No more cigarettes...

Why Amazon reminds me a lot of the Netflix debacle...

Back in 2011, shares of Internet video-streaming company Netflix plummeted.

In today's Digest Premium, Paul Mampilly, a former securities analyst for a hedge fund, explains why the situation in online retailer Amazon reminds him of the crash in Netflix shares...

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

No more cigarettes... Dollar General on smokes and booze... 3D Systems plunges... Wrong on J.C. Penney?...

 CVS Caremark will no longer sell cigarettes.

The country's largest drugstore chain just announced it would stop selling cigarettes and tobacco products in its 7,600 stores by October 1.

The decision will cost CVS around $2 billion in annual sales. That's no insignificant sum, but that's less than 2% of its annual revenue.

 It's a sign the company is moving more toward becoming a health care provider in addition to its retail business...

"We have about 26,000 pharmacists and nurse practitioners helping patients manage chronic problems like high cholesterol, high blood pressure, and heart disease, all of which are linked to smoking," Larry Merlo, chief executive of CVS, said in a statement. "We came to the decision that cigarettes and providing health care just don't go together in the same setting."

Today, the Washington Post reported that CVS stores already house more than 750 MinuteClinic health clinics. The article said dropping cigarette sales will help CVS pursue more lucrative deals with hospitals and insurance companies.

 Back in 2011, Dr. David "Doc" Eifrig recommended CVS to his Retirement Millionaire subscribers to profit from aging Baby Boomers and their growing dependence on pharmaceuticals. Here's what he said at the time...

Retirement Millionaire readers are up more than 80% on the recommendation.

 CVS' decision to stop selling tobacco-related products is welcome news for a company in the Stansberry's Investment Advisory portfolio: discount retailer Dollar General.

In the December issue, Porter and his team of analysts showed how 2,000-plus large-cap U.S. stocks and more than three dozen industries have performed during the Federal Reserve's previous quantitative-easing efforts starting in 2008.

 The best-performing industry was tobacco... followed by gas, water, utilities, and electricity. As Porter wrote...

 Porter's team recommended buying Dollar General. The vast majority of the company's sales come through household supplies, frozen food, and other basics. And now, it's working to increase sales and traffic by introducing tobacco products. From the company's most recent annual report filing with the Securities and Exchange Commission...

 Dollar General is just starting to sell tobacco products in some of its stores... And it's well-positioned to pick up a large share of the traffic that CVS will lose from cigarette sales. It has 11,000 stores across the U.S. (It's opening 700 more in 2014.) Dollar General is looking to bring in more customers. Cigarettes – a low-margin product – are a good way to increase store traffic and drive up sales.

 On a related topic, in the January issue of his Investment Advisory, Porter recommended a dominant player in the cigarette market...

It's capital-efficient, trading for an enterprise value (EV) – market cap - cash + debt – that is less than 10 times earnings before interest, taxes, depreciation, and amortization (EBITDA). It generates thick, 50%-plus margins – the widest margins in the industry – and a 36% return on assets.

Today, the company sports a 4.5% yield... and has returned 72% of its profits to shareholders over the last five years.

Suffice it to say, shares have big upside at today's levels. You can access this company's name – and the rest of Porter's research – with a risk-free subscription to Stansberry's Investment Advisory. If you decide it's not right for you within the first four months, we'll give you a 100% refund. To learn more, click here (without sitting through a long promotional video).

 In the January 13 Digest, we told you about 3D Systems – a 3-D printing stock that trades for 21 times sales and 74 times forward earnings. Between 2012 and 2014, the company had soared 10-fold... And we outlined why hedge-fund manager Whitney Tilson was shorting the stock.

At the time, 3D Systems was trading for more than $91 a share. Three weeks later, shares are down nearly 30% (including 14% today) after the company cut its fourth-quarter profit estimates and forecast weaker-than-expected results for the current fiscal year.

 This is the same action we saw with online retailer Amazon after it reported disappointing earnings and fell 10% in one day last week.

The market is pushing these popular growth stocks to absurd heights... then sending them crashing back down.

 Former securities analyst Paul Mampilly says we'll probably see more stocks face the same fate...

 New 52-week highs (as of 2/4/14): Aware (AWRE), Penn Virginia (PVA), Range Resources (RRC), and Virginia Mines (VGQ.TO).

 In today's mailbag, one subscriber is disappointed in us... Send your e-mails – good or bad – to feedback@stansberryresearch.com.

 "The information on JCP is incorrect. The company was financially sound until Ron Johnson took over! I would have hoped that you would share accurate information and not sensationalize. I was under the impression that you were a professional, sound financial advising company. How am I supposed to take your financial advice seriously? I'm extremely disappointed and will take you off my reading list." – Paid-up subscriber MEV

Goldsmith comment: We're sorry to lose you, MEV... But the business was on the downturn. Sales fell from around $20 billion in 2007 to less than $18 billion in 2010 – when billionaire hedge-fund manager Bill Ackman was looking to turn the company around. Sales per square foot fell as the company opened more stores. Earnings fell from $1.1 billion in 2007 to $251 million in 2009, a 78% drop.

The business was fundamentally flawed... It's not a high-end retailer... And it is getting crushed by Target and Wal-Mart. Does that sound like a thriving company?

Does this look like one?

We agree that Ron Johnson's plan to turn the company around was a failure... But it only hastened JCP's inevitable demise.

Regards,

Sean Goldsmith
Miami Beach, Florida 
February 5, 2014

Why Amazon reminds me a lot of the Netflix debacle...

Editor's note: In yesterday's Digest Premium, former securities analyst Paul Mampilly likened Amazon's decision to raise subscription fees to Netflix's 2011 Qwikster disaster. Today, he explains just how far Amazon's misstep could cause shares to fall...

 As I (Paul Mampilly) mentioned yesterday, online retailer Amazon's decision to raise the price of its Prime membership reminds me a lot of Netflix...

Remember... back in 2011, the Internet video-streaming company raised its subscription fees 60% by splitting up the streaming and DVD-rental segments.

As a result, customers fled, growth stalled, and Netflix shares fell more than 75% in four months from July 2011 to November 2011:

 Having worked in asset management, it's easy for me to see why Netflix shares plummeted. The small group of fund managers who buy stocks like Netflix do it for one reason: growth.

Once the growth stopped, these fund managers wanted nothing to do with the company. So shares plummeted.

 These same fund managers likely own Amazon. And with the online retailer looking to dramatically increase the price of its subscriptions, these fund managers are going to connect the dots, just like they did with Netflix. They won't wait for Amazon to report slowing growth. They will anticipate it... and start to dump shares.

From my experience, when these fund managers are selling, you want to get out of the way.

 I believe Amazon shares are likely to plummet, just like Netflix did.

With the huge run that the stock has had over the last year, I can even see shares falling 80%. Amazon's closest competitor is Wal-Mart, which trades for 50% of its annual sales. If you put forth that valuation to Amazon, you get a market cap of $35 billion... close to an 80% decline in the company's value from here.

 At the very least, don't buy Amazon shares today. If you like to short stocks, now is probably a good time to build a short position in Amazon.

– Paul Mampilly

Why Amazon reminds me a lot of the Netflix debacle...

Back in 2011, shares of Internet video-streaming company Netflix plummeted.

In today's Digest Premium, Paul Mampilly, a former securities analyst for a hedge fund, explains why the situation in online retailer Amazon reminds him of the crash in Netflix shares...

To continue reading, scroll down or click here.

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