I just had the greatest fishing trip of my life...
I went to Chub Cay, an island about 115 nautical miles southeast of Miami. The first island you come to in the Bahamas out of Miami is Bimini, about 45 nautical miles out. And Chub Cay is around another 60 nautical miles southeast from there.
The fishing in Chub Cay is so good because it's the closest island to what's called "the pocket." An absurd geological formation, the pocket sits at the top of an extremely deep stretch of water that is in the middle of the Bahamian islands. Known as the "tongue of the ocean," its deepest point is more than 10,000 feet deep.
And all of the water from this deep expanse funnels into a corner between Andros Island and Chub Cay, where the seafloor goes from 10,000 feet deep all the way to just 10 feet deep. And the pocket is literally a triangle... it's pointed. When you have wind that blows out of the southeast for days and days and days, all the baitfish in the water get pushed into the pocket.
It's like Jurassic Park. It's filled with giant sharks, marlin, sailfish, and all kinds of predatory fish feasting on the tuna and the other baitfish that get pushed into the pocket. We fished there for three days. We caught two white marlin and one gigantic blue marlin. We also caught a 600-pound tiger shark.
We filled up the boat with tuna, dolphin, and strawberry grouper. And we caught our limit of cobia. We had more than 200 pounds of fish in the boat when we returned. (Of course, we let all the billfish go.) That's just the meat that we caught. It was a great trip.
– Porter Stansberry
One of Porter's favorite places to fish...
Porter is an avid fisherman... And he recently returned from the most successful fishing trip of his life. He shares the location and details of his trip in today's Digest Premium.
To continue reading, scroll down or click here.
One of Porter's favorite places to fish...
One of Porter's favorite places to fish...
Porter is an avid fisherman... And he recently returned from the most successful fishing trip of his life. He shares the location and details of his trip in today's Digest Premium.
To subscribe to Digest Premium and access today's analysis, click here.
How you can get into Porter's 'unfair deals'... Amazon soars on improved margins... New highs for natural gas stocks... Chesapeake's embattled CEO steps down and its stock soars...
One of the biggest trends in the market today is the decimation of brick-and-mortar retailers by e-commerce.
Arguably the most visible bankruptcy resulting from this trend is book retailer Borders. Electronics retailer Circuit City also shuttered in large part due to Internet competition. Circuit City's main rival, Best Buy, is also hemorrhaging sales and clients... And the company's founder is considering taking the company private.
If you had to pick one company that's done the most to hasten the demise of brick-and-mortar retailers… it would be the world's largest online retailer, Amazon. Take a look at this chart of Amazon's sales versus the sales for the Morgan Stanley Retail Index (an index of 31 national retailers).
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Last month, in Digest Premium, we spent two days explaining how clothing retailer J.C. Penney (JCP) is also faltering. (Digest Premium subscribers can read those pieces here and here.) Hedge-fund billionaire Bill Ackman owns around 20% of the company. And he hired former Apple retail head Ron Johnson as the new CEO to try to lead a turnaround.
But despite Ackman and Johnson's efforts... JCP reported consecutive sales declines of more than 20%. Customer traffic also dropped double digits. Among the main culprits… Internet competition.
Now… compare that with the latest numbers from Amazon.
Yesterday, Amazon announced that fourth-quarter sales jumped 22% to $21.3 billion. Net income fell to $97 million, from $177 million a year earlier. However, operating income increased 56% to $405 million... Shares rose as high as 12% on the news before closing the day up 6%.
Earnings were down because Amazon is funneling cash into new warehouses with the goal of drawing customers away from malls with faster delivery and huge inventory. Last year, Amazon added 20 "shipment hubs." And the biggest reason shares soared was because the additional hubs are helping Amazon's margins (shipping costs dropped to 4.5% of sales, compared with 5.4% a year earlier).
Amazon's gross margin widened to 24.1% from 20.7% a year ago. Margins were also helped by an increase in sales from third parties, which made up 39% of units purchased in the fourth quarter, up from 36% a year ago. These sales improve margins because the commission Amazon takes from these sales is 100% profit.
So JCP is losing customers and sales. Meanwhile, the company is spending loads of cash to improve store interiors. That's the wrong approach... JCP should be focused on improving e-commerce. That's what Amazon is doing...
Some of the stocks Porter recommended to benefit from the resurgence of natural gas in the U.S. are making new highs... Chicago Bridge & Iron (infrastructure) and Calpine (utilities) hit 52-week highs yesterday.
But the biggest story in natural gas today is Chesapeake Energy's controversial CEO, Aubrey McClendon. Yesterday, McClendon announced he would resign from the company he co-founded over 20 years ago... he will leave on April 1. And the market is happy... Chesapeake shares are up nearly 7% on the news.
McClendon and former president and COO Tom Ward formed Chesapeake in 1989 with a mere $50,000 initial investment. Today, the company has a market cap of around $13 billion. As of the last Securities and Exchange Commission filing, in September, it holds around $45 billion in total assets (and about $16 billion in debt).
McClendon was one of the first explorers to embrace innovative techniques like horizontal drilling and hydraulic fracturing (which are commonplace in natural gas today). He led the company to amass a tremendous portfolio of oil and gas properties across the nation. Its cumulative holdings would cover an area half the size of New York state, according to Bloomberg.
As the glut in natural gas became apparent in the U.S. and gas prices declined, the company was forced to curtail further investments and sell assets to raise cash. The company was slow to change strategy from natural gas fields to higher-margin oil fields. And earnings suffered because of lower gas prices.
McClendon's reputation was dented last April when media reports uncovered personal loans he secured using minority stakes in company-owned oil wells. The share price got hammered, dropping from around $25 to $15 in about six weeks. Here's what Porter wrote about the time...
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No, I don't think Aubrey McClendon is a saint. I think he's a greedy entrepreneur who wants to make as much money as he can. The deal he struck with his firm was that he would get, in addition to his other compensation, a 2.5% working interest in all of his firm's wells. That looks bad, doesn't it?
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Not to me. Why? Because he was also required to pay 2.5% of all of the costs. Over the last several years, that has added up to around $1 billion. Thus, Aubrey has a billion reasons to need Chesapeake's wells to perform. As a shareholder, you've got to appreciate that fact.
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The "exposé" that was published by Reuters points out that Aubrey borrowed this money from private-equity firms. To them and the people they quoted, that's some kind of a crime. I don't see it that way... People often borrow money to increase the return from their investments.
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Soon after, activist investor Carl Icahn took a 9% position in the company. And true to form, he agitated management, resulting in a new chairman and four new independent board members. Another investment firm, Southeastern Asset Management, owns 13.5% of Chesapeake and nominated three board members.
According to the Financial Times, Icahn issued a statement yesterday, paying tribute to McClendon's achievements at the company. He added...
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While it is known that some of these assets will be sold by the company in due course, I do not believe that this will in any way affect the ultimate realization of Chesapeake's potential. I am confident that history will prove that Aubrey has been correct about the value of natural gas in general and the value of Chesapeake in particular.
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Porter recommended the stock last January and got stopped out right near the bottom in May. But like Icahn, Porter continued to believe the company's assets were undervalued. In his special report "America's Secret Shale Play" – published in August – Porter unveiled a new shale play in the U.S., which the mainstream press has yet to cover. In the report, Porter covered Chesapeake and made a new recommendation... But this time, he didn't recommend its equity… but rather one of Chesapeake's bonds. Here is what he told readers at the time...
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Conservatively, we'd value its existing assets today for around $50 billion. With all of its debt trading at par, Chesapeake has an enterprise value of only $25 billion. Said another way, if you were to buy the whole company – all of its shares, and all of its debts – you could double your money simply by liquidating the assets and repaying the debts.
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But as outside passive investors, we lack the control to impose capital discipline or a massive asset sale at the company. So far, Chesapeake's management hasn't shown enough financial discipline to make us feel comfortable buying the stock. On the other hand, the company's bonds are well-protected by the company's cash flows and they're backed by the company's assets. We feel confident that these bonds will reach maturity without any default.
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Since the recommendation, Chesapeake has sold several billion in assets. As Porter told his Investment Advisory readers in November, Chesapeake raised nearly $2 billion selling assets in the Permian Basin region of Texas. And this month, Chesapeake announced it is selling its Access Midstream Partners business for another $2.2 billion. These are precisely the kinds of asset sales Porter anticipated when he recommended buying the bond and collecting the safe 7% yield.
Porter continues to hold the bond in his model portfolio. As of the January issue, readers who followed his recommendation are up 5%.
Late last year, Porter launched his newest trading service, Stansberry Alpha. He created the service to take advantage of a market anomaly he and his researchers discovered. Business schools around the nation preach the "efficient market" hypothesis, stating nobody can consistently beat the market because prices on traded assets already reflect all publicly available information.
But since the hypothesis' inception in the 1960s, smart market participants have found ways to exploit this bunk to make huge profits.
And we think Porter's "Alpha" strategy is one of the best... As he wrote in a recent Digest:
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We know many very wealthy people who made a lot by financing companies directly on terms that were absurdly unfair. The more unfair, the better. Typically, companies that need a lot of capital (say, to drill a new oil well or find a new gold mine) will sell stock directly to individuals at a price that's well below the market price of the stock. So if the shares are trading at $10, the financing might close at $8. Right off the bat, these private financiers are taking far, far less risk than [they would by] buying the shares in the market.
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But that's not the only advantage. They also demand (and usually get) free warrants in the stock. A warrant is like a call option issued directly by the company. As you may know, the price of an option is determined in large part by the expected volatility of the stock. An option on a highly volatile stock is worth a lot. And these folks get them for free as part of the deal. They're taking a lot less risk than regular investors.
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In these deals, there's tremendous financial asymmetry. They're buying stock at less than the market price. They're getting a call option for free. If the stock simply stays where it is, they'll make a small gain. If the stock goes up a lot, they'll make a bloody fortune. You don't need many deals like these to pan out well to earn a significant fortune in the market. I happen to know a few guys who've done it... several times.
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And that got us to thinking... there's got to be a way for regular, individual investors to do the same kind of thing.
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I can't give away the full details of Porter's strategy... I can tell you it's a way to profit from the best companies in the world (like McDonald's, Johnson & Johnson, Wal-Mart, etc.)... But you actually take on less risk than if you actually bought the stock. And you can potentially make triple-digit gains in one year (whereas you'd be happy with a 10% annual gain simply holding the stock).
We're currently offering Alpha at a generous discount, but the discount ends tomorrow. If you'd like to learn more, click here...
New 52-week highs (as of 1/29/13): iShares Australia Fund (EWA), iShares Germany Fund (EWG), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Insurance Fund (IAK), SPDR International Health Care Fund (IRY), iShares Home Construction Fund (ITB), Lucent Technologies (LUTHP), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), Targa Resources (TRGP), Anheuser-Busch InBev (BUD), Constellation Brands (STZ), Johnson & Johnson (JNJ), Eli Lilly (LLY), Automatic Data Processing (ADP), Ericsson (ERIC), 3M (MMM), Consolidated Tomoka (CTO), Alico (ALCO), Calpine (CPN), Loews (L), Alleghany (Y), Blackstone Group (BX), Medtronic (MDT), and Procter & Gamble (PG).
Have you made money selling naked puts or following our other trading advice? One subscriber who wrote in did... Let us know your successes here... feedback@stansberryresearch.com.
"In a recent Digest Premium, there was a question about Porter not wanting to borrow money. Another good reason to not owe money during a banking crisis is that bank failures could cause delays in getting your money (whether held in deposit or from income such as wages or rental deposits). In this case, through no fault of your own, you would default on paying your loan." – Paid-up subscriber Joseph Reynolds
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