More about investing strategies... How to score yourself as an investor... When a bond is safe... Picking the right stock... Value investing vs. insider buying... How to get Inside Strategist for only $50... Uh oh, inflation appears in China... Auto sales up... The market seems overconfident... The mailbag bashing returns...
I don't know how I got started with my Friday habit of discussing investment strategies, but I think I'll continue. It's one topic I know a fair amount about, and it's something I believe can benefit most individual investors enormously. Even if you're an experienced investor – or perhaps a professional – I hope you'll take a moment. It never hurts to review the basics. And I'd like to know whether you agree or disagree with my views...
I know from many years of working with individual investors the most important lessons are the most basic. Valuation. Position sizing. Risk management (stop losses). Portfolio management (allocation). Compounding. Taxes. If you don't fully understand these concepts, stop whatever you're doing. You are very unlikely to succeed without these tools.
Here's a good test to use to evaluate how well you're putting these ideas into action. Can you take out a piece of paper and write down from memory all of your investment positions, position sizes, risk parameters, the core reason you bought, tax basis, and your objectives? My guess is most of our audience can't do it. Whether that bothers you, I can't say. But I know if you take the time to be a good investor, the effort will pay off – massively. If you don't take the time to become a good investor, you should hire someone else to do it for you. It'll be expensive. And there's still a good chance the person will lose you a fortune. So if you want it done right, you're probably going to have to do it yourself.
I've already written quite a bit about why bond investing is the one skill I'd choose to give any individual investor. I firmly believe it is easier to value and time the bond market than the stock market. Bonds are undeniably less risky than stocks. I think distressed bonds – bonds that no longer carry an investment-grade credit rating – are particularly attractive to individuals because lots of institutions are forbidden from owning them and individual investors are heavily discouraged (by the brokers) from buying them.
As a result, the market for these bonds tends to be illiquid, unloved, and ignored. So it's easy to find values if you know what you're doing and if you're patient. Remember: There's no such thing as a bad bond, there's only a bad price. Almost any credit, if it's cheap enough, is safe to buy.
Take the recent story of General Growth Properties – the big mall owner that went bankrupt in 2009. Investors bought up its bonds for as little as three cents on the dollar. And now, those bonds are trading for more than $1 as it appears bidders for the company's assets will pay enough to cover all of the debts. Admittedly, this kind of investing is not for everyone. It takes a bit of homework and a lot of guts. One good way to learn the basics is to subscribe to our bond-investing letter, True Income. Mike Williams has been investing in bonds longer than I have been alive. He's very thorough. And he's very conservative. Learn more about True Income here.
The next "advanced" strategy I discussed in detail with you was selling put options. There's no point in hashing it out again here, but if you've never considered it, please see my essay here. I spell out the details of an actual trade and show you, step by step, how to do it.
Now... assuming you are going to buy stocks in addition to buying bonds and selling puts, the question remains which stocks to buy. Lots of folks seem to think this is the main problem for investors – but it's not. You shouldn't get to individual equity selections until after you've figured out allocation and position sizing and until after you've bought bonds and, if appropriate, sold a few puts.
So... again... assuming you're going to buy stocks, which stocks should you buy? We have analysts who cover just about every sector of the market. And we have a few "generalists" – like me, Dan Ferris, Steve Sjuggerud, and Braden Copeland – who cover almost any kind of business. But if I were going to recommend just one of our equity analysts for you to follow, it would be Braden Copeland.
Some of you would probably doubt my sincerity about this endorsement. After all, Dan Ferris must have the best overall track record, in terms of average gain and the percentage of winning recommendations – at least in equities. The kind of deep-value investing Dan practices for us is also the most rigorously proven way to invest successfully in individual stocks. And Dan is truly a world-class analyst – which is why I asked him to pen The Digest with me on Tuesdays and Thursdays. I absolutely endorse Dan's work. Lots of people – perhaps even most of the S&A Alliance members I meet – tell me Dan is their most trusted source of investment advice.
On the other hand, I know most of you simply aren't going to pay $1,000 for a newsletter – no matter how good it is. I also know value investing seems like a lot of work to some people. There's lots of talk about intrinsic value and free cash flow. Dan does a great job of bringing his stories to life... but I know most individual investors are looking for a bit of action in their stocks. They want interesting stories. They want buying and selling. Value investing is, on the other hand, boring by design. That's why I'd actually recommend new investors focus on insider trading strategies before they graduate to value investing.
Braden finds attractive businesses where the company's insiders are heavily buying shares. Please understand, what he is doing is totally legal. We're simply monitoring the SEC's filings looking for the telltale signs of insider activity. We know insiders sell stocks for many different reasons – sometimes they need the money, sometimes there's a problem with the company. You can't tell. But there's only one reason they buy stocks: They are certain the stock is going up. And they're usually right.
Each week, Braden takes the list of all of the companies with lots of insider buying and goes from there, looking for value. I can say with total sincerity I think Braden is every bit as good of an analyst as Dan Ferris. He looks under every nook and cranny when he takes on his assignment each week. It's inspiring to watch. Whether you decide to buy the stock or not, Braden is going to teach you a ton about business and investing just by explaining – in detail – how each of his recommendations works.
If you're going to buy stocks, why wouldn't you start with companies where the executives themselves are also buying? Not surprisingly, we've had consistent success with this approach, which even produced a winning average return in 2008, when the market fell in half.
If you combine bonds, selling puts, and buying stocks with insider activity together, there's no doubt you can go from a novice investor to a shrewd pro in less than a year. I urge you to try it. And lest you think all of my nudging is merely for the sake of our business, you ought to note Inside Strategist is our cheapest publication on a per-issue basis. We charge $199 for a year, but it's published weekly. That's roughly 50 issues, or a little less than $4 per issue. Coffee costs more than that at Starbucks.
To show you what I mean about the thoroughness of Braden's letter, I've attached a recent copy of one of his reports below. This is rare for us... We don't like to give away our reports for free, but in this case, I think it's worth it just to prove what I've been saying about Braden. I know he'll make you a much better investor. And... one more thing... just to make sure the cost of the product doesn't keep anyone from trying it, I've even arranged to make a special offer – that's available in today's Digest only. You can get Braden's work for only $50 upfront. Instead of charging you the full $199, we're offering a quarterly billing option for anyone who wants to "start slow" and see how it goes. I know you won't be disappointed. Click here to subscribe.
Much to the dismay of deflationists everywhere, inflation in China is accelerating. Consumer prices rose a more-than-forecast 2.7% last month (the most in 16 months), outpacing the one-year deposit rate of 2.25%. So-called negative real interest rates (when the inflation rate is greater than the interest rate) spur purchases of hard assets (like housing) and stocks. Considering the world already sees China's housing and stock markets as bubbles, expect the central bank to hike rates in the near term.
And how's inflation in the U.S.? According to Fred Smith, chairman and CEO of FedEx, our recovery could slip because businesses are reluctant to invest in new equipment and technology. Smith's opinion is highly regarded because his company is seen as global economic bellwether. "In my opinion, for consumers to spend you have to get business investment up because that is what creates the jobs," Smith said. "I don't think you will see substantial increases in employment until you see substantial increases in business investment." Smith says companies are delaying investment due to "uncertainty."
Despite Smith's warning, retail sales in February unexpectedly improved. Purchases increased 0.3%, the fourth gain in the past five months. Excluding auto sales (which were hurt by Toyota's recent woes), sales rose 0.8%, besting all estimates. And the most recent unemployment report showed a small recovery.
And as evidenced by bond market spreads, investors are regaining their risk appetite. High-yield bonds are beating investment-grade debt for the first time this year. High-yield notes have returned 3.63% this year, compared to 2.32% for investment grade. (True Income pick Freescale Semiconductor led the rally.) The extra yield investors demand to own speculative debt has fallen for nine straight days to 6.15% above Treasuries. We like bonds – a lot. But we'd be cautious about buying risky bonds with such a slight premium to Treasuries.
New highs: Fairholme Fund (FAIRX), Washington REIT (WRE), PowerShares Dynamic Biotech Fund (PBE), Hershey (HSY), Visa (V ), McDonald's (MCD), Kinder Morgan Energy Partners (KMP), Markel (MKL), TimberWest Forest Corp (TWF-UN.TO), Longleaf Partners (LLPFX), Sequoia Fund (SEQUX), Automatic Data Processing (ADP), Portfolio Recovery Associates (PRAA), Sprott Resources (SCP.TO), Akamai (AKAM), Carpenter Technology (CRS), A. Schulman (SHLM), MAG Silver (MVG), Westmoreland Coal (WLB).
In the mailbag... the adulation has passed. We appreciate your support and hundreds of letters we received, and we'll gladly accept as many letters of support as you'd like to send to us. But... we also missed the brutal beatings that are normally delivered to us. We know that's what makes our mailbag fun to read. Well, it has returned. In spades. Enjoy. And don't refrain from kicking us when we're down: feedback@stansberryresearch.com.
"Porter, you are too smart and too good a man to put your name on this description of a person. And think about this. Do you realize how many of your followers (me too but older than middle aged) are 'middle-aged, out of shape' people who may resent being reminded of those two facts? My 2 cents." – Paid up subscriber Jerry Hutchins
Porter comment: Jerry, I got a few letters like yours that faulted my ad hominem attack on the physical appearance of Terry Krepel. I could have certainly left it out and still made a persuasive argument. I meant no disrespect to anyone who struggles with his weight – I do, too.
But... I actually think it's important to point out that people like Terry Krepel – people who have no problem telling other people how to live their lives and do their jobs – frequently aren't even capable of taking care of themselves. Honestly, I knew what Terry would look like before I even Googled him, just judging by his asinine behavior and the people he works for. I've met his kind a hundred times in D.C. It is truly as they say: The plans differ, but the planners are all alike.
My advice to anyone who wants to attack other people for a living: Don't write things about people unless you're at least willing to call them on the phone for comment to get your facts straight. More importantly, don't throw stones if you live in a glass house. By the way, I contacted Mr. Krepel via e-mail and invited him to both visit my office and call me on the phone. He has so far declined to even speak to me. He's pathetic.
"Porter – Media Matters is not just supported/funded by Soros, but also was founded by then-Senator and now Secretary of State Hillary Clinton. Now it makes even more sense that the government... I mean, Media Matters... will use Alinsky-like tactics of smearing and attacking 'the man' as opposed to challenging your thesis with facts and arguments." – Paid-up subscriber "John Galt"
Porter comment: I really don't understand these people or what they hope to accomplish with their blog. It seems like the biggest waste of time and effort I've seen in a long time. Who cares what any of these people think? How could reading their material possibly enrich your life? They're not even amusing. Why don't they do something productive?
"Porter, I hope you prevail... The Supreme Court ruling should find you innocent... and the final words of the case should read... Porter Stansberry is an Honest Prick!" – Anonymous
"ALL YOU PRINT IS LETTERS PRAISING YOU. MY INVESTMENTS ARE DOWN BASED ON YOUR RECOMMENDATIONS. YOU SOUND LIKE A KID IF I DONT GET MY WAY IM TAKING MY BALL AND GOING HOME. LET ME KNOW IF YOU NEED A RIDE TO THE AIRPORT AND TAKE RUSH WITH YOU." – Anonymous
Porter comment: Now, that's more like it...
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
March 12, 2010
Don't Miss Your Chance... Follow This Strong Cluster Buy to Big, Quick Profits
(reprinted from the January 20, 2010 Inside Strategist)
This week, we're getting set to profit from one of the most powerful insider signals there is (again).
On January 6, this company announced earnings, and its business is clearly starting to rebound.
The insiders know it... And they know the stock price is getting set to soar.
So a group of them hardly wasted any time... Within days of the announcement, they bet on the future with their own money...
Following these kinds of cluster buys has been profitable for us many times last year. Most recently, we saw a big cluster buy at Dana Holding just six weeks ago. At the beginning of December, we discovered billionaire investor George Soros and the CEO loading up after the company announced it was heading for a rebound.
The Dana insiders have already lead us to huge returns... Since December, we're up more than 40% on Dana. Shares have been screaming higher as if on cue...
The cluster buy we're following this month could be every bit as successful as our Dana position...
Earlier this month, insiders at this specialty industrial manufacturer loaded up on their company's shares after a strong earnings announcement.
But they aren't just betting on the general economic recovery to lead profits higher... Over the last year, the company made significant changes to rev up its bottom line. Those changes are starting to work. Future earnings for this company are going to be much stronger.
Now, at Akron, Ohio, based A. Schulman (Nasdaq: SHLM), we have almost the same situation as Dana unfolding: We've got major insiders buying at a rebounding manufacturing supplier.
We're following the insiders at Schulman to a great target. I'm looking for a 30%-50% gain in a year on this one.
The Big Secret at A. Schulman Is... Gross Margins Are Doubling
Schulman is a worldwide supplier of plastic compounds and resins. The company has customers in the industrial, consumer products, packaging, and automotive markets. Its 16 plants are located throughout North America, Europe, and Asia.
It sells plastic color additives, custom-engineered plastic compounds, and polyvinyl chloride ("PVC") used in packaging, durable goods, and commodity products.
Essentially, if it's plastic, there's a chance Schulman supplied the raw material to make it...
However, this is a low-margin, commodity-like business. It's extremely competitive. Nothing differentiates one supplier's stuff from another's. Gross margins average a paltry 10%. The only way a company makes any money is to sell on volume.
So in 2008, to counter this problem, Schulman devised a way to increase its margins. It started to focus on cutting costs and working with customers to develop technologically advanced, specialized plastics for them. The aim was to get out of the low-margin commodity business and into higher-margin, high-performance plastics... where margins could be as much as double.
Then, trouble came in late 2008 and early 2009 when the recession hit. The manufacturing-supply business ground to a near stop. For Schulman, gross revenues almost halved – falling from $511 million for the quarter ending May 31, 2008, to a low of $273 million for the quarter ending February 28, 2009. But the company's earnings didn't suffer too much, turning negative for just one quarter.
In hindsight, the timing of the recession actually helped Schulman...
You see, recessions give corporate managers perfect cover to restructure (i.e. fire people and close facilities). And because Schulman had already started the restructuring process, (which for them meant cost-cutting by closing plants that produced the low-margin products), management suddenly had the opening to accelerate its plans.
But that's not all...
Schulman also began making great progress developing and selling its technologically advanced plastics. In the high-end auto business, Schulman is working with European manufacturers to provide patented nylon alloys for exterior components like windshield-washer nozzles and door-handle gaskets.
These alloys are specially designed to stay soft and remain black without requiring the application of a sealant after the part is made. Schulman sells the material for far more than the conventional stuff. Its customers are willing to pay up because using it removes a step from their manufacturing process, saving them money in the end.
In Latin America, the company is supplying special nanomaterial-enhanced agricultural films to major growers. This cutting-edge fabric contains ultra-small particles that filter only certain ultraviolet light waves to maximize crop yields, boosting Schulman's customers' profits. So again, customers are willing to pay more for it.
And all of this is now beginning to pay off for Schulman...
In just the nine months between the end of February 2009 and November 2009, Schulman's gross margins grew by 70%, from 10.4% to 17.4%. The company is on track to hit its 20% gross margin target within the next six months, doubling what it made with the low-margin commodity stuff just a year ago.
This Huge Gross Margin Boost Means Insiders Are Getting in
Last week, a director, the CEO, and the CFO all bought... just days after the previous Wednesday's earnings press release.
Director Stanley Silverman bought $50,000 worth of stock for $22.05 per share, increasing his stake by more than 75%. CEO Joseph Gingo bought $220,000 worth of stock for $22.13 per share, increasing his stake 12.6%. And CFO Paul DeSantis bought $20,000 worth of stock for $22.60, increasing his stake a little more than 2%.
Combined, the three took down close to $300,000 worth of Schulman shares. It's a strong signal that these three (notably the CFO – we've seen how meaningful that is) quickly decided to put their money to work – independently. I can't be sure, but my guess is all three see the same positive prospects for Schulman's future, and they're not missing their chance to put some money to work as soon as possible...
But are they getting a good price? Looked at historically, it's a wash.
Over the last five years, the average enterprise value to trailing 12-month EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple has been 7.5. To see what it is today, we need to know the current enterprise value and trailing 12-month EBITDA...
To calculate enterprise value, we first need to know the current market cap. Market cap is simply the number of outstanding shares multiplied by the price per share. Think of it as what it would cost to buy all of the common stock in the market. Once we have the market cap, we add to that number how much debt the company has and subtract from it the amount of cash and cash-like assets. That gives us the enterprise value.
EBITDA is a straightforward measure of profitability and is calculated using numbers from the income statement. As a shortcut, you can find both Enterprise Value and EBITDA in the key statistics area on Yahoo Finance.
Today, the market cap of Schulman is $603 million (26 million outstanding shares trading for a little more than $23 per share). Total debt is $108 million. The company has more than $237 million in cash and cash-like assets. (Note that with twice as much cash as debt, the balance sheet is incredibly healthy.) So the company's enterprise value is $474 million.
Trailing 12-month EBITDA is $64 million. Together, these numbers give us an enterprise-value to trailing-12-month-EBITDA multiple of 7.4. Again, insiders bought at 7.5. Like I said, it's a wash.
But that is using the trailing 12-month EBITDA – It doesn't account for Schulman's gross margins increasing from 10% to 20% and the increase in its bottom line. To see where the stock price might climb, we have to make some assumptions about that future growth – just like the insiders did.
To get a good idea, we need to work backward from an assumed EBITDA number...
The best way to assume Schulman's future EBITDA with the increasing margins comes from looking at the last two quarters, when gross margins were 15% and 17% (not even 20%, so this will be conservative). In those six months, EBITDA totaled $43 million. For 12 months, we'll double the number and get $86 million. Applying the 7.5 multiple to that EBITDA estimate yields an enterprise value of $646 million.
To get to the share price, though, we need a future market cap estimate. We can get that from the enterprise value by backing out the debt and cash numbers we used above. We'll add back the $237 million in cash and subtract the $108 million in debt to get a market cap of $775 million. With 26 million shares outstanding, Schulman stock, on this track, will be trading for close to $30 per share in six months.
Today, Schulman is trading for around $23 per share. In six months, using a conservative future EBITDA estimate, Schulman could be trading for as much as $30. That's a 30% gain.
But I think Schulman will do much better than this conservative estimate predicts. And once the market realizes what's happening – which, as we saw with Dana, can happen very, very fast – a 50% gain could come quick... and easily within 12 months.
I believe that will be just the beginning...
Action to take: Buy shares of A. Schulman (Nasdaq: SHLM) up to $24. Use a 25% trailing stop.
Also, keep in mind this stock is thinly traded. Orders to buy more shares than usual (which Inside Strategist ideas often generate) could drive the stock price temporarily higher in the near term. Use a limit order and be sure not to overpay for the stock. If shares run to more than $24, be patient. Shares will almost certainly pull back to less than $24 before they begin their true run higher.
Good investing,
Braden Copeland
P.S. Again, if you want to take advantage of today's special offer on Inside Strategist, click here.