We wrote it, did you short it?
Gannett is a rare treasure for the short seller: It's the leading business in an undeniably obsolete business, it holds a tremendous amount of debt, and on its balance sheet you will find an array of worthless assets purchased at all-time high prices. In short, there's no way this business can succeed and there are dozens of ways it can fail. We know Gannett will fail because its core business is the USA Today newspaper. Its average circulation declined 16% last year to around 1.9 million readers. Its circulation has been in decline for several years and will never recover because most people under the age of 30 will not buy a newspaper.
And while Gannett likes to trumpet its digital activities, the plain fact is, the company's revenue base is $5 billion worth of old media (newspapers, TV networks) and only $600 million worth of new media – websites. That's 88% old media and 12% new media. It is extremely unlikely the company's digital efforts will ever yield big enough profits to finance its existing debt load. – Porter Stansberry, March 2010, Stansberry's Investment Advisory
Over the weekend, Gannett announced it would slash 9% of its 1,500-person workforce and restructure its operations. As Porter noted, the paper's ad revenue and circulation are plummeting (half of the company's print circulation comes from distribution deals with hotels).
Now, the paper will focus more on distribution via digital, handheld, and "tablet" (iPads and Kindles) devices. It's also bringing its editorial and advertising departments closer together "in an effort to make the paper more attractive to marketers," according to the WSJ.
USA Today spokesman Ed Cassidy assures skeptics, "Under no circumstance will there be any compromise whatsoever in our editorial integrity." Methinks Ed doth protest too much. But it's really a moot point. USA Today is obsolete. Shares are down to $12.45 on the news. Subscribers are up 24% on the short so far.
Porter and Braden's short book in Stansberry's Investment Advisory (SIA) is on fire. They're currently short eight stocks. Only one is moving against them. Readers are up some 50% on the Western Digital and Seagate Technology shorts. Barnes & Noble is still down big, despite news of a potential buyout. And readers are up nearly 12% in just two weeks on their latest short – the luxury toymaker. I expect this stock to fall by half from here, so it's not too late to get in.
SIA is recommending a great strategy for today's market. They're still going long quality stocks, but they're hedging their portfolio with selective shorts... companies that are doomed to fail. If you don't already have some short positions in your portfolio, you should. I highly recommend a subscription to SIA. You can expect another fantastic short in the next SIA issue. In the meantime, you can learn more, here.
We know what stocks aren't doing well. But which are providing good returns lately? Disaster stocks.
The Wall Street Journal created a portfolio of 18 companies that produce goods we'd need during financial Armageddon. It includes Hormel (Spam), Dr. Pepper Snapple Group, Cummins (power generators), etc. Most of the stocks are trading at 52-week highs (including 12% Letter pick McDonald's). And the portfolio is up about 24% this year, compared to a 4.5% market decline. You can read the full article here.
The portfolio has one glaring omission... gun-makers Smith & Wesson (SWHC) and Sturm, Ruger (RGR). The Journal likely omitted these stocks because they've been destroyed. It would have brought down the average return of their hypothetical portfolio. Check out this one-year chart of SWHC...
But rest assured, if people hunker down with canned food and generators, they'll need guns to protect their bounty. And only last year, gun stocks were soaring. Starting in October 2008, SWHC rallied from around $1.50 to more than $7 a share. Retailers across the country were running out of bullets.
Gold stocks are also on a tear. In particular, Matt Badiali's Phase 1 recommendation, AuEx Ventures (XAU.TO), jumped nearly 30% today on a takeover announcement from its partner firm, Fronteer Development. Readers are up more than 100% in less than a year. Here's what Badiali wrote about AuEx and its flagship Long Canyon development in the original writeup:
The jewel of Pequop [a gold-rich Nevada region] is Long Canyon, on the eastern side of the mountain. It is a partnership between AuEx and fellow junior miner Fronteer Development Corp. The project holds 363,000 indicated ounces and 459,000 inferred ounces of gold so far, with lots of work to do. The gold is all in oxide rock, strewn across a mile-long and 800-foot-wide area. Best of all, there's plenty of room (and plenty of reasons) to find more. Drilling on the north end keeps hitting high-grade gold at shallow depth, so drilling will focus there. – Matt Badiali, November 2009, Phase 1 Investor
Badiali said Long Canyon would be a profitable mine... And likely the highest-margin mine that Fronteer Development (AuEx's partner) owns. He was right. Fronteer CEO Mark O'Dea said of the buyout, "Long Canyon is our flagship asset and owning 100% of it is important." AuEx shareholders will receive a mixture of cash and stock for their current shares. In the next Phase 1 Investor, due out Thursday, Matt Badiali will tell subscribers exactly what to do.
Kudos to Badiali... AuEx is his fifth recommendation to make S&A's Top 10 List (we print this list at the end of every Digest). While AuEx was a great pick, it was actually the worst-performing recommendation in the November 2009 Phase 1. Badiali recommended two other small-cap gold miners that month: ATAC Resources and Rainy River. Matt closed Rainy River in January for a 161% gain. And readers are up more than 200% on ATAC, an open position.
Make sure to check out this weekend's DailyWealth. The "Stat of the Week" pointed out only 21% of investors are now bullish, according to the American Association of Individual Investors. As Digest readers know, it pays to be a contrarian. And right now, the contrarian bet is long. Plus, the Fed announced last week it would do everything in its power to save the economy from deflation. It will print more money, buy more debt, and keep rates near zero for as long as it takes. As we've seen over the past few years, when the Fed fires up the printing press, the market can rally hard. Things are looking bullish...
New highs: Eldorado Gold (EGO), Silver Wheaton (SLW), AuEx Ventures (XAU.TO), McDonald's (MCD).
In today's mailbag... a lesson for would-be entrepreneurs. Send us your feedback here... feedback@stansberryresearch.com.
"In the August 27, 2010 S&A Digest, you published a whining diatribe from a person named Todd Phillips who, among other things, complained that the average working person has it far worse than the average 'up and coming' small business owner and 'they never get any of the profits.'
"If Mr. Phillips would like to share in the profits, then he should accumulate a significant amount of capital and invest his life's savings into his own small business venture where he is required to sign personal guarantees against all obligations of the business and work like heck to meet weekly payrolls and contend with the endless government regulations, write checks from their personal accounts when the business fails to generate enough gross profit to cover expenses and all the other exciting activities in which the small business owners engage.
"Mr. Phillips, unfortunately, is all too typical of the average person in this country today; he wants all the upside potential of being a business owner with none of the downside risk. In regard to having to take student loans to get through college, get a damn job changing tires on garbage trucks like I did, pay as you go, stop whining and start taking some responsibility for your own sorry life." – Paid-up subscriber Ken McGaha
Regards,
Sean Goldsmith
Managua, Nicaragua
August 30, 2010
More layoffs at Gannett... SIA's long-short strategy... Disaster stocks crush the market... Gun stocks still cheap... Badiali's latest triple-digit winner... Things are looking bullish...