Peter Schiff... Marc Faber... Jim Rogers... All these famous gurus are predicting a market crash is imminent.
I would have thought all three of these market veterans would know better than to waste time on market predictions. But they're all on TV and I'm not, so who's really wasting time?
I can't tell you with any certainty that the market is going to drop. Nor do I know anyone who has ever been able to do that. If Schiff, Faber, and Rogers are being honest, predicting market drops isn't a skill they have. It's just a big, fat guess, designed to get them more of the media attention they all seem to crave.
I can't predict the future of stock prices, but I don't need to. U.S. stocks have been overpriced for months. The Wilshire 5000 index represents the entire U.S. stock market, from ExxonMobil down to stocks of less than $1 million in market cap. Recently, the Wilshire has been trading for over 35 times earnings. It's hard to find cheap stocks with the whole market trading for 35 times earnings. If I approach you with an opportunity to buy a business at 35 times earnings, you should laugh and walk away.
That explains why I haven't made a new long stock recommendation in Extreme Value since I recommended IMS Health at $13 a share in August 2009. A buyout offer – the second one of the year for an Extreme Value stock – pushed IMS Health's share price up nearly 70% in less than three months.
IMS Health is a market-dominating business that tracks 90% of U.S. prescription drug transactions and stores the information in a one-of-a-kind database that's been 50 years in the making. Big Pharma can't survive without this information. IMS Health was selling for around five times its ample free cash flow. It was a no-brainer, a one-foot hurdle you could step over (unlike all the 10-footers out there today). You didn't have to take risk to make a big, fast return.
With Komrade Obama contemplating a government takeover of the entire health care system, comprising 16% of the U.S. economy, no wonder another high-quality, cash-gushing health care stock has gotten cheap enough to become my first new Extreme Value buy recommendation in six months. When I see a great business selling for less than six times free cash flow, with zero debt and one-third of its market cap in cash... well... that's what I sit around waiting for. It's a stock I can't say "no" to.
The main thing that's different about what I do in Extreme Value is simply that I'm willing to say "no" on your behalf. I'm willing to admit when there's nothing good enough and cheap enough to recommend.
You probably don't think much about this, but the failure to say no is one of the worst things brokers, banks, and other financial-service providers do to you, their client. They fail to tell you option-ARM loans, 20%-plus variable-rate credit cards, high-cost mutual funds, and other risky financial products are set up to make you poor and them rich. Nobody ever says, "Please don't buy this product from me. It's not a good idea for you."
Consequently, there's a huge, wide-open market for saying no on your behalf. I've found virtually zero competition there. My readers see me doing it when they open six straight issues of Extreme Value without seeing a new long stock pick. That probably feels a little disappointing... though I doubt it felt disappointing when they made more than 240% in a few months on International Royalty (the other Extreme Value buyout target from last year).
Saying no so often certainly does me little good. I could sell a lot more newsletters if I were permanently bullish and focused more on the persuasiveness of my writing than the quality of my research. I don't see how that benefits you, so I don't do it. Should I work myself straight out of a job by making Extreme Value too difficult to sell, hey, at least I'll leave with a clear conscience, not to mention a better track record than most of the competition.
If you want to know which stock out there today is good enough, cheap enough, and safe enough that I can't say no on behalf of Extreme Value subscribers, just read the February issue, which comes out next Friday, February 12, after market close. To get access, click here.
It was the largest private-equity deal in history. In 2007, billionaire investor Sam Zell sold Equity Office Properties (a portfolio of 573 properties acquired over 30 years) for $39 billion. In hindsight, it was the most obvious sign of a bursting real estate bubble... One of the shrewdest and best real estate investors in the world (his nickname is "the Gravedancer," after all) was cashing out on his life's work.
Private-equity behemoth Blackstone was flush with cheap financing, pumped into overeager banks by the Fed. So Blackstone took the bait. The deal happened very fast. According to people who worked on the transaction, Blackstone performed only "short-term due diligence."
I remember Sam Zell speaking in New York a year or so after the deal closed. The subject of Equity Office Properties came up, and he practically snickered at the idea of buying it at such a price. He ultimately contained himself and only smiled quietly, shaking his head. The audience chuckled. Everybody "knew" Blackstone had made a mistake. But Blackstone got the last laugh...
Once the deal closed, Blackstone immediately flipped 70% of the newly acquired properties to 16 buyers for a combined $27 billion. And the list of buyers was a who's who of property investors – Stamford-based RFR Properties, Maguire Properties (one of the largest landlords in Southern California), and New York real estate magnate Harry Macklowe, just to name a few.
Today, nearly all of the Equity Office buyers are underwater (the value of the property has fallen below the value of the mortgage). And guess who's stepping up to buy those properties back? In probably the biggest sign of a real estate bottom to date, Sam Zell is reentering the market...
Harry Macklowe, who bought $7 billion of Equity Office properties, was forced to return those properties to lenders and sell four more, including the famed GM building, to repay his debts. He's also selling three New York City apartment towers to Zell's Equity Residential for $475 million. Zell has already closed on two properties. Equity Residential is purchasing the properties for an average $470,000, or $545 per square foot. Equity Residential CEO David Neithercut said his firm is buying the properties "at prices well below replacement cost."
Think about all this for a minute.
When it comes to real estate, do you ever want to buy what Sam Zell is selling? It would be like buying Moody's shares from Warren Buffett. Not a good idea.
Zell buys only when he can get in dirt cheap, and he sells when someone makes him an offer he can't refuse. Because of his style and because he's such a huge buyer, Zell's sales and purchases tend to signal market extremes. His latest purchase of New York apartment space for 50%-60% below peak prices could create a pricing floor. Whether it does or not, take note: Sam Zell, the Gravedancer, the ultimate deep value player in U.S. real estate, is buying.
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New highs: Burlington Northern Santa Fe (BNI), IMS Health (RX), Shaw Group (SHAW).
Not much in the mailbag, though it seems we've made a couple readers happy. What's the other side of the story? feedback@stansberryresearch.com.
"I can't believe you're getting flak for inviting Minkow to the InterOil conference call. Responsible due diligence demands that you explore both the bull and bear cases, just as you allowed us to do on the call. It was gutsy, honest, and exactly what was called for. People, please – shutting your ears to those who disagree with you is a recipe for financial suicide. If you're only listening to half the story, sooner or later you're going to lose all your money.
"Kudos to S&A for sending your analysts to investigate the InterOil site in person. Porter, you really cut to the chase when asked Minkow point blank: 'Have you found anything about the company that leads you to believe the size of the resource they're claiming is completely fraudulent?' He hemmed and hawed and finally admitted, 'I don't know enough about the industry to make such a sweeping statement.' Game, set, and match to S&A. I will take your experts and their eye-witness accounts over that any day. Great job with the call. I look forward to more of S&A's well-balanced research. That's exactly why I'm an S&A Alliance member. If I wanted cheerleading, I'll just go to a stock message board and put all the people who disagree with me on ignore." – Paid-up subscriber Lowell Beers
"Your article today, Feb. 1, 2010 on the bankruptcy of General Motors – and how it is the metaphor for the bankruptcy of America was overwhelmingly powerful. You showed in simple terms how it should be obvious to everyone. But most people have been conditioned to believe the government is all-powerful, and simple economics is not taught until the college level, so they don't think about how ridiculous many political speeches and government actions are. Keep up the good work, even though you are preaching in the wilderness for only a few to hear." – Paid-up subscriber Alexander London
Ferris comment: If we're not crying in the wilderness, we're not doing our job. Anybody can parrot the popular viewpoint.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
February 2, 2010