Why we're not shorting this stock... yet…
In yesterday's Digest Premium, we discussed the latest "profit" announcement from electric-car manufacturer Tesla. We don't believe the company will be successful… the technology just isn't mature enough. But that doesn't stop new entrants into the field...
A group of investors – including the former CEO of automaker Lotus – are exhuming the Detroit Motors brand, last used a century ago, to market a new line of electric cars.
Their first product, a two-seater that cost $135,000, will go into production this summer.
Does the new entrant give us pause?
No. It's just another electric-car manufacturer that will face troubles...
Nissan can't excite buyers with its electric car, the Leaf – a pet project of CEO Carlos Ghosn... but at least the company is solvent.
Fisker Automotive can't say that. The company – which recently ceased production of a luxury version of an electric hybrid – may be filing bankruptcy. It stopped production of the cars in March and hired restructuring lawyers.
And we doubt that Tesla – despite its recent claims about strong profit projections – is actually profitable...
If you want to move a bunch of expenses back and move a bunch of your revenue forward, you can say you were profitable. But that doesn't necessarily mean that you are truly profitable on an ongoing basis. I (Porter) would be willing to bet a large sum of money that – no matter what it says about the given quarter – Tesla won't be profitable over a fiscal full year.
Still, I would not short Tesla at the moment.
First, I have learned not to underestimate the foolishness of California billionaires. There is no telling who might bid up the stock in some crazy attempt to buy the company. I just don't want to get involved.
Second, while Tesla is very expensive at nearly 40 times book value, I don't like to short on valuation. I prefer to short companies that are frauds. I prefer to short companies that are obsolete, meaning technology has passed them by. I prefer to short companies that are so heavily indebted, they can't possibly survive.
Tesla will never be able to produce electric cars with real utility or a competitive future. But that's not "fraud." It's just a poor product. You can't drive a Tesla car across the country easily – depending on the model, you can only travel 150-265 miles before charging it. But that doesn't mean the cars are obsolete. The technology just hasn't matured yet. And Tesla has nearly $470 million in debt. But it also has $525 million in current assets against that debt. So for now, it's not at risk of going under.
So Tesla doesn't fit into any category where I've had success shorting. It's clearly not a stock you should own, but it's not yet a stock you should short. I just place it in the big, wide category of "beats me."
– Porter Stansberry with Sean Goldsmith
Steve Sjuggerud's "No. 1 opportunity for 2013" is right on course...
In a statement today, Japan's central bank – the Bank of Japan – confirmed that its money-printing policies have "led Japan's economy to overcome deflation that has lasted nearly 15 years."
Steve called this opportunity "Abe's Revenge," referring to newly elected Prime Minister Shinzo Abe. Steve believed Abe would do everything in his power to spark economic growth in Japan. He set a goal of 2% annual inflation.
So far, the Bank of Japan is staying true to its goal…
In its first move under Abe-appointed Governor Haruhiko Kuroda, the Bank of Japan said it plans to purchase 7.5 trillion yen ($78.6 billion) of bonds a month and double the monetary base within two years. That figure far outpaces economic forecasts of 5.2 trillion yen a month.
Japan's bellwether Nikkei 225 index climbed 2.2% on the news. And the two funds Steve recommended to profit from "Abe's Revenge" were up 4% and 7% today. He thinks Japan has plenty more gains ahead.
For Steve's latest thoughts on Japan, be sure to read Tuesday's DailyWealth.
As Steve's research analyst Brett Eversole pointed out in today's DailyWealth, Annaly is still a great deal, paying an 11% dividend, and trading at book value. And historically, when you buy Annaly at or below book value, you've averaged a 38% return in 12 months. You can read Brett's full piece here.
Annaly is a mortgage real estate investment trust (REIT). We refer to these businesses as "virtual banks" because they make money the same way most banks do, by borrowing low and lending high. Annaly's business model is simple... It borrows money at low interest rates (thanks to the Federal Reserve) and invests it at a higher interest rate in government-guaranteed mortgages from Fannie Mae and Freddie Mac.
The difference between the rates Annaly pays to borrow and the ones it collects from its investments is called the "interest-rate spread." Annaly has an interest rate spread of 2%. At six times leverage – or six times more debt than equity – that's roughly a 12% return on its money. And that's what allows it to pay out such large dividends.
Most people think the spread is the most important number in Annaly's business. After all, it tells you exactly how profitable its investments are... But we keep a close eye on another number.
We've followed Annaly – the largest mortgage REIT – for years at Stansberry Research. And we've discovered the best indicator for when to buy the stock...
In the November 9 Digest, we discussed the company in depth. At the time, mortgage REITs were selling off because their spread was falling, meaning they were making less money.
But as we pointed out, the stock was trading 10% below its book value – a clear buy signal. As we wrote…
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[W]hat is the best indicator for when to buy Annaly? Well, it's extremely simple. You only have to follow one number – book value.
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Let me explain...
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Book value is essentially the value of the assets on a company's balance sheet. Here's the thing about Annaly's book value... It's not just an accounting number. It's the actual liquidation value of the business. Annaly could sell its book of mortgages on the market today for around $16.70 a share.
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At its current price of $15 a share, Annaly is trading at 90% of book value. Our research and experience has shown that whenever Annaly is trading below book value, you should buy...
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Take a look at this chart...
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Whenever the book value (blue line) falls below "1," shares rally (black line).
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Look what happened when the book value plunged in 2009... Shares rallied from $12.50 in March to nearly $20 in September. You would have made more than 60% in those seven months, including dividends. I (Porter Stansberry) recommended my readers buy shares in November 2008, when shares were trading closer to $12. We closed that position in June 2011 for an 81% gain.
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Canada leads the U.S. in the race to export liquefied natural gas (LNG).
According to Bloomberg, Canada has approved licenses for three LNG export facilities along the Pacific coast so far – all aiming at the massive $150 billion Asian market. It issued the most recent license in February.
One terminal already under construction north of Vancouver expects to begin shipping LNG by mid-2015. That's about eight months ahead of the United States. The U.S. has only approved one license so far – and that's for Porter's Investment Advisory recommendation Cheniere. But it doesn't look like Cheniere will finish its first export facility at the Sabine Pass in Louisiana until February 2016.
Energy giant Exxon and Malaysia's Petroliam Nasional (Petronas) are lining up Canadian projects aiming to tap into the Asian market.
Michelle Foss, chief energy economist at the Center for Energy Economics at the University of Texas' Bureau of Economic Geology, told Bloomberg that "the smart money is going to Canada" to export LNG... "They don't have any objections to exporting gas and it's closer to Asia, which cuts down on shipping costs," she said.
Chevron says it's focusing on Canada for LNG exports because it has a more favorable regulatory climate. Jay Johnson, Chevron's president for Eurasia and Europe, was quoted in an event last month as calling Canada's gas resources "world class."
The International Gas Union, a Swiss trade group, says worldwide LNG demand will double to 6.6 trillion cubic meters (233 trillion cubic feet) per year by 2035. Asia is leading most of that growth, as the region's economies grow and their thirst for energy increases. The U.S. Department of Energy reports that in 2011, the Asia-Oceania region (excluding Australia, which has huge resources of its own) imported 8.8 trillion cubic feet of gas.
Bloomberg reports Chevron Chairman and CEO John S. Watson told analysts last month he thinks global demand will begin to outpace LNG supplies by the end of this decade.
Since issuing its first permit to Cheniere, the U.S. government put all other applications on hold. The Obama administration wanted to study the impacts of overseas sales on domestic energy prices. Natural gas sells for around $4 per million British thermal units in the U.S. Japan pays four times that, at around $16. Bloomberg reports 19 proposed U.S. LNG projects are awaiting permission to export.
Asia is making it clear it wants access to the cheap and abundant gas in the U.S. India's state-owned company GAIL and Japanese trading firm Sumitomo recently signed a deal to use Dominion Resources' proposed $3.5 billion plant in Cove Point in Maryland. The companies say the plant could be operational by 2017. Both companies will be able to export 2.3 million tons of LNG per year. The deal is subject to regulatory approval. Dominion's export license application is third in line with the Department of Energy.
Porter added power supplier Dominion Resources to his Investment Advisory portfolio in July 2011 for its LNG export potential. The stock hit a new all-time high today. Readers who bought the stock on Porter's original recommendation are sitting on 30% gains. And those who followed Porter into Cheniere last July are enjoying 74% gains to date.
Could this be the bottom in mining stocks? Mining executives think so...
Mining industry insiders are buying shares at an unprecedented pace... According to industry research firm INK Research, there are currently seven precious metals stocks on the TSX with insider buying for every one with selling. That ratio has nearly doubled since mid-January...
"That is the type of insider buying we saw in the broad market during the height of the great financial crisis in late 2008 and early 2009," Ted Dixon, CEO of INK Research, told Canadian newspaper The Globe and Mail. "A similar situation now seems to be in place among gold and silver miners."
We know how poorly gold stocks have performed recently... But we're still bullish. Porter and Jeff Clark in particular are calling for a rally. In his most recent issue, Porter said…
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Compared with the value of their gold production, gold stocks, as a whole, are as cheap today as they were at the bottom of the gold-stock market during the crisis of 2008.
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This may not be the exact bottom... It's a fool's errand to attempt to call tops and bottoms in stocks. But it's a good time to start buying gold stocks – or start adding to your portfolio if you already own some. As Dixon notes...
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Such extreme situations usually do not last for long. With both fundamental and technical conditions supporting recent heavy insider buying, it looks like a significant bottom in precious metals mining shares may be in the process of forming now.
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We know it's difficult to think of buying gold stocks today, considering their gut-wrenching fall. But times of extreme pessimism are exactly when you should be buying.
And when you're looking to buy gold stocks, you should be reading John Doody. Longtime readers may remember us talking about John. He is the best gold-stock analyst we know.
He's made a fortune for himself using his proprietary techniques. And he's produced huge returns for his readers. From 2000 through the end of 2012, John's method for investing in gold stocks has returned 1,239%... crushing the gains from the S&P 500 (13%), gold (515%), and an index of gold stocks (222%).
If you'd like to sign up for John Doody's Gold Stock Analyst advisory at a large discount, click here to learn more...
New 52-week highs (as of 4/3/13): Abbott Laboratories (ABT), Eli Lilly (LLY), and Dominion Resources (D).
In today's mailbag… one of the funniest notes we've received in a while. We hope you enjoy. Send your e-mails to feedback@stansberryresearch.com.
"I had a bunch of guys over for a March Madness party Saturday. Big screen TV (108"), fresh kegs in a well-stocked bar, snack trays, pizza, wings, the works. At some point the subject of gold came up and I brought out the gold coin you sent me for becoming an Alliance member. They were impressed with it and wanted to hold it. We finally got it out of the plastic with a hammer & screwdriver (plus a little blood). Now I need your help, where/how can I get a new holder – perhaps one easier to open?" – Paid-up subscriber Ted L. Dent
Goldsmith comment: Well, that's the problem with weekend football parties, big screen TVs, and too much beer... They make you do silly things.
The coin in question, the MS-66 St. Gaudens, was sonically sealed in that hard-case plastic to protect the coin and lock in the grade – It was graded and verified by the Professional Coin Grading Service (PCGS).
I called the co-founder of PCGS, Van Simmons, to ask how you should resolve your issue. After bursting out laughing, Van said you can send the coin to him at David Hall Rare Coins and he'll handle it. There is a small fee to do so – the company has to re-grade the coin. (Other avenues of regarding the coin would cost you far more.) But be aware... You may have damaged the coin. Gold is soft... Any scratches or dings could lower the grade.
On a side note, Van is a great guy to know if you ever want to buy any new gold... He takes special care of S&A subscribers. His e-mail address is van@davidhall.com. And the mailing address, should you decide to have the coin re-graded, is:
Regards,