One of the funniest things I ever read about investing in public companies was written by the curmudgeonly business mogul/author Felix Dennis, in his book How to Get Rich. Dennis said public companies "are not sane places, and their share prices are not determined by sane people."
Value investing guru Ben Graham knew this, too, and created the parable of Mr. Market near the end of Chapter 8 of his classic work, The Intelligent Investor. Graham encouraged us to look at the stock market as a manic-depressive business partner who is constantly willing to buy or sell half the business. When he's depressed, he will give it away for a song. When he's elated, he will buy us out at a gigantic premium.
Today, Mr. Market is depressed about McDonald's, and he's willing to give away shares based on the sheer insanity of Wall Street analyst's earnings expectations...
Shares of the fast-food giant are being undeservedly beaten today... The company announced a 7.5% rise in same-store sales in February. Analysts were expecting 8.2% growth. Same-store sales in the U.S. rose 11%, besting expectations of 8.6%. (Strong demand for the new Chicken McBites and a Filet-O-Fish promotion drove the growth.) In Europe, same-store sales only grew 4%, below forecasts of a 6.6% increase. But the biggest disappointment came from the Asia/Pacific, Middle East, and Africa regions, where sales only grew 2.4% against expectations of 8.1%.
Shares dropped more than 3% on the news, even though the S&P 500 is up almost 1% today. Good thing we pay no heed to these analysts and their earnings expectations. Instead, we see one of the world's most powerful brands growing its business (earnings increased 11% in the fourth quarter), paying a great dividend (nearly 2.9%), and continually innovating (new product offerings contributed 9.8% to sales growth). You want to own companies like McDonald's... They have pricing power (people are willing to pay more for brands they love) and they continually grow their dividends... Since 1979, McDonald's has doubled its dividend every 4.5 years on average.
We first recommended the stock in the November 2006 issue of The 12% Letter. The stock was trading around $41 a share. Readers are up more than 160% on the recommendation. And they're receiving nearly 7% in annual dividend payments on their original purchase price. At 18 times earnings, it's not the greatest bargain in the world, but you could do a lot worse buying a business this wonderful at this price.
While McDonald's disappointed Mr. Market today... shares of Extreme Value World Dominator Anheuser-Busch InBev (BUD) rose nearly 5% to a new high. Earnings for the fourth quarter increased 91% to $1.85 billion (besting expectations of $1.61 billion). Last year's numbers were down because of a high tax bill and many one-time losses. Revenue increased 4.2% to $9.87 billion, though volumes fell 0.6% (down 4.5% in North America). And the company proposed raising its full-year dividend by 50% from 0.80 euros a share to 1.20 euros a share.
Nothing like 91% profit growth and a 50% dividend raise to get shareholders excited. But that sort of thing happens all the time with World Dominators. The ones that pay dividends raise them every year. And they tend to grow slowly but relentlessly, even in the worst of times.
Extreme Value readers who took our advice and bought BUD are up about 44% (including dividends) since we first recommended it in May 2010. The S&P 500 is up about 16% since then... Not only has BUD been a much better bet than the overall market, but buying it was far less risky than owning the average S&P 500 stock.
It's less risky than most stocks because it's the World Dominator of the global beer industry. It's like the difference between buying shares of the mom-and-pop store down the street versus shares of Wal-Mart. The mom-and-pop store can't touch Wal-Mart... but Wal-Mart could easily put Mom and Pop out of business.
Nobody is going to stop BUD, either. It'll be around five, 10, 20, and probably even 50 years from now. It's got ubiquitous beer brands like Budweiser, Stella Artois, Becks, Bud Light, Michelob, and a partial interest in Corona. As the world's biggest beer company, it is (by definition) the most successful one. It's difficult to compete with a company that can get new beers into the hands of more customers faster than anyone else. It's also difficult to compete with brands that have huge, loyal followings. If you're a diehard Budweiser drinker, it'll be hard to get you to change. Try competing with that.
Of all the types of businesses in the world... a great consumer-product franchise is insanely hard to beat from an investment point of view. Imagine coming out with a new Cola and trying to get American Idol to cut off its relationship with Coke in favor of your product. Ain't gonna happen.
With a great consumer franchise, your customers seem almost addicted to the product. They are really comfortable with it and like the sense of fun, romance, or just plain security it gives them. They depend on it. I know people who will never buy anything but a Chevy truck or a Toyota car. They're addicted... much to the delight of those companies' shareholders.
BUD is above our maximum recommended buy price... But the Extreme Value portfolio has another company much like BUD, only smaller and cheaper. It's also a World Dominating producer of alcoholic beverages. This company is the No. 1 provider in its large and growing sector of the industry, one that has exploded in the last several years. I remember when I was younger, people didn't drink their product unless they had money. Nowadays, the grocery store is full of the stuff.
We first wrote about this up-and-coming World Dominator in the June 2011 issue of Extreme Value. It's the smallest, cheapest World Dominator out there. And it has the most upside of any of them. It's up a few percent since our initial recommendation, about the same as the overall market. But the insane Mr. Market has yet to discover the stock, so it's still an incredible bargain.
The company's management has been doing everything right... selling noncore businesses... reinvesting in its highest-returning businesses... and generating gobs of free cash flow. The company expected to generate $600 million of free cash flow. Its estimate was wrong... It generated more than $800 million in free cash flow the last four quarters. The whole company sells today for just $4.4 billion, about 5.5 times free cash flow. And it's less than 1/25th the size of BUD.
Buying shares of our smallest, cheapest World Dominator right now represents an incredible opportunity to make big, safe investment returns... without taking too much risk. To learn more about a subscription to Extreme Value – which gives you access to our full list of World Dominators, including this stock – click here.
Matt Badiali published his latest S&A Resource Report last night... And it's the latest installment in one of the most important stories in the world – China's campaign to corner the world's gold market.
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On February 24, Venezuela announced Citic – the Chinese state investment company – would help develop Las Cristinas, the largest undeveloped gold deposit in South America and a classic "trophy" asset. |
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Las Cristinas contains at least 16.9 million ounces of gold. (And that calculation is based on a $550 per ounce gold price... At today's $1,700 an ounce price, its reserves should be much greater.) And it will be a simple, giant open-pit mine. The capital cost will be just $356 million. So once the trucks start hauling off its ore, Las Cristinas will be wildly profitable... |
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It's exactly the kind of gold deposit China wants to bolster its gold holdings... |
As Matt explains, Las Cristinas used to belong to Canadian mining company Crystallex. Then, Venezuelan President Hugo Chavez blocked Crystallex from developing its resources. And in February 2011, the Venezuelan government canceled the company's contract. "Chavez literally confiscated the gold deposit without explanation," Matt wrote. "Crystallex's market value fell to $23 million [from $1.2 billion]. It shut its doors for good, delisting from the Toronto Stock Exchange, before the year ended."
Now, the Chinese government is taking over this mine. And Las Cristinas is not China's first strategic gold acquisition. We recently completed a video and companion report detailing how China is going about its efforts to capture vast supplies of gold... both bullion and resources in the ground. And more important... we lay out why China wants all this gold. It's a story that could have long-lasting implications on the standard of living of millions of Americans. To see the video and learn how to access our research on China's gold strategy, click here...
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New 52-week highs (as of 3/7/12): Invesco Value Municipal Income (IIM) and Clean Energy Fuels (CLNE).
Are you holding any World Dominators in your portfolio? How long have you had them? We'd love to hear about your experience investing in Extreme Value or 12% Letter picks. Write us at feedback@stansberryresearch.com.
"I finally get it. I constantly read you harping about dividend stocks and I always think, that's great but I don't have that much capital and if I did I can do better than that. In fact thanks to your teachings I made 9.5% net in my 401K last year thanks to a near perfect trade at the end of the year. (I should have held out for a little more.) But, I was just rereading the Warren Buffet Coke stock buy and bam, it hit me, the future value of a good company is the best income stream you can get. When he bought the shares they didn't pay much but over time it grew into a 50% payout per year, that makes perfect sense. I think I will add building future income streams into my investment plan." – Paid-up subscriber Steve Hill
Good investing,
Sean Goldsmith and Dan Ferris
Baltimore, Maryland and Medford, Oregon
March 8, 2012
Mr. Market is insane... McDonald's unfairly punished... Extreme Value readers up 44%... The smallest, cheapest World Dominator... China developing Las Cristinas gold... European countries getting gold religion...