Record Snowfall in Baltimore
Record snowfall in Baltimore... Porter's 'no-risk' investment hits a new all-time high... How to prepare your portfolio for whatever comes next... A 'disappointed subscriber' responds... A new 'can't-miss' essay from P.J...
Editor's note: The race to succeed President Obama is starting to get serious... with the Iowa caucuses and New Hampshire primaries only days away.
And when politicians "get serious"... that's when we're happiest to hear from P.J. O'Rourke.
The best-selling humorist – and newest Stansberry Research contributing writer – is preparing a series of essays on the leading presidential candidates. We'll be publishing the series over the next week, leading up to the New Hampshire primary on February 9.
We ran P.J.'s essay on Bernie Sanders last Thursday. At the bottom of today's Digest, he covers Democratic front-runner Hillary Clinton...
According to preliminary measurements, Winter Storm Jonas dropped 29.2 inches on our Baltimore offices over the weekend (though many areas got even more). That makes it our largest winter storm on record.
Many streets remain clogged with snow, and most of those that have been plowed are open to just a single lane of traffic. It will likely be another day or two before our offices can reopen.
Unfortunately, this means our customer service department remains closed. If you have customer service needs... please bear with us until we can dig out our call center.
In the meantime, we're doing our best to publish on schedule with as few disruptions as possible. We should be running at full capacity before the end of the week. We appreciate your patience during this time.
We wrote it... Did you buy it?
So far, investors who bought [this business] way back in 2006 – just before the worst financial Armageddon of our lifetimes – have already made nearly 200% on their money. I'm confident that based on its current share price, similar (or even superior) returns are currently available to any investor wise enough and patient enough to buy the stock today.
There's essentially no risk to this investment at this price, given [this company's] brand, locations, price point, margins, and capital efficiency. So... if you're looking to protect your wealth during a financial crisis (you should be), look no further than the oldest recommendations still sitting in our Top 10 list. These types of companies are a great way to get rich, no matter what happens to the economy or to the stock market.
Longtime readers know Porter was referring to fast-food giant McDonald's (MCD).
In that Friday's Digest, Porter noted that most investors believed McDonald's shares were expensive. But most investors focus on earnings. And MCD's share price was an expensive-looking 20 times its earnings per share.
But earnings – as reported under "generally accepted accounting principles," or GAAP – can be misleading. They include all kinds of adjustments that don't really have anything to do with how much cash a company is generating.
That's why Porter and his team focus on earnings before interest, taxes, depreciation, and amortization – a number much closer to the actual cash coming in the door. By that measure, it was trading for just 11 times "EBITDA" – a deal for a high-quality company like MCD.
McDonald's had suffered under the leadership of a bad CEO for several years (he had recently been replaced), Porter noted. That's why McDonald's revenues slowed and declined a bit.
But Porter and his team knew something about MCD that most of Wall Street didn't... (or at least didn't care about). McDonald's was one of a relatively small number of special businesses we call "capital efficient." These are companies that generate tons of cash, but require very little to maintain and grow their business. With all those excess profits, capital-efficient business often reward shareholders with healthy dividends or by maintaining generous stock-buyback programs.
Last year, its gross margins were almost 40% and its operating margins were an incredible 28% on sales of nearly $28 billion. And that was a "bad" year.
Although GAAP accounting only credits McDonald's with earning $4.7 billion, the company actually produced 42% more cash from operations and was able to return more than $6 billion to its shareholders.
Porter explained that despite the company's poor recent performance, shareholders had been richly rewarded. Sooner or later, McDonald's new CEO would return the company to growth. And when he does, investors would do even better...
Incredibly, over the last three years (all of which came during the previous CEO's reign), McDonald's was able to return more than $15 billion to its investors via dividends and share buybacks... without growing. Even at this reduced pace, McDonald's shareholders will receive capital returns (via dividends and buybacks) equal to the entire value of the company today in about 17 years.
Of course, it won't actually take that long. The new management team will reboot the company's franchise. Perhaps it will buy growing burger chain Shake Shack, similar to its previous stake in burrito chain Chipotle. Or maybe it will create some new product or promotion that takes off. Brands like McDonald's don't just go away. They come back. There's a big growth spurt at least once a decade. And when that happens, these cash distributions will soar.
This morning, McDonald's announced better-than-expected quarterly results. The company reported same-restaurant sales in the U.S. grew 5.7% last quarter, far more than the 2.7% analysts expected.
What was behind the big jump in growth?
It turns out one of the biggest drivers was the company's new "all-day breakfast" promotion...
All-day breakfast was just introduced in October, but has already been a huge hit with customers. As Barclays senior restaurant analyst Jeffrey Bernstein told financial-news network CNBC, "People can't get enough of the Egg McMuffins in the afternoons and the evenings."
Morningstar Global senior restaurant analyst R.J. Hottovy went even further, noting that it's a great sign for the company's future under its new management team...
I think the key takeaway with the all-day breakfast is the fact they were able to roll it out in a matter of six months. That wasn't something we saw under previous leadership, and I think that bodes well for a lot of the new initiatives.
It's still early in the new CEO's tenure, but it appears Porter's prediction is already coming true...
Shares of MCD hit a new all-time high today. Readers who took Porter's advice last April are already up nearly 30%.
Kudos to Porter for the great call.
Regular Digest readers know keeping a portion of your portfolio in the highest-quality capital-efficient stocks is a cornerstone of Porter's "bear-market lifeboat."
Why is that? Why not sell all your stocks and go entirely to cash? Or better yet, why not actively short dozens of stocks?
The answer, as we've discussed, is because no one can predict exactly when a bear market will begin... and more important, stocks like McDonald's can actually perform well despite a bear market.
Since the broad market peaked last July, the S&P 500 has lost more than 10%. Meanwhile, shares of MCD are up more than 23%.
Even since the recent November highs, McDonald's has done well... Shares are up more than 8%, versus an 8% loss for the S&P 500.
This is just one recent example... But the point is, we don't want to preemptively sell a great business like McDonald's when it's paying us dividends and is likely to weather the next bear market, whenever it arrives.
Of course, owning high-quality stocks is just one part of a proper bear-market plan. We also recommend owning plenty of cash (and gold), "hedging" your portfolio, and taking advantage of distressed opportunities and "special situations" when they arise.
As Porter explained in the January 15 Digest, we're putting all of these recommendations together in one place for the first time, in our 2016 Bear Market Survival Guide...
Our team is going to spend the next seven weeks building out a "bear market" lifeboat. Over the next seven Fridays, we'll publish one module of this information. This will teach you, step by step, exactly how to position your portfolio for the coming bear market.
Each week, we'll send you an entire report telling you everything we know about each of the steps we recommend. (There's nothing else you will have to buy to prepare your portfolio for this bear market.)
Last Friday, we published the first of these modules: "How to Raise Cash, How to
Safeguard It, and How to Hedge It With Gold."
It details why holding cash is so critical in a bear market, and shows the absolute best and safest ways to hold it.
It also explains why every investor should hedge his cash position with gold, and details the four forms of gold that are most important to hold.
Again, we'll be publishing these reports each Friday for six more weeks. To learn more – and get instant access to last week's module and be among the first to receive Module 2 this Friday – click here.
New 52-week highs (as of 1/22/16): none.
In today's mailbag, a subscriber responds to Thursday's Digest. What's on your mind? Let us know at feedback@stansberryresearch.com.
"Writing in to express my gratitude. Thank you so much for addressing my question about how to deal with a put when the underlying stock decreases drastically in price. I wanted to let you how much I appreciate all of the information you have provided about options over the course of the past week.
"I have two jobs, one of which is working nights in a fine dining establishment. The webinar with 'Doc' was scheduled on one of my work nights. I wanted to see the webinar so badly that I brought my computer with me to the restaurant and hid it downstairs where we keep the recycling. I jumped on our company wifi and used Quicktime to record my screen and the audio. I snuck down a couple times during service to see if you guys were still taking questions etc. I've already listened to the saved webinar twice now, and I'll keep the files I created on my hard-drive for future reference. I really do appreciate the information you are providing. I know Porter always says 'there is no teaching, only learning'... I'm trying hard.
"That being said, thanks again for the info on getting out of a put, but I think the topic needs more coverage. I understand the idea of position sizing and using TSL's like with any other position, but in terms of 'buying back the put you sold,' I'm confused. Can you please explain how exactly one would do this and possibly provide examples with associated numbers?
"You always do a great job of explaining. I think your subscribers would really appreciate it as well. As you said, my question is one that you get a lot. Thanks again!" – Paid-up subscriber R.V.
Brill comment: Thanks for writing back, R.V. We're glad we could be of service.
If we understand your question correctly, you're asking about the logistics of actually executing the trade. The steps required will vary depending on your broker, but opening and closing options trades aren't that different from opening and closing a normal stock trade.
As you likely know, when you want to open a stock trade, you must submit a "buy" order to purchase the stock. Similarly, when you want to open an options trade by buying a put or call option, you must submit a "buy, to open" order. In either situation, your broker will charge you a small commission to carry out the trade. These charges also vary depending on your broker.
When you want to close those trades, you simply submit a "sell" order (for stocks) or a "sell, to close" order (for options). And again, your broker will charge you a commission.
An options-selling trade works the same way, only instead of opening the trade by submitting a "buy, to open" order, you would submit a "sell, to open" order. You would then close the trade – in the Microsoft example, you would buy back the put you sold – by submitting a "buy, to close" order.
Those are the basics, but rest assured... Doc covers all of this and more in his Retirement Trader service.
Unlike some other advisories, Doc doesn't just provide trade recommendations... He provides a true education... including everything you need to know to set up your account and execute the trades properly, even if you're a total novice.
Again, you can learn more – and see a live, step-by-step demonstration – right here.
Regards,
Justin Brill
Baltimore, Maryland
January 25, 2016
What Will the 2016 Presidential Election Mean to Business, Investors, and the American Economy?
Hillary: The Crone in Crony Capitalism
To people who believe in capitalism, the Clintons can seem puzzling.
They obviously aren't against making money. A speech by Bill costs like sin. (Fair comparison, since between 2001 and 2012, Bill's speaking fees totaled almost three times the $39.2 million cost of investigating him for his Whitewater imbroglio.)
But putting aside such long-ago ventures as the failed real estate development and Hillary's post-dated cattle trades, the Clintons aren't entrepreneurial. Their money comes from "crony capitalism."
A lot of rich people support Hillary. They understand crony capitalism, where what matters isn't hard work, entrepreneurship, investment, or innovation. What matters is political power and being "friends" with people who have it. The way to get rich is by gaming the political system or being paid to know how to game it.
Crony capitalists are like trust-fund babies, except they made the baby by screwing the public.
Meanwhile, for those who aren't Hillary insiders, her run for president isn't a real campaign. It's a bag of wishful thinking. An old bag of wishful thinking, if you will.
Hillary supporters think that if they get another Clinton into the White House, they'll get another "Clinton Era" – a fast-growing economy, a relatively peaceful world, some measure of bipartisan government cooperation, and a bunch of juicy scandals.
With Hillary, they'll get the scandals. But the 1990s Clinton Era was, in fact, a legacy of 12 years of Ronald Reagan and George H.W. Bush.
Hillary's legacy is eight years of Barack Obama. People think a Clinton is a lucky rabbit's foot. They forget that this foot is attached to a dead rabbit – the Obama administration.
Hillary also lacks Bill's charm, his persuasiveness, his willingness to "triangulate" policy issues, and... most of all... his "Teflon." Everything she does wrong sticks to her like dried egg yolk on last week's breakfast plate. (In fairness, she also lacks Bill's libido. Thank goodness.)
She's a weak candidate. But in 2016, being a weak candidate – as opposed to being a hopeless one – might be all that's needed.
Hillary's campaign platform is so vague that it might as well have been concocted by my daughter, a high school senior. I mean, reading Hillary's platform is like listening to my daughter when I ask where she's going and what she's going to do on Saturday night.
That said, Hillary was prescient in focusing her campaign on economic issues. Her website is titled: "A Plan to Raise American Incomes."
The plan, however, turns out to be nothing but giving more political power to Hillary.
Under the subhead "Strong Growth," we see "Hillary will invest..."
(Note that politicians never spend our money any more, they invest it. They've invested a lot of it. And they've been investing for a long time. These must be bad investments – or everybody in America would be rich by now.)
"Hillary will invest in infrastructure, clean energy, and scientific... research to create jobs..."
You can grow jobs in a petri dish?
"Infrastructure" could mean a much-needed repaving of I-95. Or it could mean a six-lane, 216-mile-long suspension bridge between the Hamptons on Long Island (where the Clintons like to fundraise) and Martha's Vineyard (where they like to vacation).
Clean energy? Maybe she'll build eco-friendly natural gas pipelines. Or maybe she'll re-fund Solyndra, the bankrupt Obama stimulus-plan scam to stick solar panels where the sun never shines.
Hillary doesn't pause to explain, forging ahead to "Provide Tax Relief for Families."
(Since Hillary has no plan to cut government spending, providing tax relief for some families means inflicting tax suffering on others. But never mind that.)
She offers just two policy proposals. First, "a tax cut of up to $2,500 per student to deal with college costs." Great! That covers 15% of my daughter's tuition, assuming she goes to an in-state public university.
Second, "cutting taxes for businesses that share profits with their employees." Businesses already do that, Hillary. It's called a payroll. And for your information – as someone whose entire time in the private sector was a couple of years as a lawyer defending chicken thieves in Arkansas – businesses have to meet that payroll whether they're making profits or not.
"Unleash Small Business Growth." Those are big words from a candidate in a political party that has been tightening the collar on business since 1932.
Hillary will "expand access to capital, provide tax relief, cut red tape, and help small businesses bring their goods to new markets." When President Obama did that, it was called Solyndra.
"Create a New College Compact." Here we go again with the "investing" – $350 billion for state university tuitions. My daughter will be going to college for free after all. And she'll get a government bonus when she's done because, according to the National Center for Education Statistics, total spending by all public institutions of higher learning is about $310 billion.
Free college will save me $17,000, at the price of increasing my income tax by – let me take a wild guess here – $17,000.
Or maybe, somehow, college will still cost money. Because the next thing Hillary says is that she'll "cut interest rates on student loans."
Like Bernie Sanders, Hillary can't understand why student loans have higher interest rates than mortgages or car loans. When did collateral become a hard concept to grasp? If my daughter doesn't pay back her student loans, will a repo man come and take back her bachelor's degree in gender studies (with a minor in post-feminist film criticism)?
On and on Hillary natters...
Raise the minimum wage to $12 an hour. A bargain compared with the $15 Bernie Sanders wants us to pay the kid who, when we say, "Cheeseburger, fries, and a Coke," looks at us as if we'd asked him to do the Black-Scholes formula calculation on McDonald's stock futures.
Hillary's going to close the "carried interest" loophole that allows people who do the hard work of hedging investment risks to treat part of their income as capital gains.
It's not a "loophole," Hillary. It's in the tax code. It's a law. And you've been known to sail pretty close to the law yourself.
Then, when our eyes are glazing over and we're nearly lulled to sleep by Hillary's dull, predictable liberal boilerplate, out pops the monster in the box!
"It's time to push back against the forces of 'quarterly capitalism' and boom and bust cycles on Wall Street... We need [to]... address the rising influence of the kinds of so-called 'activist' shareholders that focus on short-term profits... tackle dangerous risks in the financial sector... empower tough, independent regulators, and prosecute individuals and firms..."
Suddenly, Hillary is issuing a manifesto for Central Planning – the evil that, for 100 years, has destroyed every economy where it has been tried.
Central Planning means giving all the power to the government. And the head of that government will be Hillary.
Central planning is a crony capitalist's dream come true.
So what a Hillary presidency comes down to is that you'll do really well financially – if you donated enough to Hillary's presidential campaign.
Regards,
P.J. O'Rourke
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