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Best Ideas Are Often Ones You Can Actually See...

Whenever, I am asked by someone looking to start investing in the stock market and what should they buy I very rarely give them an actual investment. The basis for this is that everybody’s risk tolerance and investment horizon are different and simply giving them a trade idea is of no benefit. In fact it only puts my reputation at risk because inevitably even if the stock does appreciate I am unlikely to be around to tell them when to sell. I would giving them only half the trade.

Instead I give them the advice that was given to me from an early mentor, which I believe is sound advice for beginners. Research a company in something you have an interest in, products or businesses you can see in the real world and that you understand. Doing so achieves to objectives, firstly, it generates genuine interest and enjoyment in the research and analytical side of investing which in reality can be mundane and boring for those who are not seasoned traders. Secondly, it helps shape and pave the process to understanding what drives profitability and winning investments.

One of the first such stocks I adopted this process to was Blackmores (BKL). As a teenage self-proclaimed superstar of the sporting world with intentions of breaking the world record in the mens 100 metre sprint (I failed dismally as the record books and timing boards show), I was also interested in nutrition. Blackmores at the time had decent nutritional products and were in major supermarkets but a simple walk through the aisles of Coles and Woolworths would see that they were positioned on the bottom shelves and their branding was very vanilla. A change in strategy, branding and product range suddenly saw a burst in market presence. The same stroll down the supermarket aisle saw bright, vibrant labels, an expanded range, better positioning on higher shelves in the customers’ direct line of sight and in some cases their own dedicated portable shelving stands promoting the product in-store.

Naturally an expansive and aggressive push not only grabs the attention of consumers but also investors when they successfully began to increase sales. The share price after almost halving then rallied 500% over the course of the next two years! I won’t give away the years this occurred for fear of revealing my true age, but suffice to say that this same strategy by Blackmore’s expansion into China has seen the company appreciate 75 fold since I first researched the business!! A perfect Warren Buffet style investment opportunity.

This now leads onto an opportunity that exists within another area of my interest – the automotive industry. I have discussed in this column the changes currently underway in the industry which is experiencing some of the greatest and most rapid changes of any industry in the world. From changes to legislation on fuel consumption, emissions, safety and technology the automotive industry is undergoing sweeping long-term changes.

Like my example with Blackmores, it is easy to see these changes underway in the automotive industry, particularly on the improvement of safety with the use of technology. Any newly built European car (and some Japanese makes) have an array of new safety features. Early examples were parking sensors which evolved to parking cameras, to park assistance and now cars that reverse park themselves. A clip on youtube here from two years ago (!) shows Audi’s self piloted parking https://www.youtube.com/watch?v=vt20UnkmkLI where the driver simply uses an app and the car drives itself into the parking station and finds its own vacant space, parks and locks itself. It returns when the driver requests it on the app, all by itself.

By using cameras and sensors all sorts of new safety features have been born. Lane departure warnings, accident mitigation, pedestrian protection stability control, blind spot detection and recent features like laser lights that light up roads 400 metres ahead and infrared cameras that warn of pedestrians and objects on the road up to 200 metres ahead are all quickly becoming common features across new road cars. We can physically see this when walking into any dealership on nearly any manufacturer in the country.

Buses and trucks in particular are using many of these safety features and with legislation changes around the world now starting to require many of these driver aids the demand for this type of technology is growing exponentially.

The company at the forefront of supplying this technology to 23 major car manufacturers is Mobileye (MBLY) – an Israeli company listed on the New York Stock Exchange. With the expansion in trading platforms and the global access these platforms give to retail investors there should not be any problems in being able to buy offshore stocks for those interested. Often we have to search offshore to find the opportunities because the local market is so devoid of innovation and growth.

The company is experiencing year-on-year revenue growth north of 30% for revenues ($45 million in 1Q15), however, like Tesla, quarter on quarter profitability can be masked with one-off items. Last quarter the company earned $10.1 million net profit or 8c per share. This sounds like an enormously expensive company trading on an excessive price/earnings multiple but local investors need to appreciate the willingness of foreign investors to pay for growth and the enormous premiums paid for such opportunities.

The share price above shows that after a strong performance since listing last year there has been an extended correction and subsequent consolidation below $49. Last night a breakout occurred which is likely to have triggered the next buying wave that could easily be followed with knew “news” of further adoption of their technology into the industry. Stocks have a habit of running strongly ahead of such news events.

This breakout is being supported and confirmed by technical indicators across all timeframes with strong volumes as well. The lack of alternative competitors in this space also sees Mobileye attract large levels of buying interest that normally would be spread across a collection of peers.

This breakout could easily see a repeat of the Aug-Oct 2013 rally which would see a fresh record high towards $61. Given the rapid growth seen in the likes of Tesla, the rapid adoption of technology by the industry and the innovation of driverless cars as a new concept there are upside risks to Mobileye well beyond the initial $61 target.

And for the record I held Blackmore’s shares for less time than it took me to complete the 100 metre sprint. A case of great research, poor execution which is the second lesson of successful trading.

View More Articles By Greg Tolpigin

Greg is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.

After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.

Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.



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