Masters Series: How to Buy the Hope Diamond at Cubic Zirconia-Like Prices
Editor's note: We're in the early stages of a bear market... and in a matter of months, the world's greatest businesses will go "on sale"... and the companies that own the world's highest-quality assets will trade at huge discounts.
Stansberry Research founder Porter Stansberry calls these companies "trophy assets." Bought at the right time – and at the right price – these companies could quickly and safely return 100%... 200%... even 500% on your initial investment.
In today's edition of our weekend Masters Series – adapted from a special report – Porter explains the power of buying these unique companies...
How to Buy the Hope Diamond at Cubic Zirconia-Like Prices
There is a group of companies with assets so valuable that they always have access to the credit markets. We call them "trophy assets."
These companies own one-of-a-kind assets. When managed the right way, they give public-market investors incredible returns because they can be safely leveraged to produce very high returns on equity. While we wouldn't recommend investing in highly leveraged stocks in most cases... there are some important exceptions. Some assets are of such high quality, they always have access to debt financing.
For example, take the most valuable mine in the world – the Grasberg complex in Papua, Indonesia.
Discovered in the late 1930s and developed by the Rockefeller family in the 1960s, the mining district began producing copper, gold, and silver in the early 1970s. Today, the mine is the world's largest source of gold and third-largest source of copper. It sits among the highest mountain peaks in the world (more than 14,000 feet high), in one of the most remote places on Earth. Grasberg is a gigantic open-pit mine with a mile-wide crater that can be seen from space.
The facility also includes the world's largest milling equipment, which can process 240,000 metric tons of ore per day. The ore is sent via a slurry pipeline that runs more than 70 miles through the jungle to a seaport built to serve the mine.
Grasberg is a global trophy asset, perhaps the single-greatest trophy asset in the world.
Ownership is split between the Indonesian government (which currently controls 10%) and the public investors of global mining giant Freeport-McMoRan (FCX), who owns 90%. It will sell another 20% stake to the government over the next few years, 10% in 2016, and 10% by the end of 2019. The company estimates the mine still contains 30 billion pounds of copper, 29 million ounces of gold, and 113 million ounces of silver.
The gold alone would be worth around $28 billion at today's prices. Given the copper and silver resources in the ore, the gold could certainly be mined for free.
However, the company's market cap is less than $5 billion today. The discount to the company's obvious asset value isn't unusual. In fact, Freeport-McMoRan is one of the more volatile stocks we regularly follow. The value of its assets changes slowly. (In general, the value rises thanks to the impact of inflation.) But its share price bounces all around.
For example, in 2008, Freeport-McMoRan shares fell from $60 all the way down to almost $10 – a collapse of almost 80%. Over the past year and a half, the stock fell from $39 in July 2014 to around $4 earlier this month, a loss of 90% of its value. You can bet nothing changed about the Grasberg mine during that year. All that copper, gold, and silver was still sitting there, roasting under the equatorial sun.
Folks who claim that the stock market is perfectly efficient... that there are never important discrepancies between the price of a stock and the value of the underlying asset... should spend some time watching this stock. It often shows huge discrepancies between the share price and the asset value.
Our strategy is simply to buy the highest-quality assets in the world, assets that can safely carry a lot of debt, when those assets are trading at a broad discount to both their historic valuation and their asset value.
In essence, we want to buy the Hope Diamond... but only at a cubic zirconia-like price. The discounted price alone assures us of a good return over time. But there's something else that will help us make even more money... leverage. The quality of the assets these kinds of companies hold allows them to safely employ a lot of debt, which greatly boosts returns.
Regards,
Porter Stansberry
Editor's note: Done properly, investing in trophy assets can produce profits of more than 20% a year. And the best part is... it's not hard. All you have to do is follow a few companies that own the world's best assets... then buy them when they're trading at a huge discount to their underlying value.
That's exactly what Porter and his research team did earlier this month in the third installment of the Bear Market Survival Program. In it, they discuss how to stock your portfolio with high-quality businesses that will go on sale as this bear market accelerates... and they share a "wish list" of seven companies you'll want to load up on as they go on sale. Learn more about the Bear Market Survival Program right here.