A major deal in one of our favorite sectors...

A major deal in one of our favorite sectors... Why we're more bullish than ever... Household wages are down since 2003... Doubling our money in China... Reader feedback: A happy Alliance member...
 

 Discount retailer Dollar Tree announced today that it would acquire rival Family Dollar for about $8.5 billion.

 

Dollar Tree is the nation's third-largest discount retailer. It offered $74.50 a share ($59.60 in cash and $14.90 in stock) to acquire Family Dollar... a 23% premium over last Friday's closing price.

 

 The combined company aims to better compete with Stansberry's Investment Advisory recommendation Dollar General – the industry leader. The new Dollar Tree will have more than 13,000 stores in the U.S. and Canada and sales of more than $18 billion, according to CEO Bob Sasser.

 

 It's clear the companies see this as an opportunity to better serve the "disappearing middle class." As regular Digest readers know, we believe the Federal Reserve's quantitative easing will make the rich richer... But it will destroy America's wage earners, whose wages stagnate while prices rise.

 

That's why Porter and his analysts have loaded their portfolio with companies that cater to these folks – like Dollar General and home-rental firm American Homes 4 Rent.

 

 Stansberry's Investment Advisory analyst E.B. Tucker offered his opinion on the Dollar Tree deal...

 

I have visited every low-end retailer of significance. Not because I wanted to save $2 on off-brand paper towels. The reason I spent time in these stores was really to understand this market. Porter and I believe this sector is going to continue to grow for the rest of the decade.   And we think Wall Street has been too focused on more glamorous retailers like fashion designers Michael Kors or Coach. These brands are sexy... But when times get tough, fewer and fewer people will be in a position to splurge on designer jewelry and handbags. Meanwhile, they still need cheap paper towels and baby formula.

 

 The dollar-store market has heated up since Porter and his team first recommended it to subscribers in December. And as E.B. notes, the deal between Dollar Tree and Family Dollar is more evidence of that...

 

The $8.5 billion deal values Family Dollar stores at just under $1.1 million each. Using the same metric, Dollar General stores are valued at $1.5 million each. And that's because Dollar General is a better operator.   Before recommending Dollar General, we looked at the three market leaders... Dollar Tree sells everything for $1. Family Dollar stores underperformed Dollar General stores. We think that underperformance stems from a stark difference in each company's approach to store expansion.   Dollar General lets developers bear 100% of new store expansion risk. They agree to enter a lease at set terms once the building is complete and approved. Family Dollar offered a fee-based development arrangement where developers made a fixed amount of money per store.

 

 This difference in expansion strategy is one of the main reasons Dollar General outperforms Family Dollar. As E.B. explains, all you have to do is drive by an area that has both stores to understand why...

 

The Dollar General is probably on the corner and the Family Dollar is off-corner. When the developer has "skin in the game," he is more likely to do anything he can to enhance the value of the deal. But Dollar General keeps the location for 15 years and has the option to extend its lease for another 10 years. The company wants to be the best low-end retailer, not a property manager.   The results speak for themselves. Dollar General beats Family Dollar in revenue per location and net operating margin. We're bullish on this market for the long term... That's why we wanted to buy the market leader. This deal doesn't change anything for Dollar General. It's still the market leader, even though its rivals have combined.

 

 While Dollar Tree and Family Dollar figure out their strategies going forward, E.B. is happy to own the market leader...

 

While the new Dollar Tree figures out how it will use its size and scale to increase revenue, Dollar General will continue to do what it has done well for the last five years. It will open 700 stores this year, adding $1 billion in revenue. Same-store sales will add around another $1 billion in revenue. And Dollar General will make around $200 million in additional profit from this new revenue, because its net operating margins are consistently between 8%-10%.   The newly combined Dollar Tree will have about the same, because Family Dollar has 5% net margins and Dollar Tree's margins are 11%. We'll stick with the market leader. And now that it's trading at a discount to its combined rival, we like it even more.

 

 Shares of Dollar General rose more than 7% before settling back to even on the day. This deal reaffirms our belief that the U.S. will depend more and more on discount retailers in the years to come.

 

 Billionaire activist investor Carl Icahn announced a 9.4% position in Family Dollar last month... In his June 19 letter to Family Dollar CEO Howard Levin, Icahn said, "It is imperative that Family Dollar be put up for sale immediately."

 

Icahn got his wish... And he made about $130 million today.

 

 Again, Porter and his research team believe the Fed's money printing will destroy the middle class, whose wages will stagnate while the price of food and rent will increase as inflation takes hold.

 

 As we've recently noted, food prices are already skyrocketing. And according to this weekend's New York Times, middle-class wages are already getting decimated...

 

In 2003, the median, inflation-adjusted household net worth was $87,992. Ten years later, the average household net worth fell 36% to $56,335, according to a study financed by the Russell Sage Foundation – an organization dedicated to social sciences.

 

 Most of the pain started with the subprime crisis in 2007... Until then, household net worth had been rising, thanks to rising home prices. Without counting the support of the real estate bubble, the typical household's wealth started to fall in 2001. And as those wages continue falling, we'll profit by owning the companies that cater to this cash-strapped class.

 

 We wrote it, did you buy it?

 

China is on the verge of a major breakout.   The Shanghai Stock Exchange Composite Index (the "SSEC") – China's version of the Dow Jones Industrial Average – has been stuck in a brutal six-year bear market. The index peaked above 6,000 in November 2007. Today, it trades at just over 2,000. That's a 67% loss.   But as I mentioned in April, things are starting to turn bullish in China.   Chinese stocks are super-cheap. The average Chinese blue-chip stock trades at about eight times earnings, about 1.1 times book value, and pays a dividend of about 2.5%. Compare that with the average stock in the S&P 500, which trades at 17 times earnings, 2.2 times book, and offers a yield of 1.8%.   China's stock market would basically have to double from here just to catch up to the valuations of U.S. stocks. – Jeff Clark, June 18, S&A Short Report

 

 Jeff took advantage of a low-risk, high-reward setup in China to make two options trades... And after Asian markets rose last night, Jeff told S&A Short Report subscribers to take profits... The SSEC rose 2.4% to a 2014 high.

 

Jeff recommended buying call options on the DB X-Trackers Harvest China Fund (ASHR), which closely tracks the SSEC. The trade he recommended last month is now up 108%. This morning, he told subscribers to sell half the position.

 

 Jeff has also more than doubled readers' money on calls of Chinese real estate services firm E-House Holdings Limited (EJ)... The call options he recommended on July 2 are now up more than 100%.

 

 

 New 52-week highs (as of 7/25/14): Apple (AAPL), Automatic Data Processing (ADP), SPDR S&P BRIC 40 Fund (BIK), CVS Caremark (CVS), EMC Corp (EMC), Energy Transfer Equity (ETE), ProShares Ultra 20+ Year Treasury Fund (UBT), and Vanguard Natural Resources (VNR).

 

 We received a wonderful piece of feedback from a happy Alliance member. Have you benefited from your Alliance membership, or any of your S&A subscriptions? We'd love to hear about it. Send your notes to feedback@stansberryresearch.com.

 

 "What has being an Alliance Member meant to me? Basically, it has allowed us to retire with confidence and security. We are able to draw down our required withdrawal from our IRA's each year and still end up each year with more money after the withdrawal in each account than at the beginning of the year before the annual required withdrawals.

 

"In our income portfolio, we withdraw an amount each month to live on in addition to our Social Security and still build the balance through bond, MLP, REIT and dividend producing stocks. We sweeten the returns with selected out of the money covered calls while still getting the dividends and capital appreciation while not requiring to put up margin.

 

"Our trading account of naked puts and covered calls increases about 35% per year and in time of uncertainty (like 2015) we move more toward spreads to take less risk. We utilize Dr Smith's Smart trailing stops on all of our equities and watch alerts on our options based upon the capital margin employed.

 

"In short, the education we have gained has converted our investment program along with some judicious real estate investments into more than a million dollars with an income that we can live comfortably (but not extravagantly, but then we never did) for the rest of our lives. This has been very helpful to us because we paid for the education of a Doctor of Orthodontics, (12 years); a Master of Architecture Degrees (8 years) and a PhD in Psychology (11 years) all in out of state schools. They got their Mother's brains and good looks and my work ethic with which argument those who know us never disagree.

 

"I am now teaching our grandchildren how to make money in the options market on a careful small bite at a time disciplined program. Last year we had 60 put trades and 6 were put to us with stocks we wanted to own at a discount and have sold covered calls against for added profits. The kids think this is the greatest thing since peanut butter! At 84, we have traveled on business and pleasure to 84 countries. We have planned to visit another 16 countries over the next two to three years to become full fledged members of the Century Travelers Club. We plan to live to 100 or die trying! What an interesting trip it is. Thanks for your help Porter!" – Paid-up subscriber R.W. Kent

 

Regards,

 

Sean Goldsmith

July 28, 2014

Why Russian markets are getting crushed...

 

The U.S. recently initiated further sanctions against Russia... Now, it looks like the European Union will join in.

 

In today's Digest Premium, S&A Global Contrarian editor Kim Iskyan shares his thoughts on how this will affect the Russian markets...

 

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Why Russian markets are getting crushed...
 

Editor's note: The U.S. recently initiated further sanctions against Russia... Now, it looks like the European Union (EU) will join in. In today's Digest Premium, S&A Global Contrarian editor Kim Iskyan shares his thoughts on how this will affect the Russian markets...

 

 

 Things continue to heat up in Russia...

 

Russian markets suffered their third consecutive down day after the European Union outlined potential sanctions against the nation.

 

There's a good chance that the U.S. and EU's new round of sanctions will be rolled out this week. The West is increasing its efforts to get Russia – and President Vladimir Putin – to stand down in Ukraine. It's not going to work... and the bottom isn't in sight.

 

 A few weeks ago, the U.S. rolled out sanctions to make it more difficult for some Russian companies to raise financing in the West. This will probably be supplemented soon by additional sanctions on the Russian financial and energy sectors.

 

 The EU has been much slower to pressure Russia because it is more exposed to the Russian economy. The U.K. has been reluctant to make it more difficult for Russian companies to raise capital or do business there, since many Russian companies raise capital on London's markets. Germany hasn't wanted to sanction Russia's energy sector because it has deep and broad relations with Russia's energy sector. And France – which is building two warships for Russia – doesn't want to hurt its business by hitting Russia's weapons sector.

 

Plus, Europe gets around one-third of its natural gas from Russia... That's a powerful lever.

 

 In the bigger picture, the U.S. and EU are trying to raise political and economic costs to Putin for continuing to help separatist rebels in Ukraine, without imposing too much of a cost on their own economies. These sanctions will hurt some individuals close to Putin and will make it more difficult for some state-controlled entities to raise capital in the West.

 

Maybe most significantly, keeping sophisticated energy technology out of Russia's hands will delay new project development for years. So the odds are better that total Russian energy production will fall over time without these new projects to compensate for declining production in oil fields. Close to half of Russia's federal budget revenues come from the energy sector (and around a quarter of its GDP, including associated sectors)... So over time, that could really sting. I'll share my thoughts on whether these sanctions will work in tomorrow's Digest Premium.

 

– Kim Iskyan

 

 

Editor's note: While Kim isn't bullish on the future of Russia's stock market, he does believe one Russian stock has huge upside potential. He thinks shares could double over the next six months. To gain access to Kim's research – and to sign up for a 90-day trial – click here to learn more about the S&A Global Contrarian.

Why Russian markets are getting crushed...

 

The U.S. recently initiated further sanctions against Russia... Now, it looks like the European Union will join in.

 

In today's Digest Premium, S&A Global Contrarian editor Kim Iskyan shares his thoughts on how this will affect the Russian markets...

 

To continue reading, scroll down or click here.