Making 'gobs of cash' from poor people...

 "Businesses that cater to the bad habits of poor people are destined to make gobs of cash," Porter said on a recent episode of his Stansberry Radio podcast.

 

He has been loading the Stansberry's Investment Advisory portfolio with companies that follow this strategy, like discount retailer Dollar General, for example.

 

 Today, we'll discuss another type of business that caters to the poor: Rent-to-own (or "RTO").

 

Americans want things they can't afford. But most people aren't willing to save money to make purchases. Instead, they borrow money to buy cars or televisions.

 

RTO businesses provide folks who can't borrow money with the goods they want... at huge margins.

 

 In the April issue of Stansberry's Investment Advisory, Porter quoted a customer of national RTO chain Aaron's from an article that appeared in the Atlanta Journal-Constitution. "Without Aaron's, there are a lot of things I wouldn't be able to get," he said. "I don't have [good] credit. So to get what I want, I would just have to save."

 

This mindset is why the RTO business model is so profitable.

 

 There are more than 10,000 RTO stores operating in North America... They serve 5 million consumers and generate revenues of $9 billion a year. And 83% of these consumers have incomes between $15,000 and $50,000 per year.

 

But RTO gross margins are typically more than 80%. Operating margins are between 10% and 13%.

 

 To rent something from one of these stores, the customer usually only needs the upfront money required to rent the item for one week, a valid driver's license, and a delivery address. And because it's technically renting these items (rather than financing them), these RTO stores can charge much higher prices to willing buyers.

 

The RTO business model has been struggling lately... Credit is too loose. Everyone can get a loan today. But Porter and his team of research analysts believe credit will eventually tighten... So they added RTO firm Rent-A-Center (RCII) to the model portfolio in April. From that issue of Stansberry's Investment Advisory...

 

Like other rental markets, the RTO market prospers when credit is tight and struggles when credit is easy to come by. In the past couple years, the credit spigot has been showering cash on all comers, so many potential RTO customers have been able to get traditional credit arrangements.   That has been tough for the two national RTO chains: Aaron's and Rent-A-Center (RCII). Rent-A-Center's free cash flows since 2002 tell the story...     Notice that Rent-A-Center's best years were 2008-2009, when credit markets constricted in the aftermath of the subprime mortgage crisis. Cash flows were also thick in the relatively "normal" credit markets of 2002-2004. But when credit is flowing freely – as was the case in 2005-2007 and over the past couple years – Rent-A-Center's cash flow tightens.   But the loose-money party can't last forever. Since June 2013, we've been warning about the market's excesses and how we don't believe the Fed-fueled market frenzy is sustainable. We've written extensively about these policies. And we've added portfolio positions that we believe will survive and profit when the environment shifts... and drives many Americans into our country's growing underclass.

 Rent-A-Center is one of our favorite ways to play the "disappearing middle class." It appears investment bank Canaccord Genuity has also noticed this trend. Today, it upgraded Rent-A-Center from a "hold" to a "buy." Shares had risen more than 5% as of midday trading on the news.

 

 In the August 12 issue of the S&A Short Report, Jeff Clark followed private-equity firm Sycamore Partners into a losing trade...

 

Sycamore specializes in retail and consumer investments. It invests in struggling retailers and tries to turn them around.

 

Last November, Sycamore bought an 8% stake in clothing retailer Aeropostale for $50 million (at about $8 a share).

 

Shares had fallen about 80% as profits fell and margins contracted. However, Aeropostale had 1,000 store locations and $2 billion in annual revenue... Sycamore was betting it could improve margins and boost profit.

 

 Sycamore lost 60% of its investment ($29 million) in just nine months. But instead of selling, Sycamore loaned Aeropostale another $150 million with the option to buy another 5% of the company at $7.25 per share. As Jeff wrote in the S&A Short Report...

 

Sycamore is making a big bet on a turnaround at Aeropostale. It's a bet we can make, too – at a much more discounted price.

 

 Jeff's subscribers were able to make a long-side bet on Aeropostale with shares trading at around $3.37 per share – a 60% discount to Sycamore's original investment.

 

Today, shares of Aeropostale rose more than 8% to around $4.15 per share on no news... And subscribers who followed Jeff's advice and bought the call options he recommended are up nearly 50% in two weeks.

 

 But he thinks bigger gains are on the way. In an e-mail to me today, Jeff said the technicals for Aeropostale look great... "We now have a set of higher highs and higher lows on the chart."

 

Short interest in the stock is 30%. And Jeff said, looking at the chart today, he'd be "rushing to cover my trade."

 

 Doctors are on the cusp of revolutionizing the way we treat cancer... and Small Stock Specialist editor Frank Curzio has spent the last month researching the cutting-edge companies that are fighting the disease. Early-stage testing shows huge increases in survival rates in a widening range of cancer types.

 

The biggest new trend is in an area of medicine called "immunotherapy." Hailed as Science Magazine's "breakthrough of 2013," this new treatment trains a patient's immune system to attack cancer cells. It may sound like common sense, but one of the downsides of cancer is that the human body doesn't recognize the disease as something it should fight.

 

 Immunotherapy "fixes" this problem. As Frank wrote in the August issue of Small Stock Specialist...

 

Some of the immunotherapy treatments use drugs to send messages directly to your immune system. One message describes the threat to the cells so they can identify it. Another message tells them to attack the tumor and to keep looking for it even when it's gone so it doesn't come back. This prevents the immune system from "giving up" during the attack.   Medical researchers have also developed an immunotherapy treatment that involves removing a specific type of cell from the body. Messages on how to target a specific cancer threat are transmitted in a laboratory before the cells are re-injected.   The technology to understand and develop these therapies hasn't existed until recently. The biggest advance has been our understanding of genomics. In other words, scientists have learned to manipulate human cells to perform certain actions. For immunotherapy, that means getting the immune system to target and attack cancer cells.

 

 And the results are already positive...

 

At this summer's annual American Society of Clinical Oncology (ASCO) meeting, researchers released test results showing immunotherapy's great potential.

 

For example, clinical trials for one of Bristol-Myers Squibb's immunotherapy treatments showed 79% of melanoma patients were still alive after two years. A doctor involved in the study noted that the survival rate would have been less than 10% a couple years ago.

 

 Another drug called Pembrolizumab nearly tripled the one-year survival rate of melanoma patients who participated in the trial. The FDA was so impressed by the results that it gave the drug its "Breakthrough Therapy" designation, meaning the FDA will work to speed up the drug's approval process.

 

 Even better, doctors believe many immunotherapy drugs can treat a range of different types of cancer. When researchers tried using Pembrolizumab to treat lung cancer, 80% of patients showed signs of tumor shrinkage. These results came from a small, 35-patient Phase I clinical trial... But you can see why doctors are so excited about the long-term potential of these immunotherapy drugs.

 

 Cancer treatment is already a fast-growing market. Spending on cancer drugs has tripled over the past decade, hitting $91 billion last year. And analysts at Citi Equities Research estimate that number will hit $130 billion within a few short years. Frank expects immunotherapy to carve out a big piece of this market as new drugs gain FDA approval over the next few years.

 

Big drug companies are already jumping on this developing trend.

 

 Reporting from the recent ASCO meeting, the New York Times said...

 

Immunotherapy has also set off a frenzy in the pharmaceutical industry; Bristol-Myers Squibb, Merck, and Roche are racing to bring new drugs to market... Many other drug companies are now scrambling to get a piece of what could become a market worth tens of billions of dollars a year in sales.

 

 In Small Stock Specialist, Frank is covering the big, early-stage trends that will shape the world going forward... Like the railroad build-out in the late 1800s or the Internet boom in the 1990s. Frank thinks immunotherapy will be on par with these achievements.

 

And he believes these new developments in cancer therapy could lead to massive gains for people who invest today. Over the next few years, we'll likely see immunotherapy drugs replacing traditional cancer treatments like chemotherapy and radiation. And the companies innovating in this arena could soar as immunotherapy gains in popularity.

 

 Of course, investing in early-stage medical companies is a tough business... Truth be told, most of these companies fail. But if you pick one winner, you can more than make up for the losses.

 

That's why Frank is recommending a basket of four small-cap biotech stocks. We can almost guarantee you have never heard of these companies before.

 

 These firms all have promising immunotherapy drugs that are already in clinical trials. And Frank believes each one could return triple digits as this huge trend continues to gains momentum in the coming years.

 

Right now, you can get immediate access to all four of Frank's recommendation with a no-risk, four-month trial subscription to Small Stock Specialist. You can learn more (without watching a long video) by clicking here.

 

 

 New 52-week highs (as of 8/26/14): SPDR S&P BRIC 40 Fund (BIK), Dolby Laboratories (DLB), ProShares Ultra MSCI Emerging Markets Fund (EET), Enterprise Products (EPD), KLA-Tencor (KLAC), ProShares S&P 500 BuyWrite Fund (PBP), PowerShares Buyback Achievers Fund (PKW), PowerShares QQQ Fund (QQQ), ProShares Ultra Technology Fund (ROM), RPM International (RPM), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), Steel Dynamics (STLD), Cambria Shareholder Yield Fund (SYLD), Whiting Petroleum (WLL), and W.R. Berkley.

 

In today's mailbag, subscribers share their opinions on whether Warren Buffett is a hypocrite. What do you think? Let us know at feedback@stansberryresearch.com.

 

 "Mr. Buffett keeps getting accolades as the world's greatest investor. A tip of the hat also has to go to Brookfield Asset Management (BAM), a long time Stansberry idea. BAM goes toe to toe when it comes to performance." – Paid-up subscriber J Till

 

 "Yes, he is a hypocrite. He eschews his salary as CEO. Instead he receives stock options, dividends and capital gains. The IRS should make CEOs pay taxes on the fair market salary for a CEO, as the workers making much less money must." – Paid-up subscriber Bill Smith

 

Regards,

 

Sean Goldsmith

August 27, 2014