Sins of omission... Yesterday Apple, today shipping?!... At Hong Kong Mines & Money... The China question... Chanos: China could see "zero growth"...
In a Stansberry Radio podcast interview last week, Porter asked me (Dan Ferris) about my greatest sins of omission – stocks I'd failed to recommend which went on to be huge winners. I immediately named McDonald's.
I considered recommending the World Dominating fast-food chain to my Extreme Value subscribers in 2003, when it traded for around $13 a share. Back then, it operated more than 30,000 locations around the world. The share price was down because it was engaged in "burger wars" with its then-No. 2 rival, Burger King. They were both trying to outdo each other with their value menus. Investors thought that would forever define the industry. (It didn't… Burger King is now No. 3, behind Wendy's.)
But I didn't recommend shares… At the time, I was more of a hard-asset buyer, trying to find companies that owned big stakes in land and other assets whose values exceeded their market prices. I hadn't really learned about investing in iconic brands yet.
It's too bad… The stock trades for a little less than $100 today and has continued to raise its dividend at double-digit rates. [Note: Tom Dyson – who wrote The 12% Letter before 2010 – did recommend McDonald's in 2006. Readers who followed his advice are up 160% today.]
To listen to my full Stansberry Radio appearance, click here.
Another big sin of omission I didn't mention is Apple. The stock traded for less than $20 a share in 2002 and 2003. I remember considering the stock and thinking something like, "Those guys are pretty smart..." then moving on.
The stock now trades for nearly $600 a share. Accounting for stock splits, Apple is a 60-bagger since 2003. You don't get many chances to make 60 times your money in nine years. I don't mind that it seems utterly obvious in retrospect. All huge winners share that characteristic. What irks me is that I didn't take a deeper look at it back then. Instead, I dismissed it as a "technology play." I failed to see what it really was… a great consumer brand with a fanatical following, run by one of the most ambitious, brilliant men of our time.
So… It's fair to ask, "What sin of omission am I staring at today?" Of course, that's really impossible to say. (If I knew… I wouldn't overlook it.) But if I had to guess, I would say shipping stocks… the maritime carriers that haul goods around the world.
Not even the biggest shipping stocks qualify as World Dominators… These are commodity businesses with zero potential for anything similar to Apple-like brand recognition. And the sector as a whole swings between periods of wild booms and busts. The downdrafts in shipping can be brutal... but they can also set up rapid, triple-digit gains.
We've mentioned Frontline (FRO) in the Digest before. The $600 million shipping company has been as high as $25.09 a share and as low as $2.52… in just the last year. It hit its most recent bottom last fall. Today, it's in the mid-$7 range, about 200% up from its October low.
Despite FRO's recent improvement, the industry still looks like a "bust"… It suffers from a huge glut in shipping capacity. Add to that, investors are fearful China's slowing economy has yet to fully unleash its devastation on the commodity world (which would be awful for shippers – companies that make their money hauling raw materials).
But times like these are when you're supposed to buy commodity businesses... when they're dirt-cheap and buying them seems ludicrous.
I started asking my research partner, Mike Barrett, about shipping stocks a few months ago. None have been attractive enough to recommend. Many (like FRO) have soared in share price since we started looking… but some still trade at big discounts to book value and remain in our sights. For now, we're still looking...
My Digest co-editor Sean Goldsmith is in Hong Kong this week with our staff geologist and natural resource expert, Matt Badiali, covering the Mines and Money conference. The following bullets are Sean's dispatch for today…
Most of the mining professionals here believe the Chinese economy is slowing, a trend we've been following for years…
China has spent the past three decades building a colossal economy of exports – selling cheap goods to the West... making China a huge player in the global commodities market. The country had a seemingly insatiable appetite for the raw materials needed to manufacture those exports. Chinese demand has driven all the commodity markets higher, from wine to real estate.
But recently, demand for China's exports has softened… The mining guys are worried that if China scales back its buying of raw materials, there won't be anyone to buy their precious metals and oil. That would cause prices to fall...
We discussed China's slowing growth in the June 17 Digest…
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[China's boom] has all been fueled by debt and fixed-asset investments (land, buildings, equipment, and machinery). Consider just a few of these facts... |
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Fixed-asset investment remains greater than 50% of GDP in China, for the 12th year in a row. No other country has ever had more than nine years of this kind of sustained fixed-asset investment. |
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In the first five months of 2011, fixed-asset investment grew by 25.8% according to China's National Bureau of Statistics. That's $1.39 trillion worth of investment. |
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Jim Chanos, the famed short seller, says China is currently building 30 billion square feet of commercial real estate. That is enough to provide every person in China with a five-square-foot cubicle. |
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Jeremy Grantham, one of the world's most astute investors, points out that China has been purchasing gigantic quantities of raw materials. The scale of these purchases makes them impossible to sustain. China makes up 9.4% of the world's economy, but it is currently consuming 53% of the world's cement, 47% of the world's iron ore, and 46.9% of its coal. |
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A massive increase in China's domestic debt fueled this investment. In 2010, for example, Chinese banks extended $55 billion in loans – up 95% from the year before. Now, banking regulators are increasing reserve requirements, greatly reducing the amount of available credit. In May, lending was down 25% versus last year. |
To top his previous bearish statements, Chanos recently told Bloomberg TV he thought China could experience "zero growth." Mind you… China recently scaled back its official outlook for economic growth… lowering its gross domestic product (GDP) forecast to 7.5% from 8%. Chanos explained his view…
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A lot of people are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30%-40% of GDP and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after-write-off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero. |
New 52-week highs (as of 3/18/12): JPMorgan Chase warrants (JPM-WT), ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), Westport Innovations (WPRT), Anheuser-Busch InBev (BUD), Abbott Labs (ABT), Exact Sciences (EXAS), Chart Industries (GTLS), BLADEX (BLX), Clean Energy Fuels (CLNE), and Philip Morris International (PM).
What investments wouldn't you touch with a 10-foot pole today? And what are the safest investments you can name? We'd love to hear from lots of folks about this one, so please keep your notes short. If enough readers answer, we'll let you know what everyone loves and hates in the market right now. Write us at feedback@stansberryresearch.com.
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"Not so long ago you put up a chart of FRO and talked about the cyclical nature of the shipping industry. I immediately looked as some charts did some research and sold two $5 puts for $0.15 a share. I was hoping to get put into the stock and did. At the time, the stock was just under $5 a share. And today, it is up over $8 a share. I plan to sell calls on this stock Monday morning. Obviously I'm not going to make a fortune on 200 stocks, but with those kinds of gains who can complain. Also, I'm learning how to use options to make easy money, my education is making me money. Thank you for teaching. I'm open to learning. Thank you for the Digest and all the fantastic newsletters!" – Paid-up subscriber Matt Dragon
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Porter comment: Ah, the tender mercy and grace of our dear subscribers... Just when I thought I'd seen all the greed, avarice, and total self-absorption that mankind had to offer... a stunning, new low bar is established.
It is, at least, a novel first. In all my life, just about the only character flaw no one has accused me of is abusing drugs.
Rest assured, dear friends, I am not addicted to painkillers. Nor have I been bamboozled by my surgeons – who have been incredibly humble and cautious in the treatment (and with their prescription pads).
I require about another four weeks of rest to heal. And I expect a full recovery… Thanks for asking.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Hong Kong
March 20, 2012