A rare compliment from Goldsmith

I told folks to put up to 25% of their portfolios in BUD because it was so cheap and so safe there was no way to lose money. We ended up making 70% gains in about two years. Making 70% profits in two years on 25% of your portfolio is a tremendous success...

Here's what I wrote in July:

Let's assume BSX can grow its free cash flow by 30% over the next five years... That would leave it earning roughly $2.5 billion in free cash flow by 2014. Assuming a bullish free cash flow multiple of 20 times, that would give you a market cap of $50 billion. Today, the market cap is only $15 billion. Thus, our upside here is roughly 3.3 times our money.

My analysis assumed only about 10% revenue growth per year – a very modest amount. And thanks to new products, there was a good chance Boston Scientific would exceed this growth rate. But that's not what I found so attractive about the situation. What I found more compelling was how safe this opportunity seemed: At the time of my recommendation, the stock was trading for less than $10... and only a 10% premium to book value.

Given this company's brand, distribution, and earnings power, I know it is worth more than book value. Probably at least 50% more than book value to a larger company, like Johnson & Johnson. So I thought this was a very low-risk opportunity for us to make a significant profit. All BSX had to do for us to make a lot of money was finish paying down its debt. And it was making good progress: Last year, it reduced its debt by $1 billion.

I told you last quarter that I would hold off on saying anything [about health care reform] until we knew more about what the legislation looked like. Unfortunately in the intervening months, it's become all too apparent what the legislation looks like.

The Baucus bill, which came out of the Senate Finance Committee last week, makes absolutely no sense and would be very damaging to Boston Scientific and the medical device industry as a whole. In a nutshell, it would raise costs, stifle innovation and lead to significant job loss. It does not address the quality of care, but rather the political score board of savings. It would have the effect of more than doubling our tax liability, adding $150 million to $200 million per year. The impact is probably even greater because of the double taxation aspect which would result in part $155 billion in hospital cuts as well as some others passed on to our industry as a second order effect.

This tax on innovation is currently nondeductible in the Baucus bill. It would force us to make substantial cuts in R&D spending which in addition to harming patients would result in major job cuts. We estimate that the current legislation could result in between 1,000 and 2,000 jobs lost at Boston Scientific...

In short... the company's near-term outlook faced one risk I didn't account for because it didn't exist last July – a major tax increase on medical-device companies to help fund OBAMACARE.

Boston Scientific hit $11.74 in August, giving us a 25% stop loss point of $8.81. That threshold was broken with yesterday's close. Following our rules, my subscribers should have sold their shares today with the stock trading around $8.50. Based on a $9.68 entry price, they would have suffered around a 12% loss on the position. At the most (assuming a 25% position), they would have lost 3% of their total portfolio.

I understand nobody likes to lose money. But I hope you understand, as long as people like OBAMA! are in power, there's no telling which stock or which industry will come under fire next.

The idea that somebody would lend money to the United States for 30 years in U.S. dollars at 4 or 5 or 6 percent interest is incomprehensible to me. I'm not short bonds right now because the government keeps driving them up – I don't know how long they're going to do it – but I do suspect and hope that sometime in the next year or two, I'll be shorting U.S. government bonds, because that's the only bubble I see developing...

His specialty is "penny stocks" – stocks that trade for less than $10 a share. And Apple's numbers are bullish for some stocks in his universe:

Strong demand for Apple products should boost results at semiconductor manufacturers Applied Micro Circuits, Cypress Semiconductor, and LSI. These three under-$10 stocks all supply Apple. Cypress just raised earnings and sales guidance last week (October 15). Applied Micro Circuits and LSI report next week. I would not be surprised to see them raise guidance as well.

According to Frank, Apple's announcement wasn't the only big news for low-priced stocks:

Google also reported strong earnings last Thursday. It says large advertisers are re-entering the market. Stronger ad demand could be good news for penny stocks like United Online, The Knot, and Move, which make money selling advertising on their websites.

I'm keeping an eye on all of these stocks for Penny Stock Specialist. My latest pick is a beaten up $3 tech stock that traded as high as $25 in May 2007 – but the reasons the stock was crushed no longer exist. I think the stock could easily double in 12 months... and probably return much more.

Frank has been analyzing the penny stock market for about 10 years – it is his passion, and he's very good at it. Currently, Frank's research is only available to S&A Alliance members on a "beta" basis. But it should be available to all Digest readers by November. Keep an eye out for more info.

These actions were taken against me and my guests with considerable force: The stops involved high-speed boats, helicopters, large caliber automatic weapons, and black-booted officers decked out in SWAT-team like apparel. In the second instance, my boat was boarded and searched. IDs were taken from all eight passengers. We were ordered to stay on the far side of the boat – in the sun – for nearly two hours and treated like suspected drug smugglers while two Coast Guard officers searched every compartment of my boat – including the small tackle box drawers and our personal belongings.

They called the boarding a "safety inspection." And let me tell you... it is scary when heavily armed men are telling you not to make any sudden movements, to get on the far side of the boat. Their hands are sitting on top of their holsters... and you are 30 miles out at sea.

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Obviously, boats are not specifically named as a protected class of property... but papers and effects seem to be protected. And there's plenty of case law that has extended Fourth Amendment protections – to some degree – to places other than your home. For example, you can't be pulled over on the highway without some probable cause or some traffic violation. But... we had done nothing wrong. We received no citations whatsoever. We were in a brand new boat, running at 40 knots... clearly, there was no problem with the safety of our vessel.
 

Our new "friends" on USCGC 87318 Bluefin
 

Well, it turns out the Coast Guard and other customs agents have more power to search and seize than any other kind of law enforcement. The reason why dates back to 1790, when the Coast Guard was part of the Treasury Department. Back then, the inspections had nothing to do with safety – they were revenue cutters. The Coast Guard was looking for smugglers because, at the time, the main sources of revenue for the federal government were tariffs. Congress passed a law that would seem to violate the Fourth Amendment directly because it had to ensure its ability to collect tariffs:

That it shall be lawful for all collectors, naval officers, surveyors, inspectors, and the officers of the revenue cutters herein after mentioned, to go on board of ships or vessels in any part of the United States, or within four leagues of the coast thereof, if bound to the United States, whether in or out of their respective districts, for the purposes of demanding the manifests aforesaid, and of examining and searching the said ships or vessels...

The government, which wouldn't ordinarily be able to stop, search, and seize any American-flagged vessel anywhere in the world at any time, is now empowered to do so simply because, 100 years ago, this power was necessary for tax revenues. So guess who is now routinely assigned to duty aboard Coast Guard cutters? DEA agents.

And yet... the Supreme Court continues to pretend these random searches are merely for "safety inspections." It is yet another case of the Constitution simply being ignored.

Porter comment: Nobody in the newsletter industry is more upfront and offers more transparency than Stansberry Research. We publish our entire track record each year and assign a grade to each analyst, based on results. My results over the last year have been exceptional, as I'm sure most subscribers would recognize. However, the losses on BSX certainly do sting me. I believed this was a great opportunity – the best I'd found in a long, long time. I am extremely frustrated BSX is suffering under the threat of a huge increase to taxation – an increase that has not only cost us money as investors, but will lower the quality of health care in the United States. I'm happy to take full responsibility for the loss on the recommendation, as a part of my overall track record. But if you want to spit venom at someone, perhaps you'd consider pointing it in a more useful direction. After all, it's not my fault the company faces a huge new tax burden.

Porter comment: When it comes to stocks, I'm never arrogant. We will take our losses, while we can afford to.

Porter comment: Just to be clear, I've never met or spoken to Peter Nicholas... nor any of his representatives. I find the allegation that I would write or say anything in attempt to harm my subscribers deeply offensive... and pretty ignorant. I haven't spent my entire adult life building this advisory business so I could sell my subscribers – who have given me the greatest job in the world – down the river.

Besides, if you'd actually read my research on BSX, you would know I discuss the insider selling in great detail and explain why it is related to the collapse of Lehman Brothers. (Also... keep in mind that, over the last two days, more than 192 million shares of BSX have been traded, worth nearly $2 billion. There's not a newsletter writer in the country that controls this kind of trading volume.)

Porter comment: Don't worry, Philip. We aren't going to stop publishing high-quality information at a reasonable price. Thanks for being such a good (and reasonable) customer.

Porter comment: Ordinarily, I would agree with you. But we've never seen the government print so much money or run up such big deficits – not even during World War II. It's hard to see how the dollar could rally. One thing is certainly true, though: I'm awfully glad I started buying gold at less than $400 an ounce. I wouldn't want to have to build an entire position now, at these prices.