Wed, Aug 7, 2013|Sean Goldsmith

Gold stocks could double from here...

The way the government goes after "insider trading" suffers from a few problems... Fundamentally, it's a victimless crime.

But more important... the way current insider-trading laws are written is extremely dangerous...

Most people think insider trading is simply using material and non-public information to profit. But that's not how the law is written. Here's the definition from the Securities and Exchange Commission (SEC) website:

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

So in other words... if you tell me something about a company, it may or may not be insider trading. I can't know.

There is no clear legal definition that makes sense... It's applied differently in every single case. So for example, what if the chairman of a company's board calls me and says, "Hey Porter, I really think you should look at my stock today." Is that material, non-public information? There's no way to answer that question... nobody knows because it's different in every case.

Now, what if the chairman calls me and says, "Hey, we're not going to earn $0.18 a share next quarter. We're going to earn $0.36 because we're reversing this accounting reserve etc. etc." Is that inside information? That sounds like pretty specific nonmaterial public information, right?

But how do you tell the difference? And what if it isn't the CEO who calls you... What if it's just a guy from the accounting department who calls you and says, "Hey, I think we're doing pretty well" or "Hey, I think our clinical trial is going pretty well"?

You should handle insider trading by prosecuting the people who give out information when they are not supposed to. So don't prosecute the traders who are using the information. They haven't done anything wrong. They don't have any fiduciary obligation to the company they're buying or its shareholders. They haven't hurt anyone.

If the chairman of the board has leaked proprietary information, punish him. If a doctor running a clinical trial has leaked proprietary information, punish the doctor. Don't punish the people who are using the information... Punish the people who had a duty to keep it private.

I know this answer seems simple and obvious. That's because it is. It's just as obvious that this is a great political crime. So-called insider trading doesn't hurt anyone. It's just a way for government prosecutors to advance their careers or appear to be doing something... when really they're doing nothing.

– Porter Stansberry with Sean Goldsmith

Who you should actually punish for 'insider trading'...

Yesterday, Porter described the injustice of the government's pursuit of hedge-fund manager Steve Cohen.

In today's Digest Premium, Porter explains why insider trading laws are so dangerous... and how the government is completely ignoring the people who should be prosecuted.

To subscribe to Digest Premium and access today's analysis, click here.

Gold stocks could double from here... An important gold ratio hits a 12-year extreme... Asymmetrical trades... The poster boy for capital efficiency... First Solar gets whacked... Porter is heroic...

Gold stocks appear to be turning the corner...

Barrick Gold, the world's largest gold miner, announced an $8.7 billion write-down on its Pascua-Lama project in the Andes. The company also cut its quarterly dividend... But the stock barely budged.

And one of our close contacts, a renowned gold-stock expert, called the bottom in mid-July.

Still, it's been a brutal drop this year – both for gold stocks and the metal itself... The price of gold is down from $1,675 an ounce to $1,300 an ounce this year.

The Market Vectors Gold Miners Fund (GDX), which holds a basket of gold miners, is down nearly 50% year-to-date.

But our resident precious-metals expert, S&A Resource Report editor Matt Badiali, noted an important ratio in the gold market is at a 12-year low... And it's bullish for gold stocks.

Matt is simply talking about the price of gold stocks compared with the price of gold. When the ratio is at extremes, big moves happen...

And today, gold stocks are the most undervalued they've been compared with the price of gold since January 2001. As he wrote in today's Growth Stock Wire...

One measure of value for gold stocks is the gold-stocks-to-gold ratio. This is a simple measure of the ratio of the price of gold stocks to the price of gold. When it gets badly out of whack, big moves happen in gold stocks.

For example, the chart below shows the ratio of the value of the iconic AMEX Gold Bugs Index ("HUI") – which tracks the 15 largest, publicly traded gold miners – to the price of gold. When the ratio is very high, it means gold stocks are expensive relative to gold. When the ratio is very low, it means gold stocks are cheap relative to gold.

The ratio was at its most extreme in November 2000. After that ratio was reached, gold miners soared 435%. In 2008, another extreme point was reached. Gold miners soared more than 150% in the next 12 months.

We can't know for certain where gold prices will go from here... But the setup for gold stocks is attractive today. It's what's called an "asymmetrical" profit opportunity.

Let's say gold stocks have the potential to fall another 25% (which is highly unlikely, considering how oversold the sector already is)... That means by investing in gold stocks, you're risking an unlikely loss of 25% for the potential to make 100%-plus gains. So your upside is four times greater than your downside. That's a bet we'll take all day.

If you're ready to "dip your toe" into gold stocks, you should sign up for Matt's S&A Resource Report. He travels the world visiting mining projects, looking for the best and safest companies for his readers.

And over the years, Matt has built an incredible network of experts in the resource space who alert him to new opportunities and share their vast knowledge of different projects around the world.

In short, Matt's knowledge of gold stocks – and commodity stocks in general – is fantastic. And in his latest issue – due out today after market close – Matt offers a full rundown of the values he is seeing in gold stocks. After analyzing the market for the past month, Matt has boiled the market down to his two favorite buys. If gold holds steady at these levels, gold stocks could easily rally 50%-100%.

A subscription to the S&A Resource Report costs just $39 for one year. Plus, you can try the S&A Resource Report completely risk-free. (If you decide in the first four months that it's not right for you, we offer a 100% money-back guarantee.)

If we see a rally in gold stocks, you could make a fortune. Learn more about a subscription to the S&A Resource Report by clicking here. (This will not go to a long video.)

While most market participants have been worrying about the Federal Reserve scaling back ("tapering") its quantitative easing and other unpredictable, short-term moves... Stansberry's Investment Advisory readers have been enjoying steady profits in one of the market's safest stocks: Hershey...

Porter originally recommended Hershey in his December 2007 issue. He said it would likely be the most profitable stock he ever recommends. How could Porter be so sure this stock would outperform? It's the poster child for capital-efficient businesses. As Porter wrote in that issue...

This idea – the importance of corporate capital efficiency – is the key to understanding Warren Buffett's success as an investor. He never mentions the words "capital efficiency." Instead, he talks about the importance of returns on net tangible assets and the value of economic goodwill. Don't let the accounting language distract you: Both concepts are measures of capital efficiency.

As Buffett says, "Ultimately, business experience, direct and vicarious, produced my present strong preference for businesses that possess large amounts of enduring Goodwill and that utilize a minimum of tangible assets." Where do you find stocks with these qualities? Buffett answers: "Consumer franchises are a prime source of economic goodwill."

I have come to believe evaluating capital efficiency gives us a permanent edge in the market, as almost everyone else ignores this crucial variable... Few people even understand the concept...

Or in terms Buffett would recognize, this company has among the highest returns on net tangible assets in the world, uses very little leverage, and has a balance sheet where economic goodwill dwarfs all of its other assets.

Hershey is capital-efficient because it can grow sales and earnings without reinvesting a ton of capital back into the business. This allows the company to return a large chunk of cash to shareholders every year. Hershey has paid a dividend every quarter since 1974. And it's raised that dividend all but three years since then. Plus, the company buys back loads of stock, which reduces the share count, giving existing shareholders a larger stake in the company.

As Buffett says, "time is the friend of a wonderful business." Simply buying and holding a company like Hershey and reinvesting dividends can make you a fortune. As Porter explained...

Thanks to the miracle of compounding, if Hershey's current rate of growth continues over 20 years, investors should expect to make 20 times their money – or capital gains in excess of 1,900%. Again, that's not including the impact of reinvesting the cash dividends, which would significantly increase returns.

There aren't many businesses that you can realistically expect to make you 20 times your money. There are even fewer businesses that you can expect to hold safely for 20 years. But in this case, you can. This company's leading product has remained totally unchanged for more than 100 years and is known throughout the world as a leading "luxury staple."

Porter's readers are up 159% to date on Hershey – the stock hit an all-time high yesterday. And his Investment Advisory subscribers are still enjoying growing dividends and share buybacks every year.

Shares of one of our favorite whipping boys, solar-energy boondoggle First Solar, plummeted today after reporting earnings that fell short of Wall Street expectations...

For the full story on why First Solar is one of our favorite short candidates, be sure to reread the March 9, 2012 Digest.

First Solar was performing well leading up to last night's miss... In April, the stock jumped 45% in one day after the company offered positive guidance through 2015.

But the company reported second-quarter revenue dropped to $520 million, a 46% decrease from the year before. Analysts were expecting $729.7 million. First Solar also cut its full-year revenue guidance from $3.8 billion-$4 billion to $3.6 billion-$3.8 billion. The company cut its earnings-per-share outlook to a range of $3.75-$4.25 per share down from $4-$4.50.

The bad news sent shares down nearly 14% today. It's been a bumpy ride...

New 52-week highs (as of 8/6/13): Fluidigm Corp (FLDM), 1st United Bancorp (FUBC), and Hershey (HSY).

Quiet day in the mailbag... Surely we've angered you lately. Send your notes to feedback@stansberryresearch.com.

"You constantly reinforce my opinion of you. You are heroic. You may not know it but you are more 'Objectivist' than most of us who consider ourselves Objectivists. I'm proud of you and the fact that I am an Alliance Member." – Paid-up subscriber Rick Marchetta

Regards,

Sean Goldsmith
Baltimore, Maryland
August 7, 2013

Who you should actually punish for 'insider trading'...

Yesterday, Porter described the injustice of the government's pursuit of hedge-fund manager Steve Cohen.

In today's Digest Premium, Porter explains why insider trading laws are so dangerous... and how the government is completely ignoring the people who should be prosecuted.

To continue reading, scroll down or click here.

Who you should actually punish for 'insider trading'...