A World Dominator yielding more than 5%...

A World Dominator yielding more than 5%... Is tobacco a good investment today?... Why tobacco has historically crushed it... Our bold bet pays off... Sears Holdings announces formation of REIT... A 100% win percentage trading Apple... Why this type of performance isn't uncommon selling puts...
 

 One World Dominator is trading at a new 52-week low... and it's sporting a 5%-plus yield today.
 

I'm talking about cigarette maker Philip Morris International (PM)...
 

 

 A 5.2% yield on a safe stock like Philip Morris is spectacular in today's zero-percent-interest world. But is it time to buy? Before we answer that question, a brief history on the company...
 

Altria Group, another World Dominator, spun off Philip Morris International in 2008. Altria maintained the domestic tobacco business and gave Philip Morris everything else. Philip Morris is a $117 billion corporate behemoth selling tobacco products internationally.
 

 Stansberry International editor E.B. Tucker and research analyst Bill McGilton have been following the international tobacco sector. As they wrote in a private e-mail...
 

Philip Morris International's $30 billion in annual sales are spread between Europe, Eastern Europe, and Asia (at 30% each). The remaining 10% of revenue comes from Latin America. It's truly a global tobacco company.

 The big question surrounding Philip Morris is whether it can maintain its large dividend. As E.B. explained...
 

Today, the stock is trading at a new low. It sold off on speculation that its high dividend might be in jeopardy. Philip Morris produced $6.6 billion in free cash flow last year. (That's operating earnings minus capital expenditures.) A company can only pay out what's left after paying expenses... that is, unless it borrows.   The problem with Philip Morris and other tobacco companies is they aren't growing. People still smoke. They aren't likely to quit. But cigarette sales aren't rising. That's hurting Philip Morris... and it will continue to hurt the company until it can convince the market that its dividend is safe.   In our view, Philip Morris is nearing buy range. If the dividend gets cut, shares will fall more. But in the long run, this business is incredibly stable. For example, if the economy enters recession and consumer stocks get crushed, cigarette sales will likely stay flat. Flat is good in a recession... and that's a great time to own tobacco stocks.

 Extreme Value editor Dan Ferris added that Philip Morris shares were selling off because folks in the U.K. and elsewhere are talking about new bans on smoking. But he isn't worried. "People want to smoke," he wrote in an e-mail. "Shopping trumps politics."
 

 And in the case of tobacco, shopping trumps just about everything...
 

In the December 2013 issue of Stansberry's Investment Advisory, Porter and his research analysts studied what happened to the market and various sectors when the Federal Reserve reduced or considered reducing quantitative easing since it first initiated the policy in 2008.

The Fed "tapered" four times over that period. The average tapering period lasted 84 days. The market lost an average of 16% over those periods. Porter's team examined more than 2,000 large U.S. stocks and 39 industries to see what held up the best. The answer: tobacco stocks.
 

On average, tobacco stocks declined just 4% during tapering periods. It was the best-performing sector... In fact, 29% of the stocks in the sector actually rose during those periods.
 

 And in the January 2014 issue of Stansberry's Investment Advisory, Porter's team discussed the dominance of the tobacco sector and its history of capital efficiency. (These are companies that return lots of capital to shareholders because the business doesn't require much capital to maintain it.) Despite all of the headwinds, tobacco stocks still made longtime investors a fortune. From that issue...
 

If capital efficiency is a long-term strategy... doesn't that disqualify cigarette makers? Everyone knows Americans are smoking less these days. And governments keep raising cigarette taxes. Tobacco companies aren't allowed to freely advertise. Aren't these companies going nowhere fast? Take a look at these numbers (below) for the stocks in the Bloomberg index of tobacco companies...   24-Year Study of the Bloomberg Tobacco Index Date Share Price Gross Margins Dividend Yield Return on Assets 12/31/1990 $90.14 45.4% 3.1% 9% 12/29/1995 $149.53 49.5% 4.1% 11% 12/29/2000 $212.45 54.2% 4.7% 14% 12/30/2005 $356.60 47.1% 4.2% 10% 12/31/2010 $535.99 58.6% 4.8% 15% 12/31/2013 $824.28 62.2% 4.4% 19% 24-year growth 814% 37% 44% 117% The table above tracks the progress of Bloomberg's tobacco index, a group of companies that includes industry stalwarts such as Altria/Philip Morris (Marlboro), RJ Reynolds (Camel), and Lorillard. As you can see, from 1990 to today, the stock prices of these companies shot up more than 800%, as the companies drastically increased margins, dividend yield, and return on assets.

As Porter's team pointed out, the remarkable thing about these numbers is that they occurred during a tumultuous time for the tobacco industry...
 

Domestic smoking has decreased drastically since 1990. Prices also had to be cut as generics flooded the market (early '90s). The Master Settlement Agreement (MSA) was reached in 1998, requiring tobacco companies to reimburse the government for medical expenses, curtail advertising, and set up anti-smoking education programs.   The Department of Justice won its lawsuit against the industry. Smoking has been banned in buildings throughout the country. States imposed additional taxes – some as high as $5.85 per pack – in an effort to discourage smoking.   And yet... through it all, the companies – and their owners – have prospered. We have no idea what the next 24 years will bring, but it would be hard to imagine a more challenging stretch than the last 24 years. Many thought the MSA would bring the industry to its knees.

 One final note on tobacco from E.B...
 

At Stansberry International, we track all of the world's leading tobacco stocks. Right now, we're following Korea Tobacco & Ginseng (KT&G) closely. Its sales are up 30% since 2010, compared with 7% growth for Philip Morris over the same period. KT&G's dividend is only 3.8% (still healthy), but it's in less danger of being cut since sales and profits are growing. And the company trades at lower multiples than Philip Morris on several metrics...   Global Tobacco Companies Philip Morris KT&G Market Cap* $117 $11 Sales* $29.8 $3.9 Dividend Yield 5.3% 3.8% Total Debt* $29.5 $0.2 Price-to-Sales Ratio 4.0 2.8 Price-to-Earnings Ratio 14.5 13.7 Five-Year Sales Growth 1.8% 5.5% * In billions Source: Bloomberg

 We revisited "the most hated company in the market" – Sears Holdings (SHLD) – in the March 25 Digest. We won't go into the entire backstory today. For the original (long) thesis, be sure to read the January 16 Digest.
 

 In short, Wall Street saw Sears as a retailer spiraling toward bankruptcy. But Porter and his team believed that chairman and billionaire investor Eddie Lampert was selling off assets to pay dividends to shareholders and eventually form a real estate investment trust (REIT).
 

As they wrote in the December issue (bolding for emphasis)...
 

In November, Lampert announced plans to do a "sale and lease back" deal involving 200-300 wholly owned Sears store locations. Such deals have been common for a long time... when they involve an independent lessor. Normally, businesses agree to these arrangements when they want to extract capital from their real estate holdings and invest it in more profitable areas of their operations. They will sell their office buildings or other land holdings to a REIT and then sign a long-term lease agreement. This allows corporations to remain in their office towers, but no longer own them.   With Sears, the rationale for a deal like this is different. It has no more-profitable areas to use the capital. So instead, it needs to be sold to shareholders. So Lampert is creating a new Sears REIT to hold these stores and handing its shares to Sears shareholders. As you may know, REITs are simply tax-advantaged entities created to hold real estate properties and funnel the cash they generate directly to shareholders. So the move essentially means that Sears stores will be paying rent to their own shareholders... including, of course, Lampert and ESL.

 While Stansberry's Investment Advisory subscribers had made a healthy profit on Sears – and everything was slowly playing out as they predicted – Porter decided to tighten the stops earlier this month. He wrote in an update...
 

Lampert doesn't want to disappoint the market, so he's putting out some sort of lukewarm news [telling investors the REIT plans are on track during the company's poor – as expected – fourth-quarter earnings], and I think as we get closer to the actual spinoff – or offer or however it materializes – I think news is going to get better. I would expect to see Sears shares rallying into that spinoff into May or June.

 Sears has been talking about forming a REIT since 2005. And today – hopefully not an April Fools' joke from Lampert – Sears announced it would form a REIT.

The REIT, called Seritage Growth Properties, will acquire around 254 of Sears' properties. The deal will generate more than $2.5 billion for Sears. Seritage will lease the Sears and Kmart locations back to the retailer.

Sears also announced it would form a $330 million venture with mega-REIT General Growth Properties, contributing 12 properties at GGP's malls. GGP will contribute about $165 million to the deal.
 

 Shares rose as much as 12% on the news before pulling back. But because so many shares of Sears are currently sold short, we expect a further "melt up" as news of the REIT settles in.
 

 A special shoutout to reader Marshall Brown, who recently asked what value our newsletters bring...
 

This is just one example, but going long Sears Holdings was one of the boldest and most contrarian calls Porter and his analyst team could make. As we noted in past Digests, 99 out of 100 brokers surveyed by financial magazine Barron's wouldn't touch the stock. It was toxic.
 

But Porter's team wasn't swayed. They dug in, did the work, and found what they believed to be a hidden gem (albeit a speculative one).
 

It's a huge feather in the cap to be the lone man recommending a stock... and for their thesis to be proven correct.
 

Porter's subscribers were up 26% on Sears in just four months as of yesterday's close.
 

 I'd like to highlight another incredible performance at Stansberry Research... The success DailyWealth Trader has had trading consumer-products giant Apple over the years...
 

DailyWealth Trader started recommending options on Apple back in June 2013. And the results were extraordinary... In total, they recommended 24 trades on Apple. Every single trade was profitable. And the average annualized gain on the trades is more than 30%.
 

The DailyWealth Trader team produced these results following two of our favorite trading strategies: Selling covered calls and selling put options (and collecting income upfront) on safe and strong companies trading at reasonable valuations. As Brian wrote...
 

A gain of 30% in the course of a year is something you might expect from a riskier investment strategy. But we generated these gains with a strategy focused on one of the world's safest, strongest, most dominant companies.   And remember, this strategy has produced a win rate of 100%. Extraordinary win rate. Extremely high annual gains. All while trading a safe, strong company. This sort of thing just doesn't happen very often. When it does, you remember it for a long time.

 Lest you think Brian's success with Apple is a fluke, Dr. David "Doc" Eifrig has used the same strategy since launching Retirement Trader in April 2010.

Doc has amassed the most impressive track record in the history of our business... recording 208 out of 210 closed positions for a win. That's an overall win rate of more than 99%. Right now, Doc is sitting on 69 consecutive winning positions. And his average return is incredible: 9.3% (or 49.6% annualized).
 

 We've urged longtime Digest readers to sell puts for years. And some readers have had amazing success, like subscriber Robert P., who told us...
 

Thank you to Stansberry Research and Dr. Eifrig! I want to relate my experience regarding my subscription to Retirement Trader. I had debated much about investing $3,000 into this opportunity for education and researched recommendations, but chose to do so. I received very nice additional gifts (Edited: It's a surprise) and have just completed my first month of trading for a pre-tax profit of $3,218.41. I couldn't be more pleased and have learned very much.

 New 52-week highs (as of 3/31/15): Prestige Brands Holdings (PBH).
 

 We've gone on long enough for today, so we're skipping the mailbag. If you've had success following Doc Eifrig's recommendations in Retirement Trader, please e-mail us your successes to feedback@stansberryresearch.com.
 

Regards,

Sean Goldsmith

April 1, 2015