn to join him as he expands his empire.
Every year, millions of cars are bought and sold at auctions. Instead of doing the buying and selling at auction, Johnson created the conduit to make that commerce happen.
What started as a small junkyard in 1982 has grown into a $12 billion global empire today.
Just about anybody who deals with buying and selling cars has done business with Johnson and his company, Copart Inc. (Nasdaq: CPRT).
Copart is the eBay of the automotive world. At any given time, it has more than 125,000 vehicles up for auction at 200 locations in 11 countries. In all, the company sells more than 2 million vehicles across the globe each year. It takes more than 10,000 acres of land just to house its massive inventory.
What’s crazy is how big this company is, how strategically vital it is to the automotive world… and how virtually nobody outside the industry has ever heard of it.
EBay we all know… Copart, though, is one of Wall Street’s best kept secrets.
That’s because, as I hinted at above, the company’s main prospects aren’t everyday car buyers.
Although it’s now possible for regular folks to buy via its platforms, most of Copart’s customers are body shops, junkyards, insurance companies and retail car dealers.
But I don’t want you to think of Copart as merely some big junkyard or just another used parts dealer.
That’s not the case at all. Instead, think of Johnson’s creation as a technology giant.
Thanks to Copart, no longer do wholesale car buyers, retailers or the general public need to physically be present at an auction. They can buy cars from the comfort of their own home.
With its technology, Copart can handle everything electronically. And given the fact that cars come with titles, registrations and a whole host of red tape, that’s saying something.
The technology that allows thousands of individual auctions to occur on several continents across the planet each day creates quite a competitive moat for the company.
There’s little threat of a fresh startup firm coming in and offering anything even close to what Copart is able to offer its customers.
“The amount we invest in technology in a quarter is more than these guys generate in revenue in a year,” said the company’s CEO, Jayson Adair. “That’s not a boastful statement by any stretch; that’s just a factual statement. How do you compete with the investment and generating the technology, the returns and then being competitive on price? It becomes very, very difficult to do that.”
That’s a big, bold statement… and it’s exactly the sort of thing we want to hear from companies we plan to own for a long while.
To understand exactly how that competitive stance protects the company and its shareholders, you must understand how the company works.
Here’s the thing. If you’re looking for a nice, shiny new car inside one of Copart’s auctions, you’re likely not going to find it. That’s because the majority of the vehicles it sells are salvage vehicles – cars and trucks that were considered total losses by insurance companies.
The insurers – wanting to stick with what they know best… insurance – contract with Copart to consign their vehicles. From there, the auction company takes possession of the vehicles, gets them listed on its site and seeks out the highest bidders.
Once deals are made, the company collects the money and ensures the proper paperwork is completed, and the winning bidders take delivery of their new vehicles.
Again, anybody from body shops to junkyards to retailer customers may be bidding on any of Copart’s auctions.
It takes a lot of technology to make it happen. But it also takes a lot of land.
For centuries, alchemists have looked for a way to turn base metals into gold. It would seem Willis Johnson has finally found the way.
Copart has another advantage… It lays claim to some 10,000 acres of land to house the vehicles it sells.
But the land isn’t in just one or two or even three spots. No, the auctioneer has its land spread out across the globe – with locations in the United States (where it does some 75% of its sales), Europe, South America and the Middle East. In fact, it now operates more than 200 locations in 11 countries.
And Copart keeps expanding. For example, the company recently bought 100 acres of land in Spartanburg, South Carolina… grabbed 36 acres in San Antonio… and picked up another 155 acres in Dutchess County, New York.
For Copart’s 2019 fiscal year, revenue, gross profit and net income were $2 billion, $898.3 million, and $591.7 million, respectively. These represent an increase in revenue of $236.3 million (or 13.1%), an increase in gross profit of $136 million (or 17.8%), and an increase in net income of $173.8 million (or 41.6%), from the same period last year. Fully diluted earnings per share for the year were $2.46 compared with $1.73 last year, an increase of 42.2%.
What led to such a big surge?
Part of the reason is that operating results in 2018 were adversely affected by one-time costs incurred as a result of Hurricane Harvey. The other part is… everything mentioned above. Copart is operating on all cylinders and pulling away from any competition.
And the company’s international footprint is still growing.
For example, in 2012, the company moved into Germany. Earlier this year, Copart opened its 12th new location in the country. Thanks to Copart’s technology, it’s the only company of its kind working in the country. And it’s paying off. In the past two years, the number of cars sold outside of the U.S. grew by 37.7%, largely driven by sales in Germany.
As the company uses its technology to attract new buyers and sellers, it will sell more vehicles at more locations on more acreage, and ultimately, it will use that growth to put more money into the pockets of shareholders.
I’m convinced the growth will continue.
This is your chance to invest in a behemoth of its industry. The moat surrounding its business is getting bigger by the week. And its footprint on the planet is quickly making it a real estate rock star.
It’s a perfect position for our Own What You Know Portfolio.
And it all started with a junkyard and a dream.
Poised to Pop
“Credit is just one component and the credit cycle is just one component of what might affect us,” said Vasant Prabhu, chief financial officer for Visa (NYSE: V), talking positively about the way interest rates are moving. “The bigger megatrend is really the digitalization of cash.”
Let me use those words to be the first to tell you about the biggest technological trend you’ve never heard of… and one we’re powerless to stop.
It has to do with a trend I’ve studied a lot… the death of cash.
Word of cash’s demise is spreading fast. It’s created a fresh (and hot!) investment opportunity. Take a look at these circumstances.
Sweden is the world’s most cashless economy, with barely 1% of the value of all payments made using physical money. Korea announced it would halt printing physical coins by the end of this year… and India withdrew the most popular banknotes from circulation.
The trend is accelerating quickly.
But here’s the thing. I’ve got proof that these are merely the early adopters. We’re at the very beginning of this megatrend… the start of the phase that sees parabolic growth.
You see, while many folks have ditched cash altogether, many have not. In fact, even in Sweden – again, the world’s most cashless society – less than half of folks are aware of the technology I’m going to tell you about.
In Canada, just over a third know about this technology.
And here in the States, the numbers are even smaller.
It makes sense. After all, there’s still an amazing $17 trillion worth of cash that has yet to be digitized.
But my research shows that money is about to get zapped at a stunning rate. And when it does, investors in the company I’m about to share with you stand to get rich.
For a glimpse at the pace at which our money is going from analog to digital, let’s look at some recent figures released by our pals at the San Francisco branch of the Federal Reserve. They tell us – at least in the U.S. – that cash is still the payment of choice for all deals under $10.
But that will soon change. From 2011 to 2019, for example, the total number of all cash transactions fell by more than 25%. The number of folks paying with cash is now below 30%.
But, believe it or not, America has always been known as a late adopter of technology. That is certainly proving to be the case with this trend.
For evidence, we turn back to the man with that booming quote, Prabhu… and some hot new technology.
“In Australia,” he recently told us, “94% of all face-to-face transactions are contactless. In the U.K. it’s rapidly climbing into the 70s, and in Canada it’s accelerating.” Notice he said “contactless.” That is key.
As Visa’s CFO, Prabhu has a big interest in this trend. And quite a unique view of what’s happening in the world of money… particularly global money.
And he’s excited about the notion of contactless payments – where a customer simply holds their credit card, key fob or even phone in front of a device and, voila, the transaction is done.
It’s being touted as incredibly quick, safe and easy. As global trends prove, consumers love it. And so do the companies that make it happen… like Visa.
Let me share a quick history lesson. While I love to pick on the Federal Reserve (it deserves every bit of it), I must give credit where it’s (rarely!) due.
The Fed has done something quite good over the past century. It has made using cash and paying with checks essentially free. It wasn’t all that long ago, I’ll remind you, that folks paid “interchange” fees for using checks, and private banks issued their own forms of cash.
In fact, few folks know it, but the cash in our wallet today (if you’re one of the smart ones still using it) is not printed by the federal government. No, it’s printed by a private bank that the government recognizes as the only source of American money – the Federal Reserve.
Historically, countries had several banks issuing notes. And each tended to discount cash offered by other banks.
It made cash rather expensive to use… but it added some hefty profits to the banking industry’s bottom line.
The Federal Reserve solved the problem. Right now, if you use cash or a check, the transaction is entirely free. Throughout history, that notion has been a rarity.
But I’m convinced it’s an idea that’s going into the history books as banks take full advantage of the typical consumer’s yearning for ease and comfort.
As folks take to the convenience of going cashless, banks and processors like Visa are once again getting a cut of every transaction.
In the case of Visa, it’s getting about 2.5% of every digital dollar going through its system.
Considering the company processed about $8.8 trillion worth of payments last year (a figure that’s growing about 15% annually) via its customers’ 1.4 billion cards… that small percentage added up to a huge figure – more than $23 billion in revenue.
It’s no wonder the company loves this cashless trend.
But as Visa’s CFO tells us… it’s just getting started.
You see, most folks in the States know about the cashless trend. They’ve seen it firsthand. But few folks know about the contactless payment trend that seems to be turbocharging its spread.
As one expert told us, once folks try it, they don’t go back.
Here’s why that’s critical…
Visa started shipping its first contactless cards to its users in November 2018. That means the technology that’s now responsible for more than half the transactions in countries like England and Australia is now available in the biggest market of them all.
It’s arrived in America.
That makes this an ideal time to buy shares of Visa. But there’s not much time to waste. Credit card use is increasing rapidly.
In 2019, total payment volume jumped 3% to 11.6 trillion. Visa raked in a profit of $12.1 billion. A huge 18% leap from last year’s $10.3 billion in net income.
From here, the profit potential hinges on three main ideas…
Interest rates: The higher they rise, the better the company’s net interest spread (meaning it can borrow cheaply and lend that money at much higher rates).
Foreign exchange rates: A strong dollar has created a headwind for the processing industry as it’s forced to convert weaker currencies into a stronger greenback.
Cashless payments: The big one. The more folks give up cash, the more transactions Visa will see. And the more money will trickle to its bottom line and into the pockets of its shareholders.
And, as always, I recommend you buck this trend and convert those profits to cold hard cash.
The world is going cashless whether we like it or not. We might as well profit from it.
Joining the Stars
If you’re not familiar with the name Constellation Brands (NYSE: STZ), I’m sure you’ve come across some of its most popular labels. They’re superstars in a rich galaxy of brands.
The company sells wine, beer and spirits. Black Box… Robert Mondavi… Woodbridge… Modelo… and, oh yeah, a little one called Corona, among others. Constellation is the third largest beer company in the United States and the world leader in premium wine sales. Clearly, with more than 100 brands in its portfolio, Constellation is one of the most significant players in the alcohol industry.
But something peculiar is happening in the booze biz. Tastes are changing. Wine is no longer the go-to beverage of choice. Instead, folks are turning to fancier beers, high-end liquors and, of course, marijuana.
While America’s cannabis business is still in its infancy, companies like Constellation fear full legalization in the States could suddenly change long-standing market demographics.
In particular, Constellation believes moderate- to high-income folks will turn away from alcohol and instead turn to marijuana and cannabis-infused products.
That’s why it bought a huge stake in cannabis-focused Canopy Growth Corp. (NYSE: CGC) and has the option to buy even more.
I’m convinced that someday (soon) Constellation will own the entire company and it will be a leading part of the alcohol maker’s business.
If that’s the case, you may ask, why not just pick up shares of Canopy and hold on? Ah, we already answered that question. It takes money, you know, to make money.
From here, Canopy’s share price is likely to remain quite volatile. Shares have certainly slipped from their sky-high valuations…. But the pot industry is currently under intense scrutiny, and these stocks could drop further.
That’s why Constellation will be patient. It’ll wait until the hoopla of recreational pot legalization wanes and the buying frenzy stalls before it goes all in.
It has time – and a hefty pile of cash – on its side. Most investors don’t.
That’s why it makes great sense to invest in Constellation. It already has what it needs to start transforming its business to be more cannabis-centered.
As the cannabinoid market takes off, Constellation will have the power and the leverage to take full advantage of it. It will remain a leader in one industry and, thanks to its stake in Canopy, will emerge as a leader in a brand-new industry. It proves it takes money to make money.
Next time you’re working on a project, be mindful of what products you have in your garage, kitchen, toolbox… you’ll see brands and the companies they represent that we’re all intimately familiar with.
The knowledge will pay off.
Invest in what you know and use. You’re already the expert.