IOC makes new highs...

IOC makes new highs... Badiali called it... Matt and Cactus in Papua New Guinea... Minkow's 'research'... An easy 61% on XOM... Doc's blue-chip oil pick... Jeff Clark: 'Take profits on oil'... Selling options for income...

 One of the most hotly debated stocks we've ever recommended is trading at new highs on a string of good news.

Pacific Rubiales Energy, a $6.8 billion Colombian oil producer, bought a 10% interest in one of oil and gas producer InterOil's three discoveries, called Triceratops. Also, the shares have been buoyed by news that InterOil recently completed a successful drilling effort, and oil major Royal Dutch Shell is considering buying out the company.

Matt Badiali recommended InterOil to his S&A Resource Report subscribers in January 2010. The company operates in Papua New Guinea. And it controls what we thought could be one of the world's largest oil and gas reserves. When he recommended InterOil, billionaires George Soros and Carlo Civelli had already taken positions. And Japanese investment bank Mitsui also owned the stock. (Japanese banks are notoriously conservative.)

On the other hand… our friend and hedge-fund manager of T2 Partners Whitney Tilson was short InterOil, bolstered by research from Barry Minkow, founder of the Fraud Discovery Institute.

Minkow, as you may know, went to prison in the 1980s. His publicly traded carpet cleaning company, ZZZZ Best, was a Ponzi scheme. After his release, Minkow remade himself into a watchdog, exposing fraudulent companies. InterOil marked his first foray into the energy sector...

 Our analysis of InterOil was based on boots-on-the ground research... We sent Matt Badiali and Cactus Schroeder – one of our most trusted oil experts – to Papua New Guinea to research the company and its reserves. Then Matt, Cactus, and Dan Ferris all had dinner with Civelli – the company's largest shareholder – in Zurich. Many of our associates operate in speculative mining and energy stocks. And we're not at all naïve about it. Dinner went well, and Matt came away still confident in his call.

 Meanwhile, the shorts were rallying behind Minkow, who based his short thesis on the barrage of press releases InterOil sent out. What Minkow – whose main business experience involved cleaning carpets – didn't know was that press releases are very important to speculative natural resources companies. InterOil is drilling for natural gas in a remote jungle. Nobody would know they exist or what they're doing without press releases.

 How does the story end? Well, extreme market volatility in 2011 "knocked" InterOil out of the S&A Resource Report model portfolio.* But as I said above, the stock pushed on to new highs. And Minkow is back in jail... Last March, Minkow pleaded guilty to criminal insider trading for actions that damaged the stock price of Lennar, one of the country's largest homebuilders.

 You can read a more complete version of the InterOil saga (including an amazing picture of the company burning off gas) here. The InterOil dispute shows the power of boots-on-the-ground research and a strong network of professionals... We did the tough research and were proven correct. We hope Tilson covered... The stock could go even higher from here.

 One of our top sources in the energy sector is bullish on InterOil. He believes the Big Oil companies will start a bidding war for the company (with ExxonMobil as the most likely buyer).

 On the topic of ExxonMobil... The largest publicly traded oil company in the world hit a 52-week high yesterday. In my (Dan Ferris') opinion, you can be as bearish as you want on oil, natural gas, or whatever… There's plenty of reason to expect oil prices to fall from here… But I'll never sell short ExxonMobil. Nor am I likely to advise selling the stock at these prices. I remember when oil prices brushed a low of near $10 a barrel in 1999. ExxonMobil earned a double-digit return on equity that year. That made an impression on me...

So when famous short-seller Jim Chanos said he was shorting the stock in the summer of 2010, I explained in the July 2010 issue of Extreme Value why I thought he was wrong. I said right in the headline to that issue, "Buying [Chanos'] latest target could earn you the safest 50% profit of your life." ExxonMobil closed at $56.57 that day. It's more than $87 today. Including $3.77 per share paid out in dividends, the stock has returned 61% since I said Chanos was wrong.

ExxonMobil is one of the most brilliantly managed companies on the planet. It's also a low-cost producer of oil and gas. It's the kind of stock you buy, reinvest dividends, and forget about for 20 years (provided we keep using oil and gas for the next 20 years… which I think is a safe bet).

 Dr. David "Doc" Eifrig also has one of the world's biggest and safest oil companies in his portfolio (Chevron). Doc and I are confident these businesses will create a lot of value no matter how low oil prices go.

They're huge, cash-gushing businesses. And they have healthy dividend yields to protect us from the downside. These are the kind of stocks you buy and hold for decades, slowly and safely compounding your wealth (and perhaps selling options along the way, more on that below). ExxonMobil has raised its dividend every year for 29 years, and Chevron has raised its dividend every year for 24 years.

 On the other hand… our trading guru, Jeff Clark – who takes a much shorter-term perspective than Doc or I – says it's time to take profits in the oil sector... In today's Growth Stock Wire, Jeff noted the AMEX Oil Index is up 10% since he recommended buying into the sector last month. But now, the oil sector bullish percent index (BPENER) is almost overbought. As of last Friday, the BPENER was 73, which is nearing the "danger zone"...

 The "selling options for income" mailbag phenomenon continues...

Readers love the idea... to the point that some say it has not just changed the way they invest... but has changed their lives.

Regular readers know we've gone to great lengths to educate you on selling options to generate income. While most investors see options as vehicles that increase portfolio risk, sophisticated investors see them as vehicles to reduce risk. We've written dozens of Digests about the idea. Doc has produced an incredible set of educational videos for his Retirement Trader readers. And he's helped his readers achieve steady, safe income streams by selling options... while compiling the greatest-ever track record in our industry.

We're not surprised that Doc has helped readers make incredible returns. But we are surprised at the letters we've received from readers. It's overwhelmingly positive feedback.

You see, when you write to thousands upon thousands of readers all over the world, any given idea is bound to offend, irritate, or anger some people. You write about buying stocks that pay safe dividends, and people write in to say we've lost our minds to think long-term investing works. You write about short-term trading, and people write in to say we've lost our minds to pay the extra capital gains tax. Write about the problems of paper currencies like the dollar, and people will write in to call us anti-American. You get the idea. You can't please all the people all the time.

But over the years, we've noticed how the idea of building option-selling programs around blue-chip stocks generates overwhelming feedback from readers who say the idea has transformed them into much more successful investors and traders. They write in to say they've purchased boats... cars... even houses with their gains. They write in to say they are now making money with much less risk than with their former strategies. They write in to invite Doc Eifrig to Christmas dinner. That's how big an impact this idea can have on people. Learning these strategies is an "a-ha!" moment for most readers.

Showing people this low-risk, high-return way to manage money is one of the most gratifying things we've ever done in the history of our company.

 You'll find more feedback on selling options for safe income in the mailbag below. And you can be sure we'll write more about this subject in the future. (As always, we invite you to share your experiences at feedback@stansberryresearch.com.)

 New 52-week highs (as of 7/30/12): Berkshire Hathaway (BRK), Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), Franco-Nevada Corp. (FNV), Utilities Select Sector SPDR Fund (XLU), Coca-Cola (KO), PepsiCo (PEP), Abbott Laboratories (ABT), Integrys Energy Group (TEG), ExxonMobil (XOM), Union-Pacific (UNP), Two Harbors (TWO), Wal-Mart (WMT), Target (TGT), Altria Group (MO), and Philip Morris International (PM).

 "Kudos to Matt on his IOC call! I kept my shares through the turbulence, mainly because his boots-on-the-ground analysis gave me confidence that he was on to something. He is finally proven right! Good for him, and for you. I can't remember if it hit a stop or not, but you should mention in the Digest that it hit an all-time high. 'We wrote it, did you buy it?' Yes!

"On an unrelated note, you've finally convinced me to sell puts. Thanks for keeping the pressure on. I started with Mister Softee and have made a modest, but inspiring, profit. I think it was Doc who said, once you sell puts you won't go back. Agreed. it's nice watching them march to zero, especially knowing that if they don't, I'll be happy to own the stock anyway.

"Looking forward to the conference this fall. Just waiting for the official announcement so I can book my flight..." – Paid-up subscriber Rich

 "I was also one of those people who ignored selling options due mainly to ignorance in how to go about it and a reluctance to learn because of my closed mind attitude. After watching the videos and paying attention to the instructional advice given by Doc Eifrig and the Palm Beach Letter boys, I've become a believer.

"I started my dip in the water last August. In the eleven months since then here are my results: Sold 18 puts of which 8 resulted in assigned purchases; sold 18 covered calls (some of which were on the stocks from the assigned puts), 2 were bought back to cover and 2 stocks were assigned sold. Overall net profit from all 48 of these transactions is $30,000+ to-date. Only two losses were incurred for about $760.

"Although some of these options were on stocks not specifically recommended by Doc or Palm Beach I try to follow the same concept they advocate. Only option stocks that you want to own. I'm very pleased with my results and I continue to hone my learning and option skills all the time now. Many thanks for helping me into this new investment vehicle." – Paid-up subscriber B. Hansen

Goldsmith comment: We love getting e-mails from subscribers who try new trading strategies and make money. And we've been getting more and more e-mails from people who have tried selling puts with Doc Eifrig and are making tens of thousands of dollars (including one subscriber who is making $25,000 a month using Doc's strategies).

In his two years writing Retirement Trader, Doc has closed 79 winning trades in a row. It's probably the greatest newsletter track record we've ever seen.

And his trades are super-safe... Doc only sells puts on stocks he'd want to own. So he's immediately generating income for selling the put and naming the price at which he wants to own the stock. For a fuller explanation of selling puts, read the July 19 Digest.

You can also watch this video we made to explain selling puts. As we've said many times, and as Rich (above) agrees, we believe once you try selling puts, you won't go back to buying stocks.

Regards,

Dan Ferris and Sean Goldsmith

Medford, Oregon and New York, New York

July 31, 2012

* This clarification was added after original publication.