If You Don't Buy Blue Chips Now, You Never Will

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

As of 07/08/2013

* * * Watching the election madness, I wonder if there are any limits to gullibility... or shame. Doesn’t seem like it. Don’t you wish there was a box on the ballot marked "none of the above." If that was a choice, I bet it would be a lot harder to get elected.

* * * Once, back in high school, I ran for office – class treasurer. I had no desire to win the election. I didn’t even know what the class treasure was supposed to do. But I thought it would be fun to put up posters ridiculing the other candidates… which is what I did. My only campaign promise was "Free James Brown" who was in jail at the time on marijuana charges. A few of my posters were rather graphic. And the high school authorities didn’t have a well-developed appreciation for irony… or freedom of speech. Maybe I should run for mayor…

* * * Good news for big guys: the Body Mass Index (BMI), that European-created height & weight system that calculates that every American is obese, is mathematically wrong. I knew it had to be because, according to it, I’d be overweight at 190 pounds. The last time I weighed that little, I was playing water polo every day… I was skinny. In fact, I looked like I’d just returned from running in the Ethiopian marathon.

The formula says to square your height. But height, in humans, is three-dimensional, which means height should be cubed, not squared. As a result of this flaw, practically everyone over about 5’10" has been told their obese. Who would have thought a government formula produces ridiculous results? For more details, see Bryan Caplan’s weblog on the subject.

* * * S&A Editor Christopher Hancock says, "I would love to get a shot at Larsen & Toubro." According to Forbes, "It’s India’s largest construction and engineering firm. India is building a $6 billion, 3,625-mile Golden Quadrilateral highway linking the capital with Mumbai, Chennai and Kolkata. The shares are up 80% in the last 12 months." Too bad it’s nearly impossible for foreigners to buy Indian stocks.

* * * If the Fed cuts interest rates anytime soon, look for Hong Kong real estate to soar. HK repealed the estate tax, meaning families can pass down real estate tax free, making HK property even more attractive internationally. It could become the No. 1 tax haven for the super rich. And, because HK’s currency is pegged to the U.S. dollar, HK’s interest rates are tied to ours.

* * * Andy Xie, an economist at Morgan Stanley and one of the most astute commentators on China’s economy growth, was fired last week for writing a disparaging e-mail about Singapore.

Xie cited money laundering as a principle reason for Singapore’s financial success and panned its importance compared to China and Hong Kong in the region’s economy. I wonder what would happen to my business if I fired any of my analysts who dared to write honest e-mails to their colleagues… Why does anyone do business with Morgan Stanley?

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"Why reach down into lesser quality stocks, which have far bigger risks, when you can get higher returns in totally safe investments…? It doesn’t make any sense to me, which is why, as long as some of the best businesses in the world are trading for peanuts, I’m going to stay focused on blue chips."

– Porter Stansberry’s Investment Advisory, March 2006

Early this year, I noticed the world’s best companies were, inexplicably, trading at 20- or 30-year low valuations.

I did what any reasonable investor would do: I loaded up.

I mean figuratively, of course. I’ve been "buying" the best blue-chip stocks I could find, all year long, by recommending them to you, dear subscriber, in my newsletter. In all, I’ve added eight bona-fide blue-chip stocks this year. And they’ve been very profitable, right out of the gate. As I wrote in my August issue: "We’ve been given once-in-a-decade opportunities to pick up the highest-quality equities at rock-bottom prices. I feel like a pig eating from a blue-chip trough."

Most individual investors don’t understand my excitement…

Most of my readers would probably prefer to learn about a small, high-tech widget maker that might, could, maybe will produce the next great gizmo… and see its share price rocket higher. Over the years, I’ve certainly found a lot of stocks like that. But that’s the hard way to invest. It requires taking on a lot of risk and making a lot of trades. As a result of frequent trading, you end up making Uncle Sam your partner. He takes a big cut of all your short-term profits. Like any respectable hedge-fund manager, he doesn’t care about your losses.

Let’s say you take a small part of your portfolio – $5,000 – and you begin trading risky stocks, cutting your losses quickly and only moving into new stocks that are definite uptrends. Let’s say you’re great at this kind of trading, among the best in the world. In one year, you make five consecutive trades that all go up 50%. The first trade takes your capital to $7,500. Second trade gets you to $11,250. Third trade gets you to $16,875. Fourth trade gets you to $25,312. And the fifth trade takes you all the way to $37,968. (By the way, the only person I’ve ever known to actually compile winning streaks like this in his trading is Jeff Clark, and he’s writing our S&A Short Report.)

At the end of the year, your trading partner, Uncle Sam, takes his cut. If you’re in the top bracket, that’s a 36% hit. Your actual profit was $32,968. But Sam takes $11,868. You get to keep $21,110. Sure, that’s pretty good. Not enough to live on, but a lot better than you could have earned in muni-bonds. So, you keep at it for another year. The next trade you make is a biotech. Whoops. The company announces before the market opens that its Phase III product was a total failure. The stock falls 80% – before it opens. You can’t get out. All you can do is sell, because you’re afraid the stock will fall more. Your portfolio is now worth $4,222.

While the numbers I use above are hypothetical, I’ve seen that sequence of events happen to almost everyone I know who does a lot of trading. Very, very few people are cut out – emotionally – to be traders. Plus, with Uncle Sam as your partner, it’s simply very hard to win.

Now, let me show you what happens when you’re able to buy a world-class, blue-chip stock at a great price.

Let’s consider Anheuser-Busch (NYSE: BUD). I recommended it in my March issue. I thought it was one of the best investment opportunities I’d ever seen – in more than 10 years as an investment researcher. I won’t bother here detailing all of the reasons why, except to say that it controls a market-leading position in the United States (and has held onto it since the 1950s), has major investments in China, and, at the time of my recommendation, the stock was trading at such a low price that the company could have afforded to buy back all of its stock based on its cash flow. I certainly wasn’t the only investor to notice the situation: Warren Buffett was piling into the stock, too.

Talk about safe: BUD has paid a cash dividend every single year since 1933 (when prohibition was lifted), and for the last 10 years, it has bought back 3% of its shares outstanding annually. As a result, buying Anheuser-Busch when I recommended it would have produced a synthetic yield (cash combined with buyback) of more than 6% annually. That’s extraordinary, especially considering that the yield on the company’s outstanding debt is only 5.3%. Or, in other words, investors buying the stock were being paid more, annually, than the folks buying the company’s bonds.

Here’s the best part. The company typically earns about 60% a year on its balance sheet equity, which is astronomical. Imagine if you could buy a mutual fund that’s earned 60% a year, on average, on its investments since the 1950s. It’s this company’s extraordinary profitability and capital efficiency that will produce outrageous long-term capital gains for its investors. If you had bought Anheuser-Busch 20 years ago, you would have paid a split-adjusted $3.91. Thus, you would have earned 9,485% on your money so far – not including dividends. And, assuming you never sold any shares, you wouldn’t have paid a penny in taxes on these gains. They’ll continue to compound tax free.

Anheuser-Busch is so safe, I told my readers that they could put up to 25% of their portfolio in the stock. In fact, the headline of my issue that month was "Will You Buy Enough." If you had put $50,000 in Anheuser-Busch 20 years ago, you’d have close to a half a million dollars in profit today – not including all the money you would have made from dividends (and your cash dividends would total nearly $20,000 per year now!).

This is how you really get wealthy investing.

There hasn’t been a better time to establish a handful of big, long-term positions in the world’s best companies since the early 1990s. With the Dow Jones Industrial Average breaking out to new highs, the bargain basement prices on blue-chip stocks won’t last much longer.

If you don’t buy ’em now, you never will.

Good investing

Porter Stansberry

P.S. To help with your blue-chip "shopping" list, I asked Stansberry & Associates researcher Sean Goldsmith to calculate how much the DJIA components would have to increase individually, to reach a new all-time high. Here’s the list: