Porter's Chesapeake rebuttal... Natural gas shippers soaring... Why Coke's so profitable... The 'boring' way to get rich... More on Wal-Mart...
Porter is speaking today at the Summit hosted by our friend Doug Casey in Florida. So he is unable to write today's Digest. He did, however, ask me to clarify an issue in yesterday's Digest...
Yesterday, Dan Ferris wrote about the CEO of natural-gas giant Chesapeake Energy, Aubrey McClendon, and the special deal he struck with his company. McClendon has the right to buy 2.5% of any well his company drills. And he recently borrowed $1.1 billion using his ownership stake in the wells as collateral. The media was in a frenzy about the deal and calls of fraud abound... Dan said he wouldn't buy Chesapeake stock.
As Stansberry's Investment Advisory readers know, Porter is a buyer of Chesapeake... He recommended shares in his January 2012 issue. We don't have a problem with our editors taking different positions on a stock. However, we ask our editors to acknowledge their colleague's conflicting opinion. We failed to do so in this case.
Porter recommended Chesapeake because he's "extremely bullish" on natural gas... And it was one of two publicly traded companies with large assets in a new, U.S. shale play. Porter wrote...
|
There is a major new shale play that's only now being staked out by the major independent oil companies in the United States. Based on information I have, I believe this new field will become the second-largest oilfield in the United States over the next 20 years (second only to the Eagle Ford). I base this statement off test wells that have been dug, the size of the shale (according to seismic data), the total organic carbon (TOC) of the shale's core samples, and the proximity of an existing major oilfield. |
|
For now, you'll have to take my word for it, because I have agreed not to name the shale or disclose where it sits... My contacts in the oil business are currently buying leases and royalties in the play which has gone completely unreported by any major newspaper or oil industry magazine. We are in this story at its infancy. |
Porter is still bullish on Chesapeake... He sent me the below note to clarify his position...
|
I disagree, as you might imagine, with Dan's characterization of Chesapeake Energy. No, I don't think Aubrey McClendon is a saint. I think he's a greedy entrepreneur who wants to make as much money as he can. The deal he struck with his firm was that he would get, in addition to his other compensation, a 2.5% working interest in all of his firm's wells. That looks bad, doesn't it? |
|
Not to me. Why? Because he was also required to pay 2.5% of all of the costs. Over the last several years, that has added up to around $1 billion. Thus, Aubrey has a billion reasons to need Chesapeake's wells to perform. As a shareholder, you've got to appreciate that fact. |
|
The "exposé" that was published by Reuters points out that Aubrey borrowed this money from private-equity firms. To them and the people they quoted, that's some kind of a crime. I don't see it that way... People often borrow money to increase the return from their investments. |
|
What does strike me as very interesting about this situation is... none of this was new information. This has all been public for years. But Reuters decides to re-publish this stuff, and all of a sudden, every major news organization is acting like Chesapeake has committed a crime. The press has driven the share price down considerably at a time when the stock is already so cheap you can buy it and literally get most of Chesapeake's natural gas assets for free (as the stock is valued today solely on the basis of its earnings). |
|
How much would you like to bet that there's a PR firm somewhere out there that was paid a handsome free for organizing this story and promoting it? How much would you like to bet that there's a hedge fund out there that wanted to buy Chesapeake stock and needed something to jack up the volume of trading and move the price lower? |
|
I don't know if that's what has happened... But I won't be surprised to find that Chesapeake has a major new shareholder when the reports come out next quarter. |
While Chesapeake shares have fallen in the face of negative headlines, another one of Porter's natural-gas recommendations is soaring... Teekay LNG Partners, the world's third-largest independent owner and operator of liquefied natural gas (LNG) vessels, hit a 52-week high today. Porter recommended Teekay LNG earlier his month as a way to take advantage of global demand for natural gas...
|
You see... the big problem with the natural gas markets isn't that there's too much gas. You really can't have too much energy. People will always consume it, if it's cheap enough. The real problem with the natural gas markets is there's no global distribution. |
|
We have some parts of the world with far too much gas... and some parts of the world with far too little gas. Given the economics, I believe the best and surest way to profit is likely to be from owning the liquefied natural gas (LNG) tankers that will distribute natural gas to markets around the world. There's going to be a huge boom in these ships, which are expensive to build and operate. |
|
Instead of focusing on the gas production companies... I think we should focus on the distribution end – the LNG shipping companies. |
Porter's readers are up 30% on the recommendation since November.
We've been writing about capital-efficient companies a lot in recent Digests... We think these companies will be some of the best performers this year. Capital-efficient companies can raise their prices to combat inflation because consumers love their products. They earn large returns on tangible assets without large capital expenditures... And they pay the excess returns out to shareholders via stock buybacks and dividends.
Coca-Cola is the quintessential example of a capital-efficient business. People love Coke... And they're willing to pay up for it. The company announced earnings this month... Coke's commodity costs (sugar, metal, etc.) soared last year. But gross profit margins only contracted 150 basis points (1.5 percentage points) to 61%. That's because the company was able to raise prices 3% to fight inflation.
Coke is what Dan calls a World Dominating Dividend Grower (WDDG) stock. It's the largest beverage company in the world... And it pays a healthy and increasing dividend (currently 2.7%). We think Dan's WDDGs will soar this year (more so than they already have). Just take a look at today's new highs list... Coke, Abbott Labs, and Altria are all at new highs... And they're all WDDGs.
Despite the great returns our readers make on WDDGs, people still complain about how "boring" this type of investing is. If you feel the same, or you simply want to understand why investing in these companies is such a great way to make money, read today's DailyWealth, written by Dan.
One of the most pervasive fallacies you'll hear about trading options is that "they're too risky."
As our trading expert Jeff Clark frequently explains to his S&A Short Report readers... when done right, trading options on a stock is less risky than buying the stock outright...
|
Options were originally designed as a way to reduce risk. For example, rather than putting up $50,000 to buy 1,000 shares of a stock trading for $50, you can use options and control the same size position with just a fraction of the funds. |
As Jeff says... the reason people think options are so risky – and the most common mistake they make when trying to trade them – is they take positions that are far too big. Rather than buying 10 contracts as a substitute for trading the 1,000 shares they would normally purchase... they only think about the small upfront cost and buy 20 or 30 contracts. Now, they hold a position that is two to three times larger than they would normally take (or worse, more than they can afford).
Knowing how to take most of the risk out of options trading is one of the critical lessons Jeff explains in a series of videos he has recently recorded to teach subscribers his strategy for making big gains in the options market...
Regular Digest readers have heard us highlight Jeff's successes before... But his performance is extraordinary... From March 2010 through the end of 2011 (the timeframe Porter used for our last annual Report Card), Jeff recommended 76 trades. An incredible 56% of them were winners. His average return was 13.1%. (And he held most of those positions for a very short time.)
Yes, Jeff has hot and cold streaks, just like any other trader. But as he's shown over the years… if you stick with his trading, you'll come out far ahead in the end. Just take a look at Jeff's recent track record trading the gold market:
- 100% in two days with Glamis Gold (1st half)
- 118% in 14 days with Glamis Gold (2nd half)
- 39% in four days with GoldCorp
- 78% in three days with Newmont
- 6% in 16 days with streetTRACKERS Gold Trust
- 8.6% in one day with Agnico
- 69.7% in 20 days with GoldCorp
- 47% in 29 days with Kinross Gold
- 100% in 22 days with Seabridge Gold
- 58% in 22 days with New Gold
- 170% in six days with GDX
- 105% in 15 days with EUO
Now, Jeff has completed a series of educational videos that describe how he monitors the stock and options markets to find these kinds of opportunities. In the videos, he walks through several sample trades... details the biggest mistakes most options traders make... explains one of the most important concepts behind mastering options trading... and shares his "all-time favorite chart pattern."
To access the videos, you need to be a subscriber to Jeff's S&A Short Report... And right now, we're offering his service at a large discount. To find out about an S&A Short Report subscription – and learn how to trade options safely and for huge gains – click here...
New 52-week highs (as of 4/26/12): Gold Standard Ventures (GV.V), V.F. Corp. (VFC), Coca-Cola (KO), Abbott Laboratories (ABT), Calpine (CPN), Chart Industries (GTLS), and Altria Group (MO).
In today's mailbag... Wal-Mart comments continue to pour in... Send your feedback to feedback@stansberryresearch.com.
"I come from Asia, a place where corruption was either openly transacted or government approved. When I was young I would envy the western world, seeing how there would be justice done upon corruption. Now much older, I know the whole world is corrupted. There is no difference from city to city. In fact, I don't blame the Walmart Conglomerate, they were not killing someone or burning my house down. They were paying their way to speed up processes, a very common practice in Asia, it's no different if you go to the laundry services and ask for express service that helps you jump the queue. The only difference is that it is unregulated. But regulation basically means that money now goes to the top rather than the minions. Do not for one moment think that your congressmen are justice fighters or people's champion. Hunger for power often leads to some self benefits privy only to policy makers. Is that not corruption then?
"My only wish was that Walmart got pounded alot more so that I could buy." – Paid-up subscriber Kenneth Cheong
"It seems to me that the only difference between bribes to local officials in Mexico and paying for licenses and fees in the US is that the US bureaucracy is more organized and enforcement, potentially more severe. Politicians are the same the world over. They are the greediest form of animal life alive. The more powerful they are the greedier they get." – Paid-up subscriber Henry Ruddy
"Porter, you better have Dan read his email more closely. There is no way he could have construed me as having met Bill Clinton at a rose garden party. See my email in its entirety below. The entire paragraph containing my name is incorrect and must be based on feedback you got from someone else.
"I never said U.S. Law was infallible. However, once passed and in force, we all have an obligation to follow it – not just the laws we like. We don't run red lights because we don't like where they are placed. We obey them or there are consequences. I've taken responsibility for determining right from wrong my entire life. Ethics define each of us. You can't select your 'ethics' like Dan has rationalized in his essay. Bribes are a crime according to our country's laws. I still think Dan needs to 'get a grip' and take responsibility for a flawed characterization of the entire Walmart fiasco.
"You guys have misquoted me and clearly owe me an apology. Read the e-mail again. Dan bragged he read it three times. Retention span must be a problem for Dan. Straighten this out in your newsletter. You can disagree with me if you like, but do it with some class, okay?" – Paid-up subscriber Steve Morrissey
"Golly Dan, You must be a little nervous.
"A) You mixed together my comments with Mr. Morrissey's – whose comment I respect as well as even the pro-Walmat comments that shed light.
"B) Your comment that, "The law is the law" vs. "Wrong is wrong."... I consider these phrases to be often diametrically opposed. Perhaps at one time they were one and the same early on in Anglo-Saxon jurisprudence, but not now. I am appalled at the law in many instances. Yet I am often guided and inspired by right and wrong.
"C) The allusion to meeting President Clinton was meant to highlight how fools can excuse poor behaviour because of their misguided adulation to a poor role model. Not to impress upon you whose elbows I have rubbed. People who have impressed me the most are the ones you will never hear of. Of course Clinton was corrupt! That was the point of why I was upset at my engineer who justified his malfeasance similarly to your justification of Walmart.
"Just because much of Washington breeds and thrives on corruption does not make it an acceptable way of conducting business. Nor did I say 'bribes are crime, blah, blah, blah.' I sympathize with your frustrations, but take a break and read constructive criticism twice. Crime and morality are not the same. Please remember the vast majority of American fools think the rich greedy bondholders of GM should have taken a haircut, regardless of their priority granted to them by the law. Lots of people would say that nobody was hurt by this corruption. Most, sadly, might say it was helpful. I would say otherwise.
"D) I'd be glad to agree to disagree and I love the fact that you guys print this stuff, but I'm not pulling your leg as much as you're not pulling mine! Your 12% Letter is making me more $$ than many other letters I subscribe to. I am even using your ideas for my children's long-term accounts. Best Regards." – Paid-up subscriber Jonathan Mossberg
Ferris comment: In my undue haste to make a point yesterday about our readers' reactions to Wal-Mart, I mistakenly attributed reader feedback about the bribery scandal to the wrong authors. The gentleman who told me to "get a grip" was not the same one who met with President Clinton in the Rose Garden.
I still feel the same way about the Wal-Mart situation. I keep looking for some concrete harm in the Wal-Mart Mexican case other than simple violation of the law. I still wonder if bribes would take place if the law were less hostile toward business. But having a righteous axe to grind doesn't mean I'm allowed to put words in our readers' mouths, so I apologize for mixing up comments and their authors in yesterday's Digest.
Regards,
Sean Goldsmith
New York, New York
April 27, 2012