Extreme Value readers made 35% this morning... and are up a little more than 100% in the past two years... on a World Dominator stock.
I (Dan Ferris) recommended Constellation Brands in Extreme Value in June 2011. I liked that it's the World Dominator of premium wine.
Back then, we saw management doing all the right things: reducing debt... increasing cash flow... selling less profitable, noncore businesses... and working its core premium wine business.
Then, something happened that we didn't count on...
Last summer, AB InBev announced its intention to acquire Grupo Modelo, the company that owns the Mexican beer brands Corona and Modelo. It's a great business with more than 60% of the Mexican beer market and a big share of the U.S. import market.
Then, the U.S. Department of Justice (DOJ) stepped in a couple weeks ago and tried to block the transaction. The government said the deal would give AB InBev too much of the U.S. beer market.
Today, AB InBev said it's willing to sell all the U.S. Modelo assets. That's a great move, because it will still wind up with more than 60% of the Mexican beer market.
What does Constellation Brands have to do with all of this?
Well, Grupo Modelo owns 50% of Crown Imports, the company that handles distribution and marketing of the Modelo brands in the United States. Crown Imports is the company that comes up with all those relaxing Corona commercials.
In the initial merger deal, AB InBev said it would sell Grupo Modelo's 50% stake in Crown to the company that owns the other 50% – Constellation Brands. Under that deal, Constellation would also get the rights to Modelo's beer business in the U.S. for the next 10 years (after which AB InBev could buy them back).
The market loved this and pushed Constellation's share price up 24% in a single day. Then... after the DOJ tried to stymie the merger... Constellation dropped 17%.
Now, AB InBev has revised the deal. In addition to getting 50% of Crown for $1.9 billion, Constellation also gets perpetual U.S. rights to the Modelo brands for $2.9 billion.
Constellation shares were up about 35% today. AB InBev – also an Extreme Value World Dominator recommendation – rose about 6% on the news.
As of this afternoon, AB InBev is up about 95% since we recommended it in May 2010, less than three years ago.
Constellation has performed even better, up a little more than 100% since we recommended it in June 2011.
If you want to learn how we found these two stocks that safely doubled readers' money in two to three years, you should check out my advisory Extreme Value.
In the February issue of Extreme Value, we recommended a company that dominates its market, has a ton of cash on the balance sheet, and gushes free cash flow, year after year. We believe its business will grow substantially in the next few years, due to several industry trends we detailed.
Extreme Value isn't for everyone. It's for patient, intelligent investors who understand that a business' value is what ultimately determines the value of its stock. Most people simply can't tolerate a two- to three-year wait in a safe stock. They want it all right now. Extreme Value investors are different.
We don't use trailing stops on our recommendations, and we still have one of the best stock-picking track records in the company. (See our "A+" grade in this year's annual Report Card.) Over the last 10 years in Extreme Value, we've learned something about which stocks to pick and which ones to avoid. That's really the ultimate challenge in the stock market.
We only recommended three new stocks last year because most stocks today – large caps, small caps, and everything in between – are simply too expensive. But we did recently find one market-dominating company that gushes cash and has a financial fortress balance sheet that we could recommend. This company will never suffer a financial crisis, and it has dominated its industry since the 1990s. It definitely has the potential to safely double your money in the next two to three years... just like AB InBev and Constellation Brands have done.
If you want to find out how to get access to Extreme Value, click here. If you decide Extreme Value isn't for you within three months, you can get a refund (minus a small restocking fee). We want you to be happy with our work. That's how Porter decided to do business back in the late '90s when he started S&A on the kitchen table of his apartment. (I know because it was my kitchen table, too.)
Excited as I am about my February recommendation and the huge success we've had with Constellation/AB InBev and several other positions... I'm getting more and more cautious about stocks in general. We only recommend great businesses when they're dirt-cheap. Most of the market is not at all dirt-cheap today.
In fact, big merger deals like AB InBev/Modelo usually happen when markets start getting expensive and companies try to use their now higher-priced shares as valuable currency.
With the S&P 500 around 17 times earnings, this strikes me as the sort of moment when the unwashed masses start feeling safe... they believe the upward trend has been confirmed and pour money into a rising market. Every uptick attracts millions at first, then billions more. I heard recently that one of the big online brokers reported 17% higher transaction volumes in January.
Be smart. Be careful. Refuse to buy stocks that aren't cheap enough. Remember that risk rises with price. Refuse to overpay for risk in junk bonds and other high-priced, riskier securities. Preserve your capital, reduce the risk to your portfolio, and make more money when juicy opportunities show up.
Legendary investor Warren Buffett seems to have found a juicy opportunity for his holding company, Berkshire Hathaway… Food giant H.J. Heinz confirmed today it agreed to be acquired by Berkshire Hathaway and the Brazilian investment firm 3G Capital Management... It's the largest deal in the history of the food industry.
Berkshire and 3G will pay $72.50 a share ($28 billion) for the company.
Heinz will be "3G's baby," Buffett said. 3G, which will match Berkshire's $4.4 billion investment in Heinz, will manage the company. The firm approached Buffett about the deal last December. But Berkshire will also buy $8 billion of preferred stock that pays 9%.
Buffett first started thinking about the Heinz deal in December, "but I have a file on Heinz that goes back to 1980," Buffett told CNBC. "This is my kind of deal and my kind of partner... Heinz is our kind of company with fantastic brands."
As we've explained before... Buffett loves to invest in companies that don't require much in ongoing capital investments to generate big revenues (what Porter refers to as "capital efficiency"). Companies like that can raise their prices to combat inflation. And they can pay out the excess returns to shareholders.
Last year, Heinz reported capital expenditures of $418 million on operating cash flow of $1.49 billion. Its return on equity totaled 35%.
That may not be quite as good as Hershey – a stalwart of the Investment Advisory portfolio – but it's very good. And Heinz has paid a dividend every year since 1984. The annual distribution started at $0.24 per share. Today, Heinz pays $2.06 per share a year, a yield of 3.4%.
Heinz also has four key attributes Buffett likes to see: It's a business he can understand… It holds a durable competitive advantage (in this case, longstanding brand names)… It has a management team he can trust… And he can get it at a fair price. When he finds those four attributes, he buys.
Of course, it's really hard for him to find investments that are big enough. Berkshire is so big now, it takes a lot to move the needle. So finding a new place for $12 billion of capital is a big deal.
New 52-week highs (as of 2/13/13): Berkshire Hathaway (BRK), iShares Australia Fund (EWA), iShares Insurance Fund (IAK), PowerShares Buyback Achievers Fund (PKW), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Targa Resources (TRGP), W.R. Berkley (WRB), Ericsson (ERIC), Hershey (HSY), American Financial Group (AFG), Chubb (CB), Navigators Group (NAVG), Travelers (TRV), Alleghany (Y), Brookfield Asset Management (BAM), Kohlberg Kravis Roberts (KKR), Procter & Gamble (PG), Two Harbors (TWO), Emerson Electric (EMR), and Activision Blizzard (ATVI).
In today's mailbag… words of support from some longtime subscribers. Please send your thoughts – good and bad – to feedback@stansberryresearch.com. We read every one…
"Porter, some words from an ex-Rhodesian. You are doing the absolute best thing for your kids teaching them to hunt and fish. Pay no attention to the ignoramuses out there. They have about as much intelligence as the average voter today.
"These outdoor activities will teach them more than what they will learn from X boxes, television or todays culture of music. Join Safari Club International and mention my name, and they will take care of you.
"And if you and your family enjoy the outdoors visit my Galleries in downtown Ft. Lauderdale or Naples. Call of Africa's Native Visions Galleries. We'd love to meet you as I have been a follower for moons." – Paid-up subscriber Ross Parker
"I received a nice portfolio when I first started my subscriptions with SA on my way to the Alliance some years ago. The far more valuable gift I received at that time was your 'Money Book.'
"You and other analysts like Dan have often recommended reading certain literature like Ben Graham every month. I read your Money Book the same way. It's one of the best values I have ever received and you wrote that back before you got 'good.' I would highly recommend another money book. Most of its already written in the archives now. Thanks for all the ideas over the years." – Paid-up subscriber Rick Griffith
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
February 14, 2013
Some people collect because they really love the asset they're accumulating. For example, collecting cars holds some appeal to me because I love cars. But I don't ever want to allow my things to own me. I want to make sure I own my things. And to be a collector, you have to be very conscientious about how you take care of these things. You have to store them in special warehouses. And you need security. In my opinion, that's too much of a hassle. It's almost running an operating business, rather than being a passive shareholder. I prefer things like real estate where I can be passive. I don't want to spend all my time managing my collections.
The other thing about collecting that I don't like is that none of these things provide any current income. So they're not suitable for people trying to live off the wealth they've accumulated. It's like a stock that doesn't pay a dividend... The only way you ever get anything from it is when you sell it.
However, owning collectibles offers one major advantage – one that I think drives 90% of the demand for collectibles: It's a great way to protect your wealth from the IRS. People know that when they die, the IRS won't have any idea what is hanging up on their walls or hiding in their vaults. So they hide money in these trophies to give to their children to avoid estate taxes. Mind you, I'm not passing judgment on these actions, nor am I recommending them... I just believe that's why a lot of demand for collectibles exists.
Collectibles are also easily transferrable across borders. You can take a Picasso on a private jet and move $100 million offshore. And no one even knows you have it.