The meltdown in biotech... Closing a trade for an 89% gain... Curing cancer and improving the heart... 'This will end in tears'... The coffee-can portfolio... How to meet T. Boone Pickens and Rick Rule...
Editor's note: The markets are closed tomorrow for Good Friday, so we will not publish the Digest tomorrow. We'll resume our regular publication schedule on Monday.
The air has come out of the biotech rally...
True Wealth subscribers made a fortune owning the iShares Nasdaq Biotechnology Fund (IBB) over the past two years... But after the recent correction, IBB hit its stop loss. Steve Sjuggerud told subscribers to close the position for an 89% gain. He wrote a DailyWealth essay on his reasons for selling – and why it's important to follow your stops – here.
Biotech is a classic "boom and bust" sector... And it had skyrocketed over the past two years. Fortunately, True Wealth subscribers were along for the ride. As Steve has said many times, "If you catch just one biotech bull market in your lifetime, you may never have to work again." Over the years, the average bull market in biotech has been good for 566% gains.
The sector was in a frenzy... Lots of biotech firms were going public. Stocks were soaring on announcements – good and bad – following Federal Drug Administration (FDA) rulings. The sector was moving higher along with other popular momentum trades – like Tesla, Twitter, and Facebook.
But as we've discussed several times in the Digest, momentum stocks turned the corner. Investors grew tired of paying ever-rising prices for companies already sporting nosebleed valuations.
Yes, biotech could go higher from here. But it's important to mind your stops. And we're happy to close the trade and lock in an 89% gain.
I asked Stansberry's Investment Advisory analyst and biotech expert Dave Lashmet for his thoughts on the sector today. Dave is a securities analyst, so he prefers not to comment on macroeconomic trends. But he did share some information on what he thinks are two of the most promising plays in biotech today...
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As Dave explained, a number of major biotech and Big Pharma companies are chasing the goal of halting or reversing the growth of tumors using artificial antibodies. And while Merck, Genentech, and GlaxoSmithKline are all players, he suspects Bristol-Myers Squibb will come out on top...
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Another expensive stock to keep an eye on, Dave says, is Amgen. The biotech giant has an anti-cholesterol antibody that pulls bad cholesterol out of your blood. When statins came out, doctors found that a 1% reduction in bad cholesterol reduces your risk of heart attack by 1%...
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Amgen has competition from fellow drugmakers Sanofi and Pfizer. Dave believes that eventually, they might split the market. But because Amgen has a one-year head-start on Sanofi and a two-year advantage on Pfizer, the competition won't lower prices. After all, the alternative is death...
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A Canadian value-investing legend is worried...
Prem Watsa is the founder and chairman of insurance company Fairfax Financial. He has made a fortune for himself and for his investors following Warren Buffett's value-investing methods. Since he founded the company in 1985, Fairfax's book value has grown at an average of 22.7% a year. Its share price has increased around 19% a year. That kind of compounding would have turned a $10,000 investment in 1985 into more than $1 million today.
Last week, at Fairfax's annual meeting, Watsa discussed the price-to-earnings ratios for highflying stocks Twitter, Netflix, and Facebook. "There's nothing underlying the value of these companies," Watsa said. "The last time this happened was in the dot-com era. This will end in tears."
Watsa singled out social-networking company Twitter in his annual letter to shareholders last month, calling it an "extraordinary speculation" given its revenue. "If you thought that Twitter was grossly overvalued at $26 per share, it promptly doubled," Watsa said in the letter. "This sort of speculation will end just like the previous tech boom in 1999 to 2000 – very badly!"
In today's DailyWealth, Capital & Crisis editor Chris Mayer shared the opposite method to buying into momentum and fads: the coffee-can portfolio.
Chris wrote about the investing wisdom he has learned from Robert Kirby – a noted value investor in the latter half of the 20th century...
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Porter recently told Digest readers about his conversation with legendary American oil tycoon T. Boone Pickens.
We want to remind you of your opportunity to meet him for yourself in Dallas on May 31. You will have a chance to interact with the legend himself and ask questions that he will personally answer.
And there's more breaking news about our event in Dallas... Friend of S&A and resource-investing legend Rick Rule has agreed to join us. Rick is the founder and CEO of Sprott Global Resource Investments. He says he has identified a rebound in resource markets that he hasn't seen since 2008. The last time this market was this depressed, he generated 16-fold and 21-fold returns. Rick will share this idea with conference attendees.
You can learn about this incredible opportunity in person and hear from many other experts at the Stansberry Society Group conference in Dallas. To learn more, click here.
New 52-week highs (as of 4/16/14): Alcoa (AA), Brookfield Asset Management (BAM), Berkshire Hathaway (BRK), Anheuser-Busch InBev (BUD), C&J Energy Services (CJES), Callon Petroleum (CPE), Comstock Resources (CRK), Dominion Resources (D), Devon Energy (DVN), Eni (E), Enterprise Products Partners (EPD), Freehold Royalties (FRU.TO), Range Resources (RRC), Superior Energy Services (SPN), Targa Resources (TRGP), ProShares Ultra Utilities Fund (UPW), Vocus (VOCS), and Utilities Select Sector SPDR Fund (XLU).
We'll end this week's Digest with a single note of praise... If you'd like to give us something to read over the holiday weekend, send us a note at feedback@stansberryresearch.com.
"I don't throw around praise 'willy-nilly.' If you don't believe me just ask my wife or kids. They would say I'm a grumpy old man. With that being said I wanted to take a moment to tell you that your article about RCII this month was hands-down the best I've ever read in PSIA. It was well researched, provided a concise investment thesis, and best of all was INTERESTING to read. Congratulations on a job well done." – Paid-up subscriber Troy Mills
Regards,
Sean Goldsmith
New York, New York
April 17, 2014
Why the U.S. market could double from here, then crash 80%...
In today's Digest Premium, fund manager Meb Faber discusses a valuation-based investing method he uses that historically outperforms.
He also explains why U.S. stocks could double from today's levels... and then crash...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Why the U.S. market could double from here, then crash 80%...
Editor's note: Today's Digest Premium features more insight from fund manager Meb Faber. Yesterday, Meb explained why you probably have too much money in the U.S. Today, he discusses what the future holds for U.S. stocks...
There is a lot of risk in buying countries or companies that are down big. Buying a basket of stocks helps spread that risk. In any given year, some of the really cheap countries or companies in your basket may do poorly. But on average, using valuation as a fundamental anchor will help balance out the poor performers.
Cambria created an exchange-traded fund (ETF) to invest along these lines. It's called the Cambria Global Value Fund. It's based on a lot of the research we outline in my new book, Shareholder Yield: A Better Approach to Dividend Investing. But instead of investing in different countries based on a market-cap weighting, we use valuation framework as a fundamental anchor.
We take the top 25% of countries in terms of affordability and equally weight those. It ends up being around 11 countries in developed and emerging markets. And if you look across that basket, you're investing in a lot of countries that are consistently the worst of all the geopolitical headlines, like Russia today.
But the geopolitical risk is one of the reasons why these countries are so cheap. We have equal weightings of Greece, Russia, Italy, Spain, Brazil, Hungary, Austria, and other emerging European countries. But that basket of equities is incredibly cheap compared with the rest of the world.
It doesn't matter if you use price-to-sales, price-to-book, cash flow, market cap, GDP... Most valuation metrics tend to say the same thing when something is cheap or when something is expensive.
Our preferred metric is the Shiller CAPE ratio. CAPE stands for the "cyclically adjusted price-to-earnings" ratio... It's the average earnings adjusted for inflation. And what we found – it's not rocket science – is that the more you pay for a market, the worse your future returns are. And the less you pay for a market, the better your future returns are.
The average country value over time is a CAPE of 17. Markets typically top in the 30s and bottom around seven. The highest value we've ever seen in the U.S. was a value of 46 in December 1999... And the lowest value was around five. And the variance in the ratio is based on what investors are willing to pay for stocks at a certain point in time. So there's a wide spectrum of what people are willing to pay.
In the late '90s, people were incredibly excited about stocks... We were in the middle of a giant equity bubble in Internet stocks. People were talking about how you no longer use traditional valuation metrics to value these companies. We know how that turned out.
On the flip side, in depressions, nobody wants to own stocks and nobody is talking about stocks. In 2008-2009, nobody was opening their brokerage statement. It's painful. You're not thinking about buying a third or fourth house... You're probably getting foreclosed on the homes you own. So people pay much less. But it's better to buy when stocks are cheap. The challenge for most people is that these types of valuation metrics play out over years and decades.
Most people are looking for a timing indicator for the next week, month, or quarter... And our strategy isn't useful for that person.
Today, the U.S. stands at a rich valuation of around 25. It's not a bubble. People tend to think stocks are either a screaming buy or in a bubble and about to crash. But the reality is, stocks spend most of the time somewhere in the middle.
Based on its valuation, over a 10-year time horizon, we expect U.S. stocks to return 3%-4% a year. It's not horrific, like in the late '90s when stock returns were projected to be negative. But it's not the 8%-10% returns people have come to expect – and that pension and endowments count on.
Anything can happen in the short run... Just look at last year when stocks were up more than 30%. Mr. Market can go up a good bit more. As an investor, you have to be able to contemplate and comprehend the possibility of U.S. stocks hitting a CAPE ratio of 45. That means stocks would double from here... But that would also be an 80% decline if U.S. stocks hit their low CAPE ratio of five.
Those things have happened in the past, and the only difference is what people were willing to pay.
– Meb Faber
Editor's note: Meb Faber was kind enough to offer his newest book for free to S&A subscribers for the next five days. To get your free copy, click here.
You can also get a free copy of his previous book, Shareholder Yield: A Better Approach to Dividend Investing, here.
Why the U.S. market could double from here, then crash 80%...
In today's Digest Premium, fund manager Meb Faber discusses a valuation-based investing method he uses that historically outperforms.
He also explains why U.S. stocks could double from today's levels... and then crash...
To continue reading, scroll down or click here.
Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)
As of 04/16/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 339.2% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 292.4% | The 12% Letter | Dyson |
| Constellation Brands | STZ | 06/02/11 | 275.5% | Extreme Value | Ferris |
| Ultra Health Care | RXL | 03/17/11 | 215.6% | True Wealth | Sjuggerud |
| Altria | MO | 11/19/08 | 185.2% | The 12% Letter | Dyson |
| McDonald's | MCD | 11/28/06 | 184.0% | The 12% Letter | Dyson |
| Ultra Health Care | RXL | 01/04/12 | 176.1% | True Wealth Sys | Sjuggerud |
| Hershey | HSY | 12/06/07 | 169.7% | SIA | Stansberry |
| Penn Virginia | PVA | 10/01/13 | 149.5% | S&A Resource Rpt | Badiali |
| Fluidigm | FLDM | 08/04/11 | 148.3% | Phase 1 | Curzio |
Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals |
| 2 | Extreme Value | Ferris |
| 3 | The 12% Letter | Dyson |
| 1 | True Wealth | Sjuggerud |
| 1 | True Wealth Sys | Sjuggerud |
| 1 | SIA | Stansberry |
| 1 | S&A Resource Rpt | Badiali |
| 1 | Phase 1 | Curzio |
Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)
| Investment | Sym | Holding Period | Gain | Publication | Editor |
| Seabridge Gold | SA | 4 years, 73 days | 995% | Sjug Conf. | Sjuggerud |
| Rite Aid 8.5% bond | 4 years, 356 days | 773% | True Income | Williams | |
| ATAC Resources | ATC | 313 days | 597% | Phase 1 | Badiali |
| JDS Uniphase | JDSU | 1 year, 266 days | 592% | SIA | Stansberry |
| Silver Wheaton | SLW | 1 year, 185 days | 345% | Resource Rpt | Badiali |
| Jinshan Gold Mines | JIN | 290 days | 339% | Resource Rpt | Badiali |
| Medis Tech | MDTL | 4 years, 110 days | 333% | Diligence | Ferris |
| ID Biomedical | IDBE | 5 years, 38 days | 331% | Diligence | Lashmet |
| Northern Dynasty | NAK | 1 year, 343 days | 322% | Resource Rpt | Badiali |
| Texas Instr. | TXN | 270 days | 301% | SIA | Stansberry |