Hard drives begin to crack

We wrote it, did you short it?

In the fiscal year after my 2003 buy recommendation, Western Digital saw revenues of $3 billion and earnings of 74¢ per share. By 2008, Western Digital revenues totaled more than $8 billion, and earnings per share hit nearly $4. In only four years, Western Digital grew its revenues by 166% and its earnings per share by 429%. Its share price rose from around $10 to nearly $50. That's a boom. So why would I recommend shorting a digital-storage maker in the face of escalating rates of bandwidth growth? Two reasons. First, most of the digital storage fueling the Internet growth today is being installed at the corporate level... Even worse for Western Digital is the increasing efficiency of solid-state storage devices – what's commonly known as "flash" media storage. – Porter Stansberry, February 2010, Porter Stansberry's Investment Advisory

Yesterday, analysts cut ratings for both Western Digital (WDC) and Seagate Technology (STX), the two leaders in the hard-drive sector – and my two favorite short sales.

Kaushik Roy from Wedbush Morgan said pricing, extra capacity, and a seasonally soft quarter will hurt the companies. He also says their earnings margins have peaked – Western Digital and Seagate shares rose 295% and 344% last year, respectively. The companies' margins peaked around 30%, which Roy says will spur vendors like Dell and HP – whose margins are hurting – to hammer WDC and STX on pricing.

Roy is missing the biggest reason to sell these companies short... Their product is obsolete. For details on how to access my full writeup in PSIA, click here...

In my February PSIA, I also explained Intel makes the highest-quality solid-state memory devices (the devices making hard drives obsolete). Western Digital and Seagate can't compete. Intel spends $6 billion a year on R&D – nearly as much as either hard-drive company's entire market cap. And Intel already makes almost all of the microprocessors used in personal computers. So it could easily optimize its memory cards for use with its processors.

And while WDC and STX are failing, Intel today announced its best first quarter since the company was founded in 1968. Demand for the company's new microprocessors "has been incredible," according to CEO Paul Otellini. He also said corporate technology spending is picking up. Intel's quarterly profit nearly quadrupled to $2.4 billion. Revenue was up 44% to $10.3 billion. The company also said it plans to hire 1,000 to 2,000 new workers – its first substantial hiring in five years.

No surprise here, but JPMorgan's first-quarter earnings rose 55%, driven by record profits in fixed income. The company earned $3.3 billion, "an embarrassment of riches" according to one analyst. We've explained many times why inflation is so great for banks. JPMorgan is currently borrowing money from the government at near 0% and lending it out at more than 5%. It's leveraging up and collecting that massive spread. As interest rates rise, we can count on the government to maintain low federal-funds rates, making the environment even better for bank lending. The stock is up around 3% today.

Our friends at The Daily Crux recently interviewed Swiss fund manager and Gloom, Boom & Doom editor Marc Faber. Faber is currently one of the most sought-after investors for his macro views on inflation, gold, and Asia. In this interview, Faber reveals the best stocks to profit from Asia's economic boom, his favorite gold stocks, his favorite way to own gold, and his favorite medical tourism stocks... He even tells readers his favorite city in the world for "nightlife." Do yourself a favor and check out this Crux exclusive. It's completely free. Just click here...

We're publishing our quarterly model portfolio today. As always, our model portfolio contains the 16 best investments from our entire coverage universe. We diversify into four different asset categories: Value, Growth, Income, and Macro. And we pick four investments in each category, leaving us with 16 separate recommendations. Thus, we call the portfolio the S&A 16. We produce revised portfolios each quarter (four times a year) so that you can compare the actual performance of our best ideas as they should be put to work in real life.

Last year's second-quarter S&A 16 has returned 60%, smashing the S&P 500's gain by 20 percentage points. That's a truly absurd amount of outperformance, especially given diversified portfolio included a bond component. Our bond guru, True Income's Mike Williams, led the S&A 16 from last year with a 326% gain on his Rite Aid bond recommendation. This is also the largest 12-month gain in the history of the S&A 16.

Maybe some day those of you who never consider bonds will take our advice: For most individual investors, buying corporate bonds when they are available at wide discounts is the best and safest way to get both income and capital gains.

New highs: Washington REIT (WRE), Financial SPDR ETF (XLF), Amerigas Partners (APU), McDonald's (MCD), Altria (MO), St. Joe Company (JOE), Banco Latinoamericano (BLX), Longleaf Partners (LLPFX), Sequoia Fund (SEQUX), Portfolio Recovery Associates (PRAA), WD-40 (WDFC), Carpenter Technology (CRS), DirecTV (DTV).

In today's Digest... a young reader looking to get ahead... What would you tell him? Send your advice to feedback@stansberryresearch.com.

"Love your logic, data, research... and ditto on most of your conclusions. But I'm still wondering... how does this all unfold?? OK, the dollar inflates to a sandpile failure, commodities, metals, barter take over. We have masses of disillusioned who may seek recourse in a violent, disobedient manner?? A new world order? New paper currencies? A new, more egalitarian social order?? A more accountable (enlightened) media? and leadership? Every dollar is like a Btu... that is, for every dollar of wealth, there must be a someone who owes... someone who will have to work, innovate, invent, reorganize, to pay the piper. Important points in this complex sandpile: consumers have socked away 3 trillion in money market savings offsetting current government largess, there are incredible assets that our government still owns including substantial gold reserves. I believe this global process will eventually, after some violence, most of which will be misdirected, re-level the playing field. The uber rich will lose to defaults, the credit mongers, ditto, big government, scaled down and depowered. Joe the plumber will survive and feed his family while the ultra ivy leaguers may seek a new foothold on the fledgling productive nascent forces capitalism always fosters." – Paid-up subscriber epyle

Porter comment: It's impossible to know how it will all unfold. But there are a few things you can know for certain: 1. Gold is going to be worth more than dollars. 2. It's unlikely the government will ever willingly give up the enormous amount of power it now holds. 3. The most powerful government in the history of mankind going bankrupt isn't going to be bullish... or good for personal liberty. Be advised.

"First off you are all GREAT! Your brilliant writing and ideas encourage other's growth. I am a young financial professional (investment advisor) considering trading, investment banking, or international finance. I am happy where I'm at but not satisfied, I feel like I haven't reached my full potential. I would like to work in NYC or Chicago, and wouldn't be opposed to international opportunities. I have an undergrad degree in finance, but am strongly considering an MBA. Would you agree this is best route to developing my career? If not, I am open to any and all advice." – Paid-up subscriber Ian

Porter comment: You're unlikely to follow this advice, but here's what I recommend. First, figure out what you want to do with your time. Not your life. Just your time. If you think really hard about what you want to do every day next week, you'll stumble onto what you should be doing with your life. That's actually the hard part, believe it or not. Most people don't think this way. They have some idea of what they think they should be doing with their lives – and the ideas are usually pretty big and grandiose. In the meantime, they don't stop and consider what the day to day will be like once they've "arrived."

Take doctors. Lots of folks want to be doctors because it's challenging to get through med school and because they believe they can get rich in medicine. Then... once they've racked up $50,000 in debt (or more) and completed 12 years of training, they suddenly realize they're going to spend almost every day for the rest of their lives in a hospital, surrounded by sick and dying people. They discover that working every day with the public is simply retail. Wearing a white coat doesn't actually make it all that much more enjoyable. (Obviously, some people love being doctors... but I've met lots and lots of people who didn't love the long hours or constantly being subjected to the medical emergencies – real or imagined – of their patients.)

So you might think you want to be in finance – but what does that really mean to you, in terms of what you'll be doing day to day? Lots of folks want to be investment bankers, until they spend five years doing that kind of work, which normally entails spending all night, several times a week, working a copying machine. Or spending days on end in front of a Bloomberg terminal. Or learning how to make love using an Excel spreadsheet.

Figure out the day-to-day stuff first, not last. And don't kid yourself. You won't be able to fake it. Here's why this is so important: Eventually, you're going to have to compete against people who actually love what they're doing every single day. They love it so much they literally devote their entire lives to doing it. They will sacrifice everything just to be the best at this thing they do. You will meet people like this, no matter what field you end up in. And they will crush you if you don't actually love what you're doing on a day-to-day basis.

In the real world, there's a huge difference between the 20% at the top and everyone else. If you don't truly love what you do every day, you'll never be in the top 20%. And you'll never be very successful.

Once you've figured out what you want to do each day, find the 10 best people in the world at it. Don't narrow your search to Chicago or New York. Chances are, the 10 best don't live there. They'll live in much, much nicer places, like Aspen or Miami or Newport Beach. And you'll want to live there too, trust me.

Spend a while researching these guys. Get to know every single thing about them. Act like a private detective. Spend three months on each guy. Pay attention to how these guys actually spend their time. Make sure that's what you want to do with your time, too. Finally... approach them.

The best way to do this is to compliment their work and to send them ideas that mirror their approach. Show them you love to do what they do and you're good at it. Find a way to make their lives easier or better. Then, volunteer to work for them, for free, for as long as it takes to prove your value to them. Be prepared for them all to say "no" at least a dozen times. They're just testing you. Very few people turn down a young, hard-working, bright person who is self-directed who volunteers to work for free – if he's persistent.

Regards,

Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
April 14, 2010