One of the few really cheap assets...
I (Porter) have been asked a lot lately about whether I've noticed any good buys right now. The question is usually phrased like this: "Are there any underpriced assets you'd be interested in buying today?"
The current situation reminds me of something veteran investor Joe Rosenberg said a few years ago in Barron's magazine: "You can have cheap prices or good news, but you can't have both."
The news hasn't been great lately. So there are still some cheap assets available... just not as many as there were a year or two ago.
The only thing I'm buying actively right now is land. I'm buying in places where I believe developers will want to put houses one day. I'm looking at plots close to high-quality resort areas, like across the river from the Ritz-Carlton in Amelia Island, Florida. You can still find privately held rental properties in timberland at reasonable prices.
But a lot of my favorite ways to avoid the inflation I see coming have gotten expensive over the last four years. One of the only cheap things left to buy out there is unproductive commercial property – raw land that could one day become a target for homebuilders.
When you look at other markets, you'll notice right away that copper and steel have gotten crushed lately. I wrote in 2004 that U.S. Steel was among the worst businesses I could imagine. I recommended subscribers short the stock when it was trading at about $30 a share. My timing was off and we ended up stopping out of the position for a loss. But now, it's well below the price I said to short it at. It's trading around $17 today.
If you study how much cement, copper, and steel China was buying between 2006 and 2010, you'll see the country spent more money per-capita on fixed-asset investments than anyone in history. So steel and copper prices are signaling that the Chinese buying binge is over for now.
Base metals are an awful business to be in. Companies in that sector tend to make a lot of money once every 10 or 15 years. And they tend to go bankrupt about once every 10 or 15 years, too. We may be swinging into the "bankruptcy phase" of that game.
I generally avoid these stocks... especially when there's not some massive uptrend in place.
By the way, a similar collapse could happen in Treasurys when the U.S. government, which is buying 80% to 90% of them, stops buying. It's exactly the same thing.
– Porter Stansberry with Sean Goldsmith
Information technology World Dominator IBM continues to reward shareholders.
The company raised its quarterly dividend payout 12% today, from $0.85 a share to $0.95 a share. IBM has raised its dividend 18 years in a row. It's paid dividends every year since 1916.
IBM's board also approved an additional $5 billion in share buybacks. IBM now has a total authorized buyback capacity of $11.2 billion – about 5% of its outstanding shares at current prices. Management will likely request another increase in its share-buyback authorization at the company's October board meeting.
IBM has reduced its share count by more than one-third since the beginning of 2000. It's returned more than $150 billion to shareholders since then via buybacks and dividends.
IBM shares fell 8% in one day a couple weeks ago when it reported earnings. Anyone paying attention knows the business is still doing well... it's still gushing rivers of cash flow... and remains the World Dominator of IT services.
Here's what I (Dan Ferris) told my Extreme Value readers just after shares dropped:
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IBM grew earnings per share 8%, to $3 for the quarter. It generated $1.7 billion of free cash flow. Gross profit margins and pretax profit margins rose. It has $12 billion in cash. IBM's non-financial-related debt was $8.2 billion, down about $600 million from last year.
The company returned $3.5 billion to shareholders during the first quarter ($900 million in dividends and roughly $2.6 billion in share repurchases). IBM has reduced its share count by 4% over the past 12 months. That will help grow its dividends and earnings per share... even if the company's profits don't budge.
Higher earnings, higher margins, and lower debt are all good signs. The market is making a mistake by pushing IBM's share price down so much. Take advantage of it.
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Shares are up 8% since that update.
Another technology World Dominator made headlines today. Microsoft's Azure "cloud computing" service has reached $1 billion in sales. Azure stores business information and software on remote servers and lets its clients (and their customers) access them through the Internet.
Business-equipment supplier Xerox is one of Microsoft's big cloud-computing customers. Azure helped Xerox cut software costs 30% and improve productivity 40%, according to Bloomberg.
Raman Padmanabhan, the chief information officer for Xerox's business services division, told Bloomberg...
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The biggest advantage I have with Microsoft is I don't have to go to any other vendor for any solution – I can go to one partner for all of my operating systems, all of my development environment and all of my infrastructure tools. Why would I waste time looking at another third-party solution?
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He may as well have said, "Why would I waste time with a company that's not a World Dominator?"
Microsoft's Server & Tools division, which produces Azure, has posted nine straight quarters of double-digit sales growth, according to Takeshi Numoto, the division's vice president of marketing. Server & Tools makes up about 25% of Microsoft's overall revenues. Its operating margin is a stout 39%.
Microsoft is the largest software company on Earth. It's got a fat balance sheet and a business that keeps gushing cash flow, no matter how many people criticize or just plain hate it. It's got all the resources it needs to continue to ramp up its cloud-computing presence.
I have never recommended shares of consumer technology giant Apple, but some wealthy investors like it...
Famed short-seller Jim Chanos revealed a long position in Apple several days ago on the financial network CNBC's Fast Money show. Chanos is short personal computer makers like Dell and Hewlett-Packard, but doesn't see that decline affecting Apple's business.
The richest man in Russia likes Apple, too. Billionaire Alisher Usmanov, who made 10 times his money on Facebook, says he recently bought $100 million worth of Apple shares. Usmanov saw opportunity after Apple shares fell nearly 40% from their peak price of more than $700 a share in September.
In an April 25 interview, Usmanov said, "Nothing is eternal, but for the next three years I believe Apple is a very promising investment, especially given large dividend payments and buybacks."
Apple's cash and securities total $145 billion, more than $150 a share and roughly 35% of its market cap. Investors, including hedge-fund manager David Einhorn, have tried to get Apple to part with more of its cash hoard, most of which is held by foreign subsidiaries.
Apple is doing the same thing many companies with large foreign-held cash hoards do. It's keeping the cash out of the country to avoid taxes... and issuing debt so it can write off the interest on its tax returns.
Apple has announced a new initiative to return $100 billion to shareholders through 2015. That's a $55 billion increase over the previous plan announced last year. The board also approved $60 billion in share repurchases, up from $10 billion announced last year. Apple called it "the largest single share repurchase authorization in history."
Apple's preliminary prospectus filed with the Securities and Exchanges Commission indicates it'll sell floating-rate debt maturing in three and five years, and fixed-rate debt maturing in three, five, 10, and 30 years. It's the company's first debt issue since 1994. According to Bloomberg, AAPL's bond sale would total $17 billion. The "order book" – the number of bonds already ordered or requested – was at $50 billion. That means demand for the bond is three times greater than the planned issue.
The prospectus doesn't indicate the amount of debt or yields... But Microsoft sold bonds last week for 0.32% more than Treasurys for five-year debt, 0.7% more for 10-year, and 0.9% more for 30-year debt. Microsoft has a triple-A credit rating. Apple is rated one notch lower at AA-plus, so its debt might garner a few basis points more above comparable Treasurys. (A basis point is 1/100th of a percent.)
Both Microsoft and Apple trade at dirt-cheap multiples of free cash flow, especially if you subtract their big net cash positions from their market caps. By that measure, Apple is trading for less than six times cash flow, and Microsoft is at less than eight times free cash flow.
In today's Growth Stock Wire, Jeff Clark presented three charts that show why he believes stocks will fall from here...
We'll only discuss one of these charts in the Digest, but we encourage you to read his full essay here.
Summation indexes are momentum indicators measuring overbought and oversold conditions. As long as the summation indexes are moving in line with the market, a rally has legs. But when the indexes diverge from the market, "it's a major warning sign that the trend is about to change," Jeff writes...
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In the charts below, you can see how the summation indexes for the New York Stock Exchange (the NYSI) and the Nasdaq (the NASI) reached deep into overbought territory in 2010 and 2012... and then turned lower a few weeks prior to the stock market peaking in those years. The indexes were modestly overbought in early 2011 before declining. The stock market followed suit a couple weeks later...
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Both the NYSI and the NASI reached extreme overbought levels several weeks ago. They have been trending lower recently as the broad stock market has rallied to new highs. This negative divergence ended badly for the market in each of the past three years. It's liable to end badly for stocks this time as well.
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Jeff also sent a new trade to his S&A Short Report readers this morning. In the update, Jeff explains the nature of "parabolic" moves in asset prices...
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Parabolic moves happen as buyers chase momentum and rush to get in at any price. Fear of missing out on the action pushes more buyers into the asset. Prices increase, pushing even more buyers in... which increases prices even more, and so on, and so on.
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Eventually, the market runs out of buyers, the momentum dies, and everyone rushes for the exits at the same time. We saw it with Internet stocks in 2000.
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We saw it with silver in 2011. We saw it with gold almost two years ago.
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One sector right now is experiencing the "epitome of a parabolic move." This sector is up nearly 25% since November (and 15% in the past eight weeks). As with all parabolic moves, Jeff believes this one will end badly...
If this sector breaks down to its support level, the trade Jeff recommended could return nearly 350%. Jeff is taking advantage of low volatility to speculate on this move because the option premiums are lower. If it works out, his readers could make a fortune. If it doesn't, they'll only lose a little. That's the beauty of buying options. You know exactly how much money you stand to lose... and your upside is huge.
We're currently offering Jeff Clark's S&A Short Report at a large discount. If you'd like to start trading options with Jeff, click here to learn more...
New 52-week highs (as of 4/29/13): Advent Claymore Convertible Securities & Income Fund (AVK), WisdomTree Japan Smallcap Fund (DFJ), iShares MSCI Australia Index Fund (EWA), iShares MSCI Singapore Index Fund (EWS), Cambria Global Tactical Fund (GTAA), iShares iBoxx High Yield Corporate Bond Fund (HYG), SPDR S&P International Health Care Sector Fund (IRY), SPDR Barclays High Yield Bond Fund (JNK), AllianzGI Equity & Convertible Income Fund (NIE), Sequoia Fund (SEQUX), SPDR Utilities Sector Fund (XLU), Johnson & Johnson (JNJ), Automatic Data Processing (ADP), MGM Resorts (MGM), Calpine (CPN), Dominion Resources (D), Corning (GLW), Brookfield Asset Management (BAM), Cheniere (LNG), Chevron (CVX), GenMark Diagnostics (GNMK), Microsoft (MSFT), and Altria Group (MO).
In today's mailbag, one reader asks why gold is worth more than paper money. Send your e-mails to feedback@stansberryresearch.com.
"While I will forever regret not buying Silver Wheaton when it was down to about $4 at the bottom of the market in 2008-09, I still don't get your insistence that gold must be held because of its intrinsic value as money?
"Why is a dollar of gold worth any more than a dollar bill unless someone says it is? In other words, does it pay to buy gold at $1450 an ounce if it's going to $800? Just having it and holding it doesn't make you any richer unless someone says gold is worth more. There is no preset value for gold, is there? If the world decides it's worth $500 an ounce, that is what it's worth. It just seems like a game that's only valuable if enough people want to pay." – Paid-up subscriber Jim T.
Goldsmith comment: We've discussed this topic several times in Digest Premium and the Digest. One of the fundamental reasons gold is a better way to store value over the long term is scarcity. There is only so much gold in the world, and governments can't print more on a whim. A dollar is just paper... and the government can print as much of it as it wants.
Consider this excerpt from Porter in the April 18 Digest Premium...
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[I]f you buy gold, even at the wrong price, you will be rewarded eventually. That's because gold is ethically, morally, and traditionally – and for sound physical reasons – the best form of money ever created.
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Of course, how much you will be rewarded depends upon the moral and economic failings of the paper money systems gold competes with. I would judge those failings to be approximately total.
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By the time my children are having children, let's say 25 years from now, I would expect the paper dollar to be nearly worthless. Because you measure the price of gold in paper dollars, you would then expect the price of gold to be nearly infinite. That's only measuring these things in terms of nominal prices, which are meaningless in the real world.
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So if you look at the value of gold and not the price, I think you'll have a much better sense of what's happening. The value of gold has remained almost completely unchanged over thousands and thousands of years. And this latest bull market in gold has not changed the metal's fundamental value.
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In Digest Premium, Porter shares his thoughts on everything from valuing gold to how you can keep the government from stealing your assets. This week, for example, he's telling subscribers how long he expects the rally in dividend stocks to last and the only asset he's buying right now. If you'd like to try Digest Premium for only $10 a month, click here...
"You gave some very valuable information about calculating position size – thank you so much. Is there also a calculation for trailing stop losses? I read your recent article on trailing stops and understood the need to set these stops, but don't know how to determine what the stop should be. Thank you for considering this request." – Paid-up subscriber Larry Bein
Goldsmith comment: Calculating a trailing stop is simple... Let's say you're using a 25% trailing stop. If you buy a stock for $10 a share, using a 25% trailing stop loss, you would sell if that stock fell to less than $7.50 a share. If shares doubled to $20, you would adjust your trailing stop to $15 a share (25% lower than the high of $20).
Regards,