R.I.P. Ringo

R.I.P. Ringo... Buybacks are a lot of fun, on the way up... American companies have 'levered up' like never before... An idea every Stansberry Research subscriber should take the time to understand...

Editor's note: Porter begins today's Digest with a personal note. You'll find the finance stuff a little further down.

I (Porter) live on a 100-acre farm just outside of the Baltimore Beltway – the eight-lane highway that encircles the city...

To my knowledge, our farm is the largest privately owned contiguous piece of residential real estate closest to the city. It's only 7.2 miles to the Stansberry Research office on North Charles Street.

Besides its location, my farm is also unique because it straddles the Jones Falls, the main river that feeds Baltimore's Inner Harbor. Up here, however, the water isn't polluted. It's spring-fed, and thus a constant 55 degrees year-round.

On cold winter mornings, the valley behind our house fills up with steam, creating beautiful landscapes. In the creek, there are trout... beavers... and egrets. The fields around the creek host bald eagles in the winter. Yes, foxes and coyotes roam in our fields, too.

In the winter, two bald eagles live on our farm

As I'm sure you realize, this is unusual...

It's rare to see such a relatively large and unspoiled piece of ground sit so close to a major East Coast city. How did I end up with such a special piece of ground? Why wasn't this parcel developed decades ago?

In the 1920s, just before the Great Depression, one of Baltimore's most successful steel and banking families rebuilt the manor house here, which dated from the 1740s. They planted a formal English garden, along with groves of apple and pear trees, and imported what at the time were exotic and towering trees – ginkgos. Today, those trees are magnificent. One is almost 60 feet tall.

Later, the family donated the development rights to the Maryland Land Trust, which means this farm can never be subdivided or developed. That's why it was still here when the financial crisis struck in 2009. Prices for unique properties like this farm plummeted.

The matriarch of the family, who was in her 90s, held on as long as she could. But she was dying, proudly and bravely at home, from lung cancer. A mutual friend introduced us to her. She liked us. She liked our boys, who were two and five at the time. And she loved my wife. She decided that we should be the next family to take care of her farm.

Money wasn't a factor in her decision. She had already turned down offers much larger than ours. She wouldn't sell to anyone she didn't believe would live here forever. Her most important question to us was simply, "Will you love this place the way I have?"

We closed the deal in the dining room of the main house, on a warm and beautiful late-July evening...

The matriarch dressed in her finest. She served us champagne. She gave us the original deed from 1703, sealed in museum glass. She gave us a large photo album of black and white pictures, including aerial photos of the last renovations that were done in 1926. She gave us all of the blueprints she had saved... and a box full of other memorabilia of the house – President Eisenhower attended a fundraiser here in the early 1950s.

We, in turn, promised to let her live in the house until she died. She had lived on the farm since 1950. It was right that she spent her last days here. It was all done on a handshake. There was no questioning the integrity or the honor of the other side. It was already known.

She died on September 11, just a few weeks later.

As you would (hopefully) expect, we've honored our other promises to her...

We've kept her existing gardens and built a larger garden in her preferred style around a new pool. We've planted additional groves of apple and pear trees. We've planted cedar trees all along the farm roads, as they were originally placed back in the 1920s. We've added birch, oak, and maple trees to the borders of the fields – more than 500 new trees in all.

We've built miles of five-board wooden fence for paddocks. We brought back chickens, pigs, and cows to the farm – and we kept the previous owners' goats. We've reintroduced wild pheasants to the valley. And we've put about 90 acres back into cultivation – soybeans and corn.

We're steadily repairing and rebuilding the structures. We've renovated the farmhouse and the little "bungalow," which I use as a hunting cabin. We completely rebuilt the manor house, on exactly the same footprint. Next, we will rebuild the barns – there are four major barns and another half dozen smaller ones. We've also added significantly to the acreage, buying an adjacent property that came up for sale before a developer who's building houses on the hillside behind us could scoop it up.

Most important, we've filled these fields with love, children, and dogs, just as the former matriarch wanted...

For my son's 10th birthday last summer, we rented a 100-foot-long, 40-foot-tall waterslide and invited an army of his friends to spend a day here running around like wild banshees. On a smaller scale, that happens almost every weekend.

As for the dogs... This place is heaven on Earth. There are foxes and pheasants to hunt, a stream to play in, and acres and acres of land to run across. For most families, one dog is enough. But not here. Not for us. We had three: a Hungarian bird dog (Ruby), a German shorthaired pointer (Scout), and my wife and my kids' favorite: a huge, lazy, block-headed black English Labrador named Ringo.

The bird dogs mostly follow me around, just waiting for me to take out a gun...

They're smart as hell. They understand everything I say. And they're eager to follow commands – especially when we're hunting. But Ringo was different. Sure, I took him hunting. But he had no idea what was going on. Birds would fly right over his head, and he'd never even blink. He had no instinct whatsoever for hunting. He wouldn't even retrieve tennis balls.

He was slow. He never understood anything I asked him to do and he made it clear he wasn't interested in learning. He wasn't that kind of dog. He'd just lie down on the floor and look at me as if to say, "I'm no show pony, damn it. And I'm too tired, anyway."

Most of the time, he would simply lie on the floor in whatever room my wife and kids were in. He would just sit there, all day if you let him. But if they moved, he would follow, hoping in vain that they would drop something to eat. Then he would lie down again. But he was always watching... just keeping an eye on my wife and the boys.

Ringo was the biggest, dumbest dog I ever met...

He was only good at one thing: loving my wife and kids. He adored them. When they came home, he would hop up and down on his front legs. His tail would wag as fast as it could (which wasn't very fast – it was as big around as my arm) and his eyes would shine. Nothing made Ringo happier (well, besides food).

He would gladly let my boys pile on top of him. They never got too rough for Ringo. He would let them pull his tail and ears – his tail wouldn't stop wagging. Nothing ever bothered him. I never heard him growl. In fact, he never even barked at anyone – not even the UPS guy.

Every night, I put my sons to bed and read to them until they fall asleep...

It is my most treasured time as a parent. My youngest, who is now six, is reading Harry Potter with me. He falls asleep in about 10 minutes. But my oldest, who's now 10, reads more complex books with me. It usually takes him 30 or 40 minutes to fade.

Ringo would always come with us. He would sit on the floor and watch us read. If you looked at him, his tail would wag. Obviously, he didn't know what we were doing. He wasn't following the story. But he did know that I was loving the boys and he knew they loved that time with me. And he 100% approved of that. He tagged along each night just to make sure I was loving them enough.

I make breakfast for the boys in the morning when they get up for school...

I get up around 6:30 a.m. and let the dogs out first. They run out in the front paddock. The bird dogs usually flush out a few birds. And then they do their doggie things. Ringo, however, was all business. He would take care of his personal needs and beeline it back to the house for breakfast.

Around 7 a.m., the boys come down. We sit in the kitchen and eat eggs and bacon or pancakes. We talk about what's happening today in school, what they're looking forward to, or what they're worried about. At 7:30, they go brush their teeth and get on their coats and backpacks. I let the dogs out for five or so minutes. As I put the dishes away, I can watch them in the field in front of the house.

Wednesday morning was just like any other...

We had pancakes. The boys were happy. Smiling. After breakfast, they went up to brush their teeth. I let the dogs out for their second morning break. Ringo was chasing Scout around the circle part of the driveway. I ran upstairs to put my shoes on. And when I came back downstairs two minutes later, both Ruby and Scout were waiting outside the front door as usual. They know the routine. But Ringo was gone.

Ringo had never wandered off by himself before. It wasn't like him. Sometimes, he would follow Ruby on a hunt in the backyard, although never down the driveway. But I wasn't worried. It's a big farm. It's 200 yards down the driveway to the road. There's a huge iron gate and a fence. Besides, Ringo never goes anywhere. He just wants to lie on the floor next to my wife. I hollered for him once, twice. I walked out a little to look down either side of the front of the house. I hollered again. "That's weird," I thought. "He was just here a second ago, and the other dogs are still here..."

The kids had already gotten into the car, so I went to the garage and told them I couldn't find Ringo. I thought I would drive down to the barns and see if he was down there. I pulled out of the garage, then drove to the front of the house to use the circle to turn around and head down to the barns. But that's when I noticed that all of the traffic had stopped on the road in front of our house. I drove down the driveway. I waited as our gate opened. I pulled the car forward through it.

Ringo was lying on his side, about 15 yards past our driveway in the grass...

An older woman wearing glasses was standing in our driveway. She was parked halfway in our driveway and halfway in the road. I got out of my car. She hurried up to me. I could barely understand her. She said she called 911. She was shaking. "He didn't stop," she said. "He just kept on going... He hit the dog. He dragged it."

My sons were in the back seat.

I walked over to Ringo. He didn't move. His tail wasn't wagging. His mouth was open, his tongue was out. His eyes, his jet-black eyes, looked at me, but his head didn't move. "Ringo," I said gently. I touched his shoulder and put my hand on his ribs to see if he was breathing. He didn't move. I waited, kneeling over him. Two or three people had gotten out of their cars. They were crying. I was in shock.

My sons got out of the car. They were crying, too. I told them to get back in the car.

I walked back over to the woman, who was still standing in my driveway, shaking. "Is he all right?" she asked.

"No," I said. "He's dead."

"Oh my God! Oh my God!" she cried. She began sobbing.

"Can you tell me what happened?" I asked.

"Yes... oh my God... oh my God... he's dead... There was a big black SUV. It was coming the other way. I saw the dog come down the driveway. I stopped. I was honking the horn, trying to get him to stop. He didn't. He just hit the dog and kept going... oh my God... oh my God..."

I didn't know what to say...

All I could think of at that moment was that my kids were in the car and we needed to get to school. "No," I realized slowly. "We're not going to school today." I tried to punch the code into the gate box so that I could back the car up and get the boys back into the house. But I couldn't remember the code. My fingers wouldn't work. I tried to think of who I should call to help me, but my mind was blank. I just sat there, stunned for a minute. Then, slowly, I figured out what I had to do.

I got the boys out of the car. We walked together over to Ringo. We knelt at his side. The boys were sobbing. The traffic started to move again. The people who had stopped drove away. It was cold.

I picked up my phone...

I called our farmer, Chuck. I asked him to bring a buggy up to the front gate. "Ringo got hit by a car. He's dead."

"What?" he asked. "Oh no. I'll be right there."

The boys were really crying. They were kneeling beside Ringo's back. My six-year-old didn't really know what was happening. He was crying because his brother was crying. But Traveler, my 10-year-old, knew exactly what had happened. Devastated, he cried so hard he couldn't breathe. He was sobbing. His eyes were bright red. Tears were dripping off his nose and his chin.

We live on a fairly busy street...

Cars drive by all of the time. Several private schools and a college are located nearby. Lots of families and students are going to class at 7:45 a.m. Several of Traveler's classmates drove by. They had played with Ringo many times. They saw us crying. They saw Ringo not moving. They knew what happened.

After a few minutes, Chuck drove up in his tiny white Japanese farm buggy. The gate opened. He came over. He saw the dog. He saw my boys. He didn't say anything. He knew. And I knew what I had to do next. I picked up my phone and called my wife, who's in New York with her mom and her sister on a Christmas shopping trip.

"Andrea, I'm sorry. Ringo got out this morning. Somehow, he got past the fence. He was hit by a car. He's dead."

Andrea started screaming and crying. "No, no, no..."

The boys were getting cold. I motioned for them to get back in the car. Chuck stepped closer to pick up the dog.

I was still on the phone with my wife.

"Honey, I have to help Chuck with Ringo's body. I'll call you right back." She hadn't stopped screaming and sobbing. I hung up.

"Chuck... please make sure he's dead," I said. "If there's any chance, let's take him to the vet."

Chuck looked at me for a second to see if I was serious. But he dutifully put his hands down around the dog's neck. Felt for a pulse or breathing for a minute. He looked back at me, but didn't say anything. He just shook his head.

I got the back legs. Chuck held the front legs. Ringo was a huge dog, more than 100 pounds. It took both of us to lift him into the back of the white buggy. Then, Chuck drove away.

I turned the car around and drove back through the gate...

The boys were in the back, crying. When we got to the house, they climbed out and went inside. I called my wife back. She had calmed down. And that's when it hit me. I fell apart. I kept saying, "I'm sorry." I kept saying, "I don't know how Ringo got through the gate." I kept saying, "He has never gone anywhere by himself before. He's always just waiting at the front door."

She reminded me that it was an accident. That it was no one's fault. "I'm driving home," she told me. "I'll be there soon."

The rest of the day was a blur. Friends came by or sent flowers and food. My sons cried. They told stories about Ringo and dug out his toys and pictures. I called my friend Alex in Miami, who gave us the dog, and told him what happened. I broke down again. It was the first time my sons have ever seen me cry.

When my wife arrived home, she was despondent. Chuck brought us dinner. We sat in the family room after dinner and watch a funny action movie with The Rock. He's our favorite. But something was missing. Someone was missing. A huge black dog wasn't where he should have been... lying on the floor, watching us.

A lot of people probably won't understand how much pain we feel from the loss of our dog Ringo...

A friend of mine once remarked that he had never had a dog that he thought would outlive him. We live on a farm. We see animals die here almost every day. We've lost goats and chickens. We've shot pheasants and slaughtered our cows. We'll soon slaughter our pigs.

But it's not the animal that died Wednesday morning that we're mourning. You see, dogs (and probably other pets, too – I've just always had dogs) aren't just animals. Ringo was a creation and a manifestation of our family's deep and abiding love.

Yes, he was an animal. But he was an animal shaped, molded, and bonded to our family by love. He returned the love we gave him, in every way he could. Mostly by wagging his tail... jumping on his front legs... and watching over our children every day. It's that love that we've lost. It's that love that we're mourning.

The love of a 10-year-old boy for his dog is something sacred

My family tragedy meant I wasn't able to attend the webinar Wednesday night, as we had promised at Stansberry Research...

I sincerely regret that I wasn't able to meet that commitment. As you know if you've been reading for any length of time, I take my commitments to you very seriously. But on Wednesday night, my sons and my wife needed me a lot more. We were really suffering.

Some of you, no doubt, wonder why I would bother with such an explanation. Does any of this really matter? I think it does. My financial publications – and especially the Friday Digest – have always been personal. I write about my opinions, my financial thinking, and what I believe the future holds for financial assets.

I can also tell you that my passion to help investors develop the skills, acquire the knowledge, and get the information they need to be successful is completely personal. If you know me a little better and know a little bit about my life, you're going to understand my company and what we're trying to do for you that much better, too.

In any case... we lost a wonderful dog this week. I thought you would want to know.

Now, about the information you've paid to receive...

I've noticed something that almost all of the highest-flying stocks in this bull market have in common...

They're buying back huge numbers of shares.

Between 2010 and 2016, investment bank Citigroup estimates that U.S. corporations bought back $3 trillion worth of stock (and paid out $2 trillion in dividends). Keep in mind, the S&P 500's total market value in 2010 was roughly $10 trillion. That's a lot of capital that has been plowed back into the stock market, which helps explain why stocks are relatively expensive (and why they've gone up so much).

Here's a good example...

Over the past five or so years, shares of home-improvement chain Home Depot (HD) have been on an incredible run, up more than 300%. That means what was a $70 billion market cap company has become a $210 billion company. But... sales and gross profits have hardly budged. Sales are up about 10% over three years. Same with gross profits.

So... what has changed? Share count. Over the last 10 years, Home Depot has reduced its shares outstanding by 33% – from 1.86 billion to 1.23 billion. When you reduce the denominator by one-third, your earnings per share increase by 50%. When companies buy back stock at the right time, the impact on results for long-term investors can be amazing. (Home Depot bought back more than 10% of its shares in 2009 and more than 6% of its shares in 2015, when prices fell.)

On the other hand, Home Depot's long-term debt has grown from $8 billion in 2009 to more than $22 billion today – an increase of 175%. Gross profit has only gone up 39% in the same period (from $23 billion to $32 billion). It's hard to say exactly how much of Home Depot's buybacks were debt-funded, but it's clear that increasing the company's leverage has played a role. In that sense, these gains are one-time in nature and could cause the company problems in the long run if those debts become more expensive to maintain.

Let me be clear: With earnings of $8 billion a year, I don't expect Home Depot to have any credit problems anytime soon. But remember... to the extent that the company is now far more leveraged, when a recession hits and earnings and cash flows decline, the market's reaction will likely be far more severe.

That's what I want to warn you about...

Across the landscape of American finance, company after company has "levered up," adding trillions in debt to finance share buybacks. That's the single biggest explanation behind the magnitude, breadth, and duration of this bull market. It will also explain the severity of the bear market that will follow. American companies haven't discovered the Holy Grail of finance. The leverage we've added over the past seven years will come back to haunt us.

To help you better understand which companies have bought back shares safely and which have been borrowing a lot of money to finance these purchases (and may come to regret it), I asked my team to build a list of companies that have bought back the most stock over the past five years. And I told them to separate these companies into two groups: the ones that have increased debt the most and the ones that have increased debt the least.

I was happy to see a longtime favorite business, homebuilder NVR (NVR), as the third-best-performing, big-buyback, low-debt business on the list.

Here are the 20 best buyback stocks (ranked by the size of the buyback) that haven't added much debt (or have actually decreased debt outstanding)...

If you want to continue to play the 'Melt Up'...

The companies from this list are probably going to continue to buy back stock without adding to debt. They're likely to continue outperforming the market as a whole. The average five-year return across all of these stocks is 99%. The S&P 500 return for the same period is around 76%.

On the other hand, if you're a gunslinger, if you want the real "action," this next list shows you the 20 stocks that have bought back the most stock over the last five years and have increased their debt the most. These companies are using financial engineering to radically reduce their share count.

It's like throwing gasoline on a fire in a bull market. The average return of these 20 stocks for the last five years is 144%, or roughly double the market's return...

One big caveat...

Stocks in the first list won't necessarily be safe to own during the next bear market. And stocks in the second list won't necessarily collapse. The point is, stocks in the second list have greatly increased their leverage lately. And that means, as a group, they have a lot more financial risk than they did five years ago.

It's especially interesting to see restaurant chains like Brinker International (EAT) and Denny's (DENN) in the second list. These companies have older, weaker franchises that depend on a lot of consumer spending. Leveraging up and buying back a lot of stock might be seen as an incredibly dumb move in the future.

You might even think that these management teams were acting recklessly... or perhaps even fraudulently... in an effort to prop up their share prices and their earnings per share in the face of weakening fundamentals.

Just an idea. Not a conclusion.

One more thing...

As you know, this past Wednesday night, we detailed some of the best information we've ever discovered about the stock market.

It's a robust and logical way to judge whether a company whose stock has fallen on hard times (down 50% or more) is going to "bounce back." When those rebounds occur, the profits are stupendous. But as you know, a lot of turnarounds... don't.

Many years ago, we tried to publish about turnaround situations we thought had a good chance for success. We used a formula that we thought made sense – a new CEO, a published turnaround strategy, and a business model that we admired.

We called the product The Rebound Report. We should have called it The Refund Report. Nobody could stick with it. The variability in the results was too great. Yes, we picked a few big winners. But a majority of these situations didn't work out. The overall results weren't inspiring.

Still, the basic idea never went away. We just needed a better filter to know which companies were most likely to successfully execute a turnaround.

Our top bond analysts, Mike DiBiase and Bryan Beach, found it...

They analyze immense amounts of data each month, assigning a proprietary credit rating to somewhere between 4,000 and 6,000 different credit obligations each quarter. By studying the credit side of the capital structure, they found something that always works. If you haven't taken the time to learn about this "Golden Triangle" idea, I hope you'll set aside an hour this weekend and really study it.

Much like buying distressed corporate bonds, this is an approach that most retail investors don't understand. But it really works. And when I say really works, I mean average returns above 50% a year... and virtually no losing positions. This is the kind of investing that should appeal to everyone. And yet... most investors continue to completely ignore this research. (Maybe we should have called it the "Bitcoin Triangle"!)

Even if you decide not to buy our research using this approach, you should at least understand how it works. This strategy will definitely help you with your own investing if you know how to use it. We just put together a brand-new presentation showing you everything you need to know to get started. Watch it here.

New 52-week highs (as of 12/7/17): Arch Coal (ARCH), Boeing (BA), CBRE Group (CBG), GrubHub (GRUB), Sysco (SYY), short position in Duluth (DLTH), and a short position in Sprint (S).

In today's mailbag, more on this week's "Golden Triangle" event... and several longtime subscribers come to our defense. Send your notes to feedback@stansberryresearch.com. As always, we can't respond to every e-mail (and we're unable to give individual investment advice), but we read them all.

"Porter and gang, I appreciated the webinar Wednesday night! Sorry to hear about your family's black lab! I've had three of them in my life, all were great pets. I hated it when I lost them, mostly from old age. Some of your readers are simply insensitive to everything but their own feelings. Unfortunately, these are the ones that do not have stops in place, position size, and diversification! Damn fools!

"I am a subscriber of Stansberry's Credit Opportunities and very much enjoyed the webinar. Mike and Bryan did an excellent job! I purchased both of their recommendations today and yes, I used position sizing. Oh by the way, I have eight bond positions currently, closed three others out per your recommendation, two were very profitable and one I broke even on. The current eight are doing fine. Keep up the great work!" – Paid-up Stansberry Alliance member Bill L.

"Dear Porter and friends at Stansberry Research, you did it again... you stun your readers with a new way to make money based on creative data analysis, and surprise your customers by including your research in their existing subscription. Thank you so much!

"Very sad to read about Ringo's accident and death, right before your boys' eyes. It must have been a terrible experience for them, resulting in a woeful day in your family. My thoughts are with you." – Paid-up Stansberry Alliance member Henk van der Wijk

"Porter, I have had a number of Labs and I know how it feels to lose one. Heartbreaking... my advice is go get a pup ASAP. Fall in love again. By the way, I really enjoy learning from all of your contributors. Two years ago I couldn't even spell 'stocks' or 'bonds.' My accounts are up over 17%. Thanks to all of you for your time and effort you put into your work. I'm a very satisfied Alliance member. Merry Christmas." – Paid-up Stansberry Alliance member Charlie Reed

"I sincerely feel for your loss, as I have 2 labs myself. They are the loves of my life, as well as my family's. This may not ease the pain, but I have been reading your newsletter for years, and it has allowed me to make substantial profits, which I use to help abused dogs in Detroit. I truly hope that this message brings you some comfort." – Paid-up subscriber John Boccaccio

"Porter, I couldn't read last night's response to my wife without crying. What a terrible tragedy for your family to go through. What is wrong with these subscribers? Complaints about a few positions not going the way Chris C. wants or vitriol from Larry about the Truth. Please! You are the definition of truth and integrity, and I am very grateful for the opportunity to get access to such excellent research. My very best regards." – Paid-up subscriber Murray House

"I just wanted to extend my condolences to Porter upon the death of his family's Lab. I'm 72, and except for law school and the military have had dogs (which are incredible judges of human character) since I was 12. Losing a dog is losing a member of your family, and is just as painful (maybe more so for children).

"I also wanted to comment upon the subscriber's email suggesting it was all a lie on Porter's part. I fear that is symptomatic of the complete loss of honesty in our public life. When virtually everyone in a position of power routinely lies, as seems to be the case today, it's hardly surprising that people react by suspecting everyone of doing the same. Until we both give, and demand, complete honesty, we won't be able to reclaim the public square for rational debate. Best regards." – Paid-up subscriber Steve McLaughlin

"My deepest sympathy and respect Porter. Dogs have been in my life for years. And when Chocolate Lab Shadow had to be put down from cancer after 13 years I cried at age 70 as much as I have ever cried in my life. I am crying now for you, Ringo, and your family.

"Dogs are so very special and do become such wonderful family members. I live near you in Pa. in a small hamlet with a 35-mph speed limit. But drivers blow through here at 50 or more all the time. So my new dog Liddy is on leash all the time because of my fear for what you experienced.

"Heal well and get a new dog when the time is right for the family. Took me a year to replace Shadow. But now I have my new best friend Liddy as a rescue. Such a wonderful feeling to find a dog in need of love from a bad situation and take the plunge. Rewarding!

"And a suggestion. I hope you have a wonderful picture of Ringo. When the time is right have it framed and mounted in a prominent place in your home. Then the family can stop by once in a while and tell Ringo how much he/she is missed and loved. This approach has helped with my mother, father and Shadow." – Paid-up subscriber Dave Slear

Porter comment: Thank you all so much for your thoughtful notes. I'm humbled by your kindness and loyalty.

Regards,

Porter Stansberry
Baltimore, Maryland
December 8, 2017