Debt Free

As many an investor can attest to, the way to make consistently large returns with your investments is to jump onto a trend at the beginning, and then ride it all the way to the top. The trouble for many investors is finding these highly profitable trends. The next step in this profit plan is no easier for many; determining the best way to capitalize on the trends.

For example, you could have grabbed a piece of the profit in the home video market 25 years ago with any of several plays. You could have bought shares in a VCR producer, such as Sony or JVC. Another option would have been to invest in a company that made magnetic coatings for video tapes, or a company that made the tapes themselves and developed many of the technologies for them, such as TDK. A third way you could have made a profit from the expanding home video market would have been to buy some shares in one of the myriad of home video store chains that spring up during this period. Yet a forth way to profit from this trend would have been to start your own video store.

The success of beginning your own store would be very hard to predict, and would depend on many factors; the store's physical location, your marketing efforts, the demographics of the community where the store was located, your skill as a business person, etc. The success of other methods would be much easier to see in retrospect. We can just examine the various companies stock price history.

Let's look at Sony (SNE) and Matsushita (MC, parent company of Panasonic). From 1983 to 1988, the stocks performed very similarly. Sony began in mid 1993 at about $6.25, while Matsushita started at $7.30. By mid 1988, they had climbed to $21.86 (SNE) and $22.34 (MC). That would have been a great 5 year run for any investor. From there however, Sony dramatically outperformed the other company. By the mid 1990's (July 1995), Sony had a stock price of $26.64, wh8ile Matsushita was languishing back at $16.60. By early 2000, Sony had given investors stellar returns, landing at a high of over $156/ share. Panasonic's mom and dad, on the other hand, had not delivered on its' initial promise, reaching a stock price of just over $30. Note: Sony has now fallen back to around $50/share, from it's mid 2000 high.

How about a play on one of the big video store chains as a way of cashing in on the home video trend? There were a few possibilities if were to have chosen this direction. The largest of these is Blockbuster Video Inc (BBI). How would you have fared had you gone this route? In 1987 an investment group led by Waste Management founder Wayne Huizenga bought a controlling interest in Blockbuster from founders Dandy and David Cook for $18.6 million. Through a strategy of franchising, rapid acquisition and cross promotions with companies in complementary industries, such as Dominoes Pizza, Blockbuster Video grew from 4 stores and $7 million in sales in 1986, to 3,500 stores and various other entertainment holdings with a combined quarterly revenue of almost $700 million for Q1 1994! Quarterly rental revenue alone accounted for almost $400 million.

Unfortunately for the common investor, the only way to buy the company's rapidly appreciating stock came in 1994, when they were folded into communications giant Viacom. Blockbuster itself did not have their IPO until 1999, when the company's glory days were far behind it. As many investors would agree, now, on the eve of most content being delivered primarily over the Internet, is probably not the time to invest in a store that is so heavily invested in physical media and the infrastructure to support it.

What about a company that mad e many of the video tapes and developed some of their core technologies, TDK? This could have been a profitable move for investors, as TDK was also developing magnetic technologies for computer drives and optical media technology, both of which took off in the late 1980's. TDK rose from the low $30 range in 1987 to finally close at $147.50 by the time of the tech stock collapse in August of 2000. TDK now sits in the mid $80 range. After a fall back to the mid $30's in 2003, it has slowly been making a recovery, and actually would have been a nice buy in late 2002 or early 2003.

What about a trend you can cash in on now? Take a look around you. What trends do you notice that could deliver nice investment returns? There are some market conditions that bear watching. Number one – the new housing market is at its lowest levels in over a decade. The Canadian dollar is at its strongest point in who knows how long. Wood futures prices are at a decade low level. The Conference Board of Canada forecast earlier this year that Canadian wood products industry revenues would drop 25% by the end of the year, and that, combined with falling U.S. dollar will be driving some Canadian wood products producers out of business, further tightening supply.

A tight supply of a commodity that is experiencing very low prices, in the face of temporarily declining demand (the housing market will, at some point, make a comeback), points to a very strong market in the future, with rapid price appreciation. While I'm definitely not a prognosticator, and hold no wood futures myself, this seems like a trend that could be capitalized on. How could you do this? As with most trends, there are several plays on this market. You could just buy wood futures contracts, but many folks don't have the stomach or expertise for futures investing. Another angle to wring profit form this trend, if it develops, would be to invest in American wood products companies that are poised to make large profits on wood's rebound.

Do careful research and you'll find firms that own large stocks of trees, well developed production facilities and solid distribution networks, and enviable financials. To make matters even better, many of these are under priced, due to the current low wood products prices and poor housing market. That, however is the time to get in on a trend, before it takes off. Happy investing.