Financial Platypus

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/08/2013

Baltimore, Maryland

* * * Thirty percent of Americans cannot say in which year the 9/11 attacks occurred, according to Harper’s.

* * * Says a reader of our Alliance conference last week in Aspen: "On Wednesday evening I saw my first wild bear casually walking down the street. What could be better than that?" Regarding our editors he remarked, "I’ve always wanted to meet Porter." Compared to the bear, I’m sure I didn’t make much of an impression…

* * * Last week, I told S&A editor Christopher Hancock to find the cheapest stock market in the world, go there, and report back to us on two or three ridiculously cheap, high-quality businesses. Likewise, I told him to swing by the most expensive market stock market in the world on the way home, for comparison. Every time I travel to places that are dirt-cheap or terribly expensive, I learn every important lesson in finance all over again. And yet… when I returned from Aspen, who did I find sitting in my office? Hancock!

"Why are you still in the United States, Hancock?"

"I’m setting up meetings…"

He did show me this interesting fact: Israel trades at 4.6 times earnings. The First Israel Fund (AMEX: ISL) trades at an 11.83% discount to net asset value.

* * * Interesting footnote about Hancock: He got his MBA from UST Kellogg in Hong Kong. MBA graduates from this school make more money than any other MBAs in the world, according to a Financial Times report out today. Hope that means I don’t have to give him a raise…

* * * Spoke with Rick Rule this morning. Rick, you’ll recall, is the man to know in the resource sector. He’s the principal of Global Resource Investments and the most important investment banker in the world for mining companies.

How do you become the most important investment banker in the world for mining companies? You survive. Rick told me something I didn’t know about Silver Standard (SSRI): Its La Pitarrilla project in Durango, Mexico, is one of the most important mineral discoveries (of any kind) in the last 20 or 30 years. He also told me something else… there’s a flood of money moving into the sector, lowering the cost of capital for drilling projects to around zero. You’ll recall what happened to telecom investors when the cost of capital went to zero in the networking sector.

* * * Here’s a new term you might like – "Dividend Double Date." Blue-chip investors often experience something few investors achieve: doubling their initial investment with a single year’s dividend payment. If you buy the right blue-chip stocks now, in 20 years you should be able to live off the dividends alone. And live well. For example, if Johnson & Johnson continues to grow its earnings and dividend at historic rates, by 2034 you’ll earn your entire investment back, each year, in dividends. So, for J&J, 2034 is the "Dividend Double Date." Put $250k into J&J today, and you’ll be living well off the dividend alone in less than 30 years. See my letter (PSIA) for the eight blue chips I’ve recommended this year. They all have dividend double dates within a 30-year time frame.

* * * Here’s the spot where I like to update you all on our portfolios… what’s moving… what the word on the street is… what you should buy next, etc. But Sean Goldsmith, who feeds me this information after collecting it from our editors, says he was too busy in Aspen all weekend to do it. Thus, his name has been changed in our office. From now on he’ll be known as "Goldbricker."

* * * I did notice one stock on my own: Dan Ferris’ latest Extreme Value recommendation (from October 13). Dan’s picks typically move at a glacial pace, which is fine because almost without exception, they all move higher. (Dan has the highest average return of all of our writers.) But his latest pick is acting like a tech stock: At one point this morning, it was up 5% – in just a few minutes. I knew this pick would do well… it’s so out of favor that subscribers were literally angry that Dan recommended it, and there’s an entire political movement that’s trying to put it out of business. Everyone, it seems, hates this company… except Dan and a handful of the world’s best investors (including Warren Buffett). I’m betting on Dan and the world’s best investors. So should you.

* * * About that cork… Last Friday, I asked how to get a cork out of a wine bottle (without breaking the bottle). This is an amazing parlor trick. I saw it performed live by our own Tom Dyson last week in Aspen. (He might have frozen up on the podium, but give the guy a bottle of wine and he knows what to do with it…)

First, pour the wine in four glasses. Next, take a fine cloth napkin. Roll it diagonally, so that it’s long and circular, with a sharp point at the top. Work the rolled up napkin into the mouth of the wine bottle and through the neck. Get as much of the napkin into the bottle as you can, then flip it over so that the cork falls into the material. Juggle the bottle as necessary so that the cork is standing upright in the napkin. Then slowly pull the napkin out of the bottle. The cork will be bound up in the napkin as it enters the neck of the bottle. Pull hard. Presto. This trick is good for $20 at almost any bar in the world. No one will believe you can do it. Look for another riddle tomorrow.

* * * * * * * * * * * * * * * * * * * *

"I have an 800 number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down."

– Warren Buffett, on why he doesn’t buy airline stocks

Nature makes mistakes. See the platypus, for example.

Evolution probably wasn’t the most efficient way to design the universe or optimize energy in nature. Of course, there wasn’t any better way to do it. Likewise, capitalism isn’t the most efficient way to distribute resources in our economy… but it’s still the best way.

People who believe in centralized control of resources always overestimate the intelligence of committees. Likewise, if scientists are wrong and religious fundamentalists are right, God has some explaining to do about the platypus.

Nature makes mistakes. So do markets. But they both make darn few mistakes, given the complexities and the energies they guide.

The airline sector is the best-known example of a market that’s very inefficient.

The industry has been a net consumer of capital since inception. Buffett jokes that we’d all be richer today if someone had shot the Wright brothers before Kitty Hawk. Airline travel has been a tremendous economic boost for the world… so why haven’t airlines made money?

Airlines don’t work because the industry is dominated by huge capital costs, but managers are dedicated to quarterly earnings. Imagine you’ve got a bucket with a huge hole in the bottom. Which would you do first? Fill it with water… or fix the hole? Airlines try to fill it with water. Sooner or later, they go broke.

The time to get into the airline business is when no one wants planes. This happens about once every 10 years, because airlines can’t afford to maintain planes that aren’t flying. Thus, whenever a recession or a crisis hits, the airlines have to get rid of their planes. That’s when folks, such as Richard Branson, enter the market, buying up planes for pennies on the dollar. Branson launched Virgin Airlines with a single 747. He had less than $5 million at risk.

Publicly held airlines do the opposite. They buy planes when they can operate them profitably – when there are too few planes in the sky. Not surprisingly, this is when airplanes cost the most.

By maximizing operating profits, most publicly traded stocks with large capital costs are disasters. I call them financial platypuses. They’re designed to fail.

My favorite financial platypuses are tankers and drillers. Both sectors (shipping and oil) are tremendously cyclical. In these markets, you’re either a contrarian or you’re a victim. Public companies are never contrarian. Their managers are paid to maximize quarterly earnings. Capital expenditures are not even listed on the income statement. So they’re ignored.

As soon as the assets (boats or drilling rigs) can be operated profitably, the managers of these firms order more of them to built. The logic is simple: We need more boats, more planes, and more drilling rigs to make more money. The managers never consider the soaring costs of these items because they’re playing with OPM: other people’s money.

When the new equipment comes online, what do you think happens to the profitability of operations? Straight into the toilet.

How much money would you guess the top-five onshore oil-drilling companies have spent on capital equipment since 1998, when oil prices bottomed?

I bet you didn’t guess $9.2 billion. That’s almost twice as much money as these five companies have ever earned, in total, during their entire histories.

What do you think is going to happen to daily lease rates on oil rigs as thousands of new rigs come onto the market?

Don’t buy platypuses. Especially not at market tops.

Good investing,

Porter Stansberry

P.S. New feature for our Digest – the Stansberry Top 10. It’s a list of our 10 best current "open" positions. As I’ve been telling you, our Extreme Value product is by far our best performer. I’ll comment on the list from time to time, when we add a new position.

Stansberry & Associates Top 10 Open Recommendations