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Tuesday, July 29, 2014 - 10:30

Robotics Is Booming -- Here's How To Cash In

Tuesday, July 29, 2014 - 10:30am

Six years after the big crash, the global economy still seems pretty shaky and could even be set for another meltdown, if some of today's headlines are to be believed. Nevertheless, many enticing investment opportunities still abound -- like robotics and automation, or R&A.

While R&A has been on the rise for decades, exciting advances have been occurring recently. For instance, the creation of physical objects from a digital file, the amazing manufacturing process known as 3-D printing, has improved so much it can be used to make nearly anything from footwear and firearms. Apparently, you can even print out a pizza now.

R&A has been playing an ever-larger role in other areas, too, like medicine. For instance, robots are being developed to perform blood draws and other routine medical tasks, as well as more complex ones such as cardiovascular surgery. Increasingly capable robots are already common on assembly lines and in the military.

Most investors have heard about how some big companies such as Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and Amazon.com (Nasdaq: AMZN) are developing robots and/or snapping up promising robot manufacturers. Apple, for instance, is creating robots to help build iPhones and other devices. Google has gotten attention recently for buying eight R&A companies and for making inroads into artificial intelligence with a prototype car that uses lasers and mapping software to drive itself.

Meanwhile, Amazon is waiting for the FAA to finalize rules permitting the use of radio-controlled drones for commercial purposes sometime next year. This would enable the firm to proceed with plans to offer Amazon Prime Air, in which packages of 5 pounds or less would be delivered by drones up to 10 miles within 30 minutes of an order being placed.

According to Transparency Market Research, R&A was already nearly a $6.3 billion industry in 2012 and could surpass $12 billion in 2019. What's more, some of the smaller pure-play stocks in the industry have already delivered very nice profits.

Take iRobot Corp. (Nasdaq: IRBT), a manufacturer of practical robots for consumers, governments, and business. The firm, which launched its flagship product (the Roomba automated vacuum cleaner) in 2002, jumped more than 245% during the past five years. In that time, robotic surgical equipment maker Intuitive Surgical (Nasdaq: ISRG) more than doubled, while the well-known R&A stock 3D Systems (NYSE: DDD) soared 2,000%.

IRBT Chart

IRBT data by YCharts

With rapid growth of R&A expected to continue, there's still more money to be made from the industry. However, I don't think individual stocks are generally the best way to go in this case.

Often, R&A stocks have nosebleed earnings multiples, even relative to projected growth, and shares can be terribly volatile. Plus, investors have probably made much of the 'easy money' available on many of these stocks, so forecasting the direction of individual stock prices is tough.

Flickr/janitors
Many consumer's are already familiar with iRobot's line of automated vacuum cleaners.

But I think the overall industry is set to climb much higher over time, and a great way to ride the trend is with Robo-Stox Global Robotics & Automation (NYSE: ROBO). This $106 million exchange-traded fund (ETF) has virtually every R&A stock you could want, including IRBT, ISRG and DDD. Indeed, ROBO is divided among 82 R&A firms of various sizes, including some larger, well-established names that are recognized for other technologies but have been ramping up R&A capabilities.

One example: venerable defense contractor Northrop-Grumman (NYSE: NOC), which occupies 1% of fund assets. NOC has been making unmanned drones for some time and just launched the versatile Cutlass unmanned ground vehicle. Farm/lawn & garden equipment maker Deere & Co. (NYSE: DE), another 1% position in the fund (and a favorite of Bill Gates, as my colleague Marshall Hargrave noted recently), has a robotic lawn mower.

Since much of the R&A revolution has been taking place overseas, it's no surprise that 62% of ROBO is in foreign stocks. Japan in particular is an R&A leader, which is why four of ROBO's top 10 holdings are Japanese companies.

Robo-Stox Global Robotics & Automation, Top 10 Holdings​

Although not obvious from its name, ROBO is an index fund. It tracks the Robo-Stox Global Robotics & Automation Index maintained by S&P Opco, an S&P Dow Jones Indices subsidiary.

The index is usually 40% "bellwether" stocks -- those the index committee deems representative the R&A industry (such as ROBO's top 10 holdings). The remaining 60% of the index is "non-bellwether" stocks of firms that devote a distinct portion of their business to R&A (like Northrop-Grumman and Deere) and should see higher revenues as a result.

To achieve those proportions, the bellwether stocks each receive about a 2% weighting in the fund, compared with about 1% for non-bellwether holdings.

Despite their R&A presence, Google, Amazon and Apple aren't in the index, presumably because R&A is still such a tiny portion of their businesses. However, it's easy to imagine all three making the roster at some point if they expand their R&A activities enough.

While R&A isn't a new industry, ROBO is a new fund, having only started trading last October. (And there are no other broad-based funds like it that I'm aware of.) The fund's expense ratio of 0.95% is a bit high for an ETF that tracks an index, but I don't consider this a deal-breaker in light of the component stocks' growth potential.

Risks to Consider: Although R&A has become a multi-billion-dollar industry, there's no guarantee it will continue to expand as projected or that broad exposure to it through a fund like ROBO will generate strong returns.

Action to Take --> R&A is growing fast, and that could mean big profits for investors, but the industry is still very speculative and fraught with high stock valuations. Therefore, a diversified approach is probably preferable for most portfolios, and the Robo-Stox Global Robotics & Automation ETF fits this bill perfectly.

If the potential of robotics has you excited, wait until you see what StreetAuthority's Andy Obermueller has been working on. Andy has identified five "game-changing" trends with the potential to revolutionize the way we live our lives -- and make early investors a killing. To learn more about these developing technologies -- and the companies behind them -- follow this link.

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.