How Rockefeller Led Me To My Latest Pick

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Thursday, November 3, 2016 - 12:00am

by Jimmy Butts

One of the world's greatest investors and businessmen was born July 8, 1839, in upstate New York. Son of a traveling snake-oil salesman, he rose from his rustic origins to become the world's wealthiest man by creating America's most powerful and feared monopoly by the time he was only 33 years old.

I'm talking about John D. Rockefeller -- an American icon and arguably one of the most mysterious and controversial businessmen in our nation's history. 

Rockefeller got his start as an assistant bookkeeper for a produce merchant at the age of 16. Having a knack for numbers and a shrewd sense of the commodities markets, Rockefeller quickly built a reputation for himself as an honest, reliable merchant. Two years after starting as a bookkeeper, he purchased a partnership in another merchant, Maurice Clark.


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But events quickly shifted when a man named Col. Edwin Drake found success in producing a substantial amount of "rock oil" from a well in Pennsylvania's "Oil Creek" region. You see, at the time oil was a still a relatively useless commodity. While petroleum was discovered some 17 centuries ago, it wasn't until 1848, when a chemist named James Young started refining petroleum into more usable substances -- like kerosene -- that oil attained the industrial prowess it has today.

Drake knew that Pennsylvania oil, if produced in mass quantities, could be boiled down and made into a product that could heat and light homes. Once his well began producing vast amounts of oil, the United States experienced its first "oil rush." Wildcatters poured into the region looking to strike wells and make their fortunes.

The Oil Creek region shipped an estimated 200,000 to 500,000 barrels of crude in 1860, a year after Drake's discovery. And in 1861 that number jumped to 2 million barrels. (A so-called Pennsylvania barrel, which contains 42 gallons, is still the standard today.) 

In 1862, Rockefeller finally entered the refining business. He and his merchant partner, Clark, backed a self-taught chemist named Sam Andrews to open a refinery, which they later renamed the Excelsior Oil Works. Even though Rockefeller put up the same amount of capital as Clark, he was considered a junior partner because he was only 22 years old, roughly 10 years younger than Clark. 

Rockefeller became more and more interested in the oil business. He quickly took over the day-to-day operations of the refinery, and it became clear that Rockefeller had an extraordinary ability for making and executing business decisions. His fanatical attention to efficiency and costs helped turn Excelsior into one of the most consistently profitable refiners in the country and the largest in Cleveland.

Many critics of Rockefeller claim that he built his empire with unscrupulous tactics, collusion, predatory pricing and bribery. But in my research, it seems he paid a fair price, often even a premium, for many of his acquisitions. One thing is clear: Rockefeller made calculated business decisions in a calm, collected manner, which sometimes can come across as ruthless or cold-blooded.

Things eventually came to a boiling point with the Clarks and their partnership was dissolved. The 25-year-old Rockefeller coolly outbid the Clarks at auction, who conceded when the bidding hit $72,500. Rockefeller was also throwing in his half of the merchant business he had with Clark, which pushed the final price up near $100,000 -- an amount equal to $1.4 million in today's dollars.

It turned out to be a solid bet for Rockefeller as the next year, 1866, Excelsior Oil had sales of $1.2 million -- more than 12 times the purchase price. This was only the beginning for the oil titan, but also marked the start of his reputation as a man with a "soul of a bookkeeper."

Rockefeller moved swiftly and efficiently as he built his empire -- always paying special attention to detail as he consistently found ways to improve margins.

His knack for understanding distribution, networking and integration served him well. Rockefeller built his business through acquisitions of pipeline-based crude facilities, tank storage farms, tank car loading facilities, domestic and international wholesale shipping and distribution operations, and ship loading facilities. 

At its heyday, Rockefeller's company, Standard Oil, controlled roughly 90% of all refined oil in the United States, dominating in all facets of the refinery business: refinery output, transportation and distribution. 

As you would expect, having such a tight hold on one of the world's most critical resources made Standard Oil investors a fortune. Between 1882 and 1906, the company paid out over $548 million in dividends -- or approximately $15 billion in today's terms.

Rockefeller was able to build one of America's greatest dynasties by controlling every aspect of the business. While it was that very same notion that led to the breakup of his company in 1911 after the Supreme Court found the company in violation of anti-trust laws, many of the same principles in the refinery business hold true to this day. 

That's why the latest pick in my premium newsletter, Top Stock Advisor, is taking a page out of the Rockefeller handbook. While it's not exactly a monopoly, it does boast the best profit margins in its industry. In fact, its profit margin dwarfs the industry average by more than 6-to-1 and its return on equity is quadruple that of its peers.

And just like when Rockefeller controlled many aspects of the refinery business, this refiner has built a network of retail gas stations, refineries, pipelines, marine terminals and storage facilities. In the last five years, this stock has rewarded shareholders with a total return of 234%, compared with the S&P 500's 65% return. But the stock has fallen as much as 40% from its recent highs, which gives us a great opportunity to pick up a legacy company at a great price.

Unfortunately, I can't share the name of this pick with you in today's issue. But I highly encourage you to search for companies with the traits that made Rockefeller and his investors a fortune. In the meantime, If you'd like to learn more about Top Stock Advisor and get the names and ticker symbols of all our picks, go here.

Jimmy Butts 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.