The Real Robot Invasion Is Here - Find Out How to Profit from It

Despite what iconic movies like "Blade Runner" and "The Terminator" show you, the real robot invasion won't be a dramatic humanoid uprising. But it will be extremely profitable.

VectorThe robot revolution is actually already here - it just doesn't have the cinematic appeal that walking and talking bots deliver. Instead it's being led by task-oriented machines that are much less sophisticated - and therefore much cheaper - than anything in the movies.

These labor-focused inventions are already having a huge effect on businesses' bottom lines. A May 2017 article in Recode found that companies that have heavily automated their business processes were twice as likely to exceed their internal financial goals compared to companies that haven't invested much in automation.

Not all moves to automation will be profitable for investors right away - so we've found the best opportunities for you today. And it's time to get in if you haven't already, as the pace of the "robot takeover" is getting faster...

The Rise of the Machines: From a Glacial Pace to a Profit-Boosting Geyser

Automation is nothing new. Humans have been developing technologies to increase productivity - that is, to produce more with less - for thousands of years.

The wheel, the printing press, and the assembly line are all examples of how we automated complicated processes in order to reap tremendous economic (and social) rewards.

But the pace of automation certainly seems to be picking up in recent decades. Think of the major developments we've seen just in our lifetimes:

  • Instead of going into bank branches and filling out slips of paper to hand to a teller, we deposit checks and get cash from ATMs, such as those manufactured by NCR Corp. (NYSE: NCR).
  • Instead of licking a stamp and handing a letter to a mail carrier, we send an instant e-mail using services by Alphabet Inc. (Nasdaq: GOOGL) or Microsoft Corp. (Nasdaq: MSFT).
  • Instead of paying a travel agent to book our flights and hotels, we hop on Expedia or Orbitz - both owned by Expedia Inc. (Nasdaq: EXPE) - and have our trips planned out in minutes.
  • Instead of handing money to a tollbooth attendant, we use devices to speed through tolls and pay automatically. (E-ZPass, the U.S. leader in this industry, is a private company.)
  • Instead of an assembly line of low-wage, hourly workers, machines developed by companies like Switzerland's ABB Ltd. (NYSE: ABB) now do as much as 90% of the assembly work at certain factories.
  • Instead of driving a tractor for hours at a time, farmers are increasingly letting autonomous vehicles do the more tedious, time-consuming tasks on the farm. Deere & Co. (NYSE: DE) has been a pioneer in this technology.

But as the pace of robotic technology increases, so does the hype machine surrounding it. To make smart investments in technology, we need to separate reality from sci-fi fantasy.

Specifically, we need to separate what machines theoretically can do with what they can do well and still provide a solid return on investment (ROI).

Return on Investment: The Glass Ceiling for Robots

Quick: What's 84,342.1 times 6,417?

A robot could finish that calculation before most of us humans have even figured out where to begin.

But now ask a robot to lace up your shoes for you.

In fact, the difficulty of automating this task has been a sticking point in the footwear industry.

Not that it's impossible. But it's such a small task, and robots have so much difficulty with it, that it doesn't make financial sense to automate it. It provides no ROI.

Driverless-car technology is another example where ROI is a limiting factor.

Developers, analysts, investors, and consumers are all excited to see driverless cars on the sales lot - that is, "level-five" autonomous vehicles that don't require steering wheels or gas pedals. But while some have suggested such a vehicle would only cost an extra $10,000 compared to a standard model, Quartz reported in March that the real figure is closer to a quarter-million dollars!

That sounds more like a new toy for the wealthy than a revolution in transportation.

And we're not even there yet. Autonomous vehicles face some significant technological hurdles. According to a 2016 article from Business Insider, self-driving cars struggle on bridges, in bad weather, on roads without clear lane markings, in cities, and especially in situations that require human interaction.

Uber has launched a fleet of self-driving cars as a pilot program in Pittsburgh. But the cars require a driver for safety. Danielle Muoio reported for Business Insider that the driver on her test ride had his hands on the wheel nearly the entire time, and she heard frequent "dings" from the car indicating that human driving was necessary.

Tesla Inc. (Nasdaq: TSLA) CEO Elon Musk vented to reporters in 2015 about lane markings in California disrupting the driving ability of autonomous vehicles. It highlights an issue that doesn't get much attention in the excitement over driverless cars: In order to provide a reasonable ROI, fully autonomous vehicles may require a transportation infrastructure that is different - and maybe very different - than what we know today.

That doesn't mean we shouldn't get excited about self-driving technology. We just have to adjust our expectations.

Some of the intermediate steps to full autonomy are major developments in their own right. We're already seeing cars equipped with features that help drivers stay in their lane and apply the brakes in an emergency. It probably won't be long before many of us can get on the highway and read a book or play video games while our car gets us to our exit.

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Plus, USA Today reported, in 2015, that we can soon expect cars that can unobtrusively detect if a driver is intoxicated and disable the engine if necessary. Saving 10,000 American lives a year would indeed be a huge benefit to the economy.

An acceptable ROI when it comes to building a car that can do everything a human driver can do is likely further away than the industry cheerleaders would like you to believe.

Nevertheless, as we've already discussed, driverless technology is already here. And with the right company, it's already paying dividends...

You Can Profit from the Real Driverless Revolution

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The 180-year-old Deere & Co., owner of the iconic John Deere brand of tractors, has spent the last two decades positioning itself as a leader in autonomous vehicles.

"We kind of laugh when we see news stories about self-driving cars, because we've had that for years," Jason Poole told The Washington Post in 2015.

Poole owns a small family farm in Kansas. Thanks to the driverless technology on his John Deere tractor, he doesn't have to waste hours of his life on a tractor. Instead, he drives the first curved row on the hilly terrain - to teach the lay of the land - and then lets the machine do the rest.

Some of Deere's models not only drive themselves, but collect soil information and make automatic adjustments to changing crop conditions. And thanks to Deere's acquisition of Blue River Technology earlier this year, some of them will soon be able to identify and target weeds on their own.

Driverless technology on a tractor provides a great ROI. The artificial intelligence is relatively uncomplicated - there aren't a lot of variables to navigate - and the economic reward is high.

That's why we featured Deere & Co. as one of our best stocks to buy in October. Shares have risen more than 40% in 2017, as Deere has beaten earnings expectations in each of the last four quarters. And its dividend yield is 1.72%.

Another area in which driverless technology is especially promising is commercial trucking. The New York Times reported in November that annual spending on self-driving trucking technology has increased tenfold in the last three years, to $1 billion.

In October 2016, Uber completed its first delivery via self-driving truck. Now of course, the truck was not fully autonomous. But trucks don't need to drive themselves completely in order to provide a high ROI.

At the moment, a self-driving truck allows the driver to put the vehicle on autopilot once it's on the highway. And like those Uber cars in Pittsburgh, a notification will let the driver know if he or she is needed to take over. If the warning isn't heeded, the truck will come to a stop.

This alone is a big deal. There are about 400,000 accidents involving trucks every year in the United States, and the majority are caused by human error. Aside from the economic costs, these accidents lead to 4,000 deaths per year.

But it's the next step that's really exciting...

Long before we get to full autonomy, Uber's Advanced Technologies Team envisions an environment in which truckers work at transportation hubs, picking up trucks on their way in and getting them to their destination, or picking up loads and getting them to the highway. The vehicles handle the long haul on their own.

In this arrangement, humans and robots work together, each doing what they're good at. Truckers stay close to home and stay moving while on the job - a momentous improvement in quality of life for a profession that is notorious for its associated mental and physical health problems.

black truck stopped on highway
Technological and economic hurdles may hold up the widespread availability of self-driving cars. But trucks that can get themselves from one transportation hub to another offer huge profit potential.

And because of the value of truck loads and the hours in transit, the ROI for this technology is potentially enormous.

There will still be some job losses in the trucking industry, and that's going to create pushback. But there currently aren't enough truckers to fill the available jobs in the first place - CBS News reported in October that U.S. companies were struggling to fill 50,000 openings in 2017. Second, as we will discuss in a future article, the tremendous increase in productivity will ultimately be a net positive in the jobs market.

We can also expect some pushback from government regulators and perhaps from a public wary of sharing the road with driverless 18-wheelers. But the long-term benefits - for businesses, consumers, workers, investors, and the general public - make this transition inevitable.

Uber is not yet traded publicly. And we generally don't recommend rushing out to buy companies immediately following their IPO, for reasons enumerated by Money Morning Chief Investment Strategist Keith Fitz-Gerald, in November.

Plus, you've probably heard about Uber's organizational chaos. In addition to its recent shakeup in management, the rideshare company is also facing a lawsuit over possibly stealing trade secrets in developing its driverless technology. On Nov. 30, news broke that a former Uber employee had written a letter in May supporting the allegations. In other words, it's not looking good for Uber right now.

A much more reliable option in this space is Waymo - which, by the way, is the plaintiff in the case against Uber. Much has been made of Waymo's October milestone of putting level-four autonomous vehicles (self-driving in limited conditions) on public roads in Arizona. The smart money is on Waymo to put the first level-five, fully autonomous vehicle on the road.

But again, with 50,000 vacancies ready to be filled immediately, it's self-driving trucks that investors should be more interested in. And Waymo has quietly been testing a semi-autonomous big rig since at least last summer. Given how far ahead of the pack Waymo is in self-driving technology, it is hands down the top choice for investors looking to capitalize on the next breakthrough in transportation.

None of this should be a surprise when you realize that Waymo's parent company is Alphabet Inc. (Nasdaq: GOOGL).

With this pick, you don't just get the incredible profit potential of autonomous vehicles. You get all the benefits of one of the largest, most efficiently managed companies in the world. Alphabet has divisions that cover everything from mobile phones and cloud computing to virtual reality and artificial human skin, not to mention an impressive portfolio of California real estate. And this giant conglomerate does it all with executive offices that take up only half a floor - a model inspired by Warren Buffett's Berkshire Hathaway.

An ultra-lean executive level means Alphabet's divisions like Waymo are free to be creative without a lot of organizational congestion from the top. So you have all the cutting-edge technology that Uber has (and more) plus a management team that is inspiring rather than frightening.

Add to that $90 billion in annual revenue and an average 17% annual growth in earnings since 2010, and Alphabet is a no-brainer. That's why it was another of our recent best stocks to buy. You can expect it to deliver gains for years to come.

The Robot Jobs That No Human Can Do

For all the talk of robots replacing humans, what some of the jobs robots do is beyond the capability of humans anyway. Once again, the general principle applies: Humans do what humans are good at, and robots do what robots are good at.

Take the silicon chip, for example. Today, a chip that goes in your phone or laptop computer contains hundreds of millions of microscopic transistors. Manufacturing these chips for mass distribution is only possible thanks to robot technology. Human specialists still take part in the process, but much of the physical work is far too precise for human hands.

Microchips, with millions of parts crammed into a penny-sized area, offer an excellent example of a manufacturing process that would be impossible without robotic assistance.

Robotic sophistication is only becoming more critical thanks to Moore's Law, which states that the number of transistors in an integrated circuit approximately doubles every two years. Today's chips may have reached the limit of how many transistors can be squeezed into them, so chip developers have found a new way to keep progressing: stacking them like pancakes.

Chip stacking has become increasingly common in the last five years, according to a November article in The Wall Street Journal. It's what makes the Apple Watch possible. The leader in this technology, Samsung Electronics Co. Ltd. (Nasdaq: SSNLF), managed to stack 64 chips on top of each other for its latest V-NAND flash memory data storage. The result of this trend is a new type of circuit board architecture populated with miniature skyscrapers to maximize a device's real estate.

All of this, of course, is only possible thanks to automation. As our gadgets pack ever more power into small packages, we're moving further and further away from what human workers of any skill level are capable of.

One of our favorite plays in advanced robotics is Cognex Corp. (Nasdaq: CGNX). The Massachusetts-based company develops and manufactures machine vision systems that can be used for component identification, quality control, or production automation. Clients include the aforementioned ABB, Samsung, and Apple Inc.

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Cognex's Dataman 100 barcode reader increased production volume for Samsung's printed circuit boards by 30% compared to the manual labor that had previously been used to identify components. That's a classic example of a job that machines can do more efficiently than humans.

But Cognex's machine vision provided a more essential productivity boost at French carmaker Renault's Sandouville factory.

Imperfections in the laser-welding process can cause problems that ultimately result in a vehicle - chassis and all - being sent to the scrapyard. Catching these imperfections before the car has been assembled translates to major savings in production costs.

But the defect could be a hole less than a half-millimeter in diameter - beyond the ability of a human eye to spot. Even shining a light on the welding points and checking the other side for illumination proved ineffective in catching all of them.

Enter Cognex and its "In-Sight" vision sensors. A prototype developed for this specific task was tested by Renault in 2002. The result: Not one defect escaped the machine's eye. It was perfect.

Cognex is a great play for the robot invasion, because nearly every application of robotics involves machine vision. The stock has already performed fantastically - it's up 125% this year - but there's no reason to think demand will be slowing down in the near future. As our dependence on machines increases, more and more companies will inevitably be turning to this industry leader for solutions.

Money Morning Director of Technology & Venture Capital Research Michael Robinson highlighted Cognex in September as a component in one of his favorite exchange-traded funds (ETFs), one that can get you in on every aspect of the rise of the machines.

From Driverless Vehicles, to 3D Printers, to Medical Robots, This Pick Capitalizes on All of Automation's Potential

If you don't want to spend $1,000 per share for Alphabet stock or place your automation bet all on one or two companies, there's a great option that spreads your investment across the sector: Robo-Stox Global Robotics & Automation ETF (Nasdaq: ROBO).

ROBO trades around $40 right now and has holdings in 80 companies that are on the cutting edge of automation and robotics. That includes the aforementioned Deere, Cognex, and ABB, as well as...

  • Daifuku Co. Ltd. (OTCMKTS: DAIUF), which creates automated factory solutions for a variety of businesses, including robotic baggage claim systems in airports on four continents.
  • Rockwell Automation Inc. (NYSE: ROK), which specializes in industrial automation and offers businesses the capability of monitoring every aspect of production from handheld smart devices - cutting down on defects and boosting productivity.
  • Nvidia Corp. (Nasdaq: NVDA), one of the leading developers of artificial intelligence for autonomous vehicles. Partners include Toyota Motor Corp. Ltd. (NYSE: TM), Mercedes-Benz, and Tesla.

"I believe this is an ETF that offers patient tech investors some excellent long-term potential," Michael Robinson said in September, "and would make a great foundational play for your portfolio."

global robotics graph

As it turns out, ROBO is rewarding not-so-patient tech investors, too. The ETF is up nearly 20% since Michael made that call, compared to 8.6% for the S&P 500. It has more than doubled since February 2016, in what has been a virtually uninterrupted climb. That alone shows that the rise of the machines is already in full force. For investors looking to get in on it, there is no time to delay.

Up Next: What the Broader Implications of the Robot Invasion Mean for Your Wallet

Picks like Deere, Alphabet, and Cognex get you a piece of companies that are developing the next generation of robotics. But more important than the manufacturing of robotic systems is the increase in productivity that comes from automation. When the assembly line was introduced, for example, it didn't just allow companies to produce more cars at lower costs. It transformed lives, moving people from farms to the city. It created new industries around gas stations and auto repair. It created new government roles regarding infrastructure and the laws of the road.

Coming up, we'll discuss the ways in which automation is boosting productivity and creating new opportunities - and how you can profit from the shifting landscape.

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About the Author

Stephen Mack has been writing about economics and finance since 2011. He contributed material for the best-selling books Aftershock and The Aftershock Investor. He lives in Baltimore, Maryland.

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