“Tailpipe Riches: Car of the Future” Outstanding Investments

By Travis Johnson, Stock Gumshoe, June 25, 2008

It’s been a little while since I looked at something from Outstanding Investments, so this one caught my eye. It was buried in a long teaser email that was all about Saudi Arabia lying about their oil reserves, and the various solutions to the oil crisis … but about halfway down, Byron King started teasing us about a company that will be helping to enable the “car of the future.”

Part of the reason to pay close attention, by the way, is the recent track record of Outstanding Investments — it has been the strongest performer in the Hulbert database for the last five years, thanks in part to a focus on commodity-related stocks, so although it’s had a few different advisors and past performance is no indicator of future results, I do like to keep an eye on what they’re doing.

King goes through the various options for solving the problem of making cars more efficient and green, essentially saying that the Prius is great but is not a mass solution because of expense and weak highway performance, and that natural gas or hydrogen will not be taking over immediately, either. Hard to argue with him in the short term, since natural gas seems largely destined for fleet use and there is no infrastructure to speak of for hydrogen (though a hydrogen fuel cell car comes along every now and then, like Honda’s recent foray).

He focuses on the gunk that comes out of the engine … and says that the key to the future is diesel.

The logic is interesting — you can make diesel out of coal or other oils (ie, biodiesel), so there is some potential for weaning from crude oil, and it is more efficient than gasoline in general, and King argues that the next breakthrough will be diesel combined with hybrid technologies.

But it’s what comes out the tailpipe that has historically clouded our perceptions of diesel, at least in the U.S.

“Emissions are the key to profits … the way to profit from the diesel revolution is to buy the company that’s going to remove the last
obstacle that stands in the way of diesel: pollutants.”

He throws in some jibber jabber about Europe and their widespread adoption of diesel in passenger cars (true) because of its increased efficiencey (also true, as far as I can tell).

But he says they’re also looking for the next wave — Europe and, a bit behind, the US have mandated stricter standards for diesel to create a cleaner burning fuel, and big engine makers have really benefited from a big upgrade cycle as heavy truck operators upgrade their fleets, which folks investing in Cummins (for example) have really enjoyed … but cleaner diesel still ain’t “clean.”

“You see, the Europeans still haven’t been able to remove the last bit of filth from diesel exhaust. They’ve just put up with it for the sake of fuel economy and lower carbon emissions.

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“Whoever comes up with the best diesel tailpipe solution stands to make a killing. And a high-tech American company has done exactly that. It’s come up with a diesel filter that’s far superior to what the Europeans now have.”

Byron goes on to tell us that “diesel tailpipes” will be a billion dollar market by 2010. And that this company “will be on every front page in the country.”

So what is it?

“This company is a technology leader that created one of the most important inventions of the ’90s telecom boom — but I’m not talking about Microsoft or Intel or any of the obvious choices. The company I have in mind keeps a lower profile.

“… My crystal ball says its technology is going to wind up in 200 million vehicles. I’ll tell you all about the stock in a FREE special investment report called Tailpipe Riches: The Race to Build the Car of the Future.”

So what is this company?

Well, I’ve already seen them on the front pages of newspapers dozens of times, but that’s because I grew up just down the road from their headquarters in upstate NY — this is …

Corning (GLW)

Do love the old GLW ticker — from the days when they were a simple glassworks, with an army of glass blowers.

Corning’s contribution to the tech revolution of hte 1990s was, of course, fiber-optic cable — the inventor of this tiny strand of spun glass worked for Corning back when he came up with the stuff in the 1970s. And they both gloried in that and suffered from it, as the massive overbuilding of fiber networks in the 1990s gave them a true boom and bust experience up in Corning, NY.

And this was no garden variety boom-bust — if you happened to buy GLW at it’s height, around $110, you could have been one of those poor souls who got shaken out and sold near the lows just two years later, right around $1.50. That’s a loss of greater than 98% … which scared folks away from Corning for probably longer than they should have been scared. Since then, the shares bounced rather quickly into the $10 range, then slowly and gradually doubled to their current range, in the mid-$20s.

Corning is now primarily looked at, at least by retail investors, as an LCD play — they’re a dominant maker of the special large format glass screens used in everyone’s favorite new HDTVs, and they say that business is still going pretty well, though fears for the consumer have some a bit worried.

This business that Byron King is teasing us about has been a relatively small part of Corning, but might indeed grow much larger if he’s right. They make ceramic substrates for diesel catalytic converters and filters, apparently (I don’t know if those are the correct technical terms), and have been in similar businesses for many years — they also invented the basic substrate that most standard catalytic converters have used for decades.

Diesel vehicle emissions are certainly a growth area for Corning, though I couldn’t tell you what that’s going to do for Corning’s growth … or whether diesel will really end up being the main solution, with or without new filters. I suspect this will be a good business for them, but I would be surprised if the returns were so dramatic that the shares double by January or anything exciting like that (King didn’t specifically predict that, to be fair).

That’s largely because Corning is a huge company, with a $40 billion market cap and annual sales of about $6 billion and growing. I like the company, and if you want a great, innovative American company with ties to heavy industry, healthcare, technology and other areas where there is potentially interesting growth, and a culture that has nurtured many breakthrough inventions, I can’t argue against buying shares in this one.

The only thing that gives me some pause is that Corning, though it is a large and diverse business, has tended to ride those boom and bust waves in some big product areas on occasion, and LCDs might, I suppose, be another one of those if margins sink with competition, or sales drop.

So far, Corning is indicating that won’t happen — their shares just jumped a couple percent because they released an optimistic forecast for LCD sales. So you do get the flip side of that, too, in share price outperformance over shorter time frames — just look at another innovative company that has its fingers in pies across the product spectrum, 3M: the more conservative MMM has dramatically lagged GLW and their big bets on a few products in the last five years. I like 3M, too, but they seem to be a bandleader in search of a hit lately, while GLW is playing the chart-toppers over and over and hoping not to lose the tune. MMM’s chart for ten years has been a slow and steady climb, GLW’s has been Everest followed by Death Valley, followed by Mount McKinley. Nothing wrong with that, just know what you might be getting into — it takes all kinds, and GLW and MMM are given roughly similar valuations by the market, and are of similar size (though the comparison may not be fair for a multitude of other reasons). Over ten years, they’ve both more or less doubled — but it was a lot harder to pick good entry points in GLW, while time and a larger dividend have made almost any shares of MMM bought during that time work for most investors. If you’re trading and like shorter term profit opportunities, however, GLW has certainly been dramatically more volatile, so saddle up and enjoy.

So where were we, before that probably largely pointless comparison? Oh, right — diesel filters. If you want to learn about Corning’s work in this area, there’s a good summary article from the Wall Street Journal from back in March, available here as a pdf.

And just in case I confused things too much by hauling that comparison to MMM out of thin air, this might be the time to note that yes, just as in all areas of life, there is competition — 3M makes ceramic diesel particulate filters, too, as, I’m sure, do many others, though it’s been Corning that has been lauded for breakthroughs in this area of late.

The shares seem reasonably priced, at a small discount to the greater market. Not much debt. A tiny dividend. Nothing to sneeze at, just be aware that Byron King’s projected billion dollars in diesel tailpipe business (even assuming that GLW dominates that market) isn’t necessarily going to make Corning shareholders wealthy overnight. I’d probably be happy to own GLW (or MMM, for that matter), but I don’t right now.


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Woman with Portfolio
Guest
June 25, 2008 6:18 pm

There are several reasons to own Corning, and I seldom see folks mention it as a silicon play, since it owns 50% of Dow Corning, which has a solar division. Now that the implant scare has died down, Dow Corning is not radioactive. (I hope.)

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Family of Corning
Guest
June 26, 2008 9:35 am

My uncle was one of the scientists at Corning who developed ceramics and glass for natural gas pipelines as well as Corelleware and Revereware in the 50’s to 70’s. I have family who still work for Corning and I haven’t heard much from them lately about the company’s prospects. They were doing restructuring/reductions last I paid attention. Any news on how that is helping them? Would love to own them again, but still a bit timid (one that bought in the 20’s and watched it hit the 100’s, then drop like a rock – sold in the 40’s . . . ).

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Elissa Stein
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Elissa Stein
June 26, 2008 9:40 am

Gumshoe, this is an old ad that’s been recycled–I think they started recommending it in 2006 or early 2007. Jim Cramer has also stated that he thinks the Corning diesel filters/green technologies can eventually be as big as the glass component of their business- and projects the real growth will be around 2010 and beyond. I do purchase options on GLW once in awhile. It is not particularly volatile, but they have been modest winners.
GLW’s factories have been running at full capacity for the TV glass for some time, so they can’t easily increase production.

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Jeff Uscher
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Jeff Uscher
June 26, 2008 9:43 am

There are two Japanese companies for which diesel particulate filters (DPF) are significant parts of their business, Ibiden (4061:JP) and NGK Spark Plug (5334:JP). These are both traded on the Tokyo Stock Exchange. Technologically, Ibiden has the better product because it can operate at a higher temperature but NGK Spark’s DPF is cheaper to manufacture. Both companies (along with GLW) ship and manufacture their DPFs in Europe. The key point here is that, in the US, the EPA mandated that all diesel be refined to Ultra-Low Sulphur standards. Now that ULSD is available at any diesel pump in the US, DPFs can be used to effectively reduce sooty emissions. In terms of pollution, there is a trade-off in that you get slightly higher NOx emmissions but diesel exhaust emits a lot less CO2 than gasoline. Given the improved fuel efficency and the increased ability to use biodiesel, it really makes sense to shift to diesel wherever possible. Most automakers are planning to introduce more diesel models to the US market for the 2009 and 2010 model years.

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Gravity Switch
June 26, 2008 10:19 am

Since I wrote this yesterday afternoon, there have been some interesting articles about GLW investors — the Cabot Letter recommended a sale of their GLW position:
http://tinyurl.com/5rcof9

And Ron Muhlenkamp bought more:
http://tinyurl.com/5mbq2q

There are at least two perspectives on everything, and, of course, two sides to every trade.

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tzg
Member
tzg
June 26, 2008 10:59 am

Europeans haven’t preferred diesel over gasoline because of efficiency reasons but because it’s cheaper. Diesel engines do get better mileage, but the real reason for their popularity is that diesel fuel has always been taxed at a far lower rate than gas in most European countries. One exception is Switzerland where diesel costs more, so diesel cars are in a very definite minority there although sales have been picking up lately.

Mark
Mark
June 26, 2008 11:08 am

Hey, that Wall St.J. PDF articule on Corning DPF
doesn’t pop up. Headsup

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Al
Guest
Al
June 26, 2008 11:30 am

I seem to always be interested in reading not only Gumshoe’s articles but also the various responses. It is a good way to learn what is going on in the investment world. Thank you to all.

SageNot
Member
SageNot
June 26, 2008 11:43 am

Justice Litle was the editor of OI back when GLW was selected on 12/12/05, but it’s nearly flat-lined since & broken down sharply with the rest of the market recently.

I agree with re-recommending a portfolio stock when their fundamentals take a turn for the better, the “hold” is correct for now, but I’d buy it once they reverse this downturn with both hands.

Our son spent two months in Europe last summer, & the Renault they rented was a bio-diesel that gave them great MPG. BD is the accepted fuel for cars in most of Europe, why our US auto manufs. don’t switch may be due to the Intl Oil lobby influence. France is 80% nuclear for their industrial usage as it is, but the dummies in our Congress still don’t get it.

If you really dig Byron’s OI, he has another service that makes bets on less well known companies that he claims are too thin to include in OI (I’d say yeah, right, but I can’t complain, OI has delivered, big-time!)

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EYOUNG
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EYOUNG
June 26, 2008 2:01 pm

In reference the economy of diesel: I could seriously be in error here, but I am really confused where the economy comes in! Is the gas mileage improvement worth the dollar / gallon more than regular unleaded???
IMHO, Natural gas would be a greater economy, IF we could get some more stations for it,,, Seems the conversion from unleaded to NG is not that severe!
Comments welcome!

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sequential
Guest
sequential
June 26, 2008 2:59 pm

Please check out Hydro-Assist fuelcell kit I dont know whether they have perfected it yet but apparently for about $1500 you can have it fitted to your vehicle and save a bundle on fuel they are also
working on a catalectic converter to save you even more its called PICC SYSTEM comments please

sniper
Guest
sniper
June 26, 2008 7:11 pm

Cramer was also a big fan of Sears Holdings (SHLD)
and was always touting it even when it was at $170.
I take Cramer with with a bit of salt. As SG says, ‘do your own research’. Good investing.