The most valuable asset you can own... What's so great about Apple products?... Portrait of a massive wealth generator... The stock market's 300-pound bouncer... Steve's high-yield bond play... Get paid 'more than you deserve'... Readers chime in on Peak Oil...
As the editor of Extreme Value, S&A's only service solely dedicated to value investing, I (Dan Ferris) have always been curious about the answer to one question: "What's the most valuable type of business or asset you can own?"
Attempting to answer this question quickly led me to the conclusion that intangible assets are far more valuable than tangible ones. Take a simple example. Apple is the most valuable public company in the world. Why? Is it because its products can be melted down and sold for $1,000? No. Apple's wares are the most valuable consumer products in the world because of the experience, relationships, and plain-old smarts of the folks who create them.
On top of all that... Apple has created an allure around its brand that allows it to charge premium prices. It designs products with human desires and feelings in mind. Other types of MP3 music players, smartphones, and tablet computers cost a lot less and do everything Apple's do. But people are willing to pay more because they like the feeling Apple products give them.
Quite simply, Apple products make them feel cool. And "feeling cool" turns out to be worth quite a lot. In the last four quarters, Apple generated more than $45 billion of free cash flow.
So... the most valuable type of asset – and the best vehicle for compounding wealth at high rates of return for a long, long time – is a business that sells a highly valuable and desirable intangible.
And I've found just such a company for my Extreme Value subscribers...
In the September issue of Extreme Value (due out this Friday)... I will recommend one of the world's truly great businesses. I've been watching this company for years. And it had always been too expensive to recommend, until now...
It's not Apple… But like Apple, its business is built around knowledge and relationships. Without giving too much away… here's a little taste of the wealth-generating power of this business...
It consistently generates 30%-plus returns on capital (adjusted for excess cash)...
It gushes free cash flow and requires little reinvestment to keep it growing at a double-digit annual rate...
It has raised its dividend every year for almost two decades. For the last 10 years, the dividend has grown more than 20% a year...
It has no debt and more than $1 billion in cash...
Employee compensation is uniquely structured to inspire great performance... and it works...
In short, this is my dream business. If I could only own one business for the rest of my life, this might be it.
The last thing I expected to do this month in Extreme Value was recommend a new stock. I'm insanely picky about adding new stocks to the portfolio. The back page of Extreme Value is like the most exclusive club on the block. And I'm the 300-pound bouncer out front with strict orders to keep out the riff-raff. I've only recommended two stocks in Extreme Value all year.
This company is one of the few that can make it past the bouncer. This one-of-a-kind company dominates its industry in two important ways that will hold the competition at bay and keep it in the No. 1 spot for a long time.
It's one of the greatest wealth-generators on the planet… growing shareholder net worth at more than 17% a year for a decade. It generates almost $3 of market cap for every $1 of earnings it has retained during that time. It's like a bank account that safely triples your money every 10 years.
And the price is finally right. This business normally trades at sky-high earnings multiples because everyone knows it's highly valuable. But now, investors have become skeptical about the global economy... the 2012 presidential election... rising taxes... the European crisis... and China's economic slowdown...
So the valuation has fallen to its lowest level in 15 years. Investors don't understand how none of this matters. This business will seem like the greatest bargain on Earth in another couple years.
If you want to get past the red velvet rope and learn more about the wonderful wealth-compounding machine I just described, try a subscription to Extreme Value here. (It won't take you to a long promotional video.)
If you don't like Extreme Value within three months of signing up, you'll get a refund, no questions asked. We want you to be happy with our work. That's the only way we'll do business.
I managed to land squarely on the home page of Barron's website this morning. It's flattering to be recognized by the world's biggest financial magazine... I spoke with a reporter last week about some of my work in Extreme Value and The 12% Letter. Barron's posted the Q&A as an exclusive online feature. You have to be a Barron's subscriber to read the interview. You can find it here.
In his March 2012 issue of True Wealth, Steve Sjuggerud told readers why he expected high-yield bonds to soar this year... In short, he believed the higher-yields these bonds pay would be irresistible for money managers looking for yield in a world of zero-percent interest rates.
And as Steve pointed out, high-yield (or "junk") bonds were paying a high interest rate compared to the risk. From True Wealth…
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Over the last 25 years, the total returns on junk bonds have kept up with the total returns on stocks – but with half the risk (half the volatility). |
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There are times when it's dangerous to buy "junk" bonds. But right now is the OPPOSITE of that. Right now is actually a fantastic time to buy them... Here's why: |
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You are getting paid way more in interest in junk bonds today than you "deserve" to get, relative to the amount of risk you are taking. This situation won't last. |
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Specifically... junk bonds are currently paying about 8% interest. Ten-year Treasury bonds are paying about 2%. So junk bonds are paying an enormous 6% interest "spread" over Treasurys. |
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The spread over Treasurys has been this high or higher only three times in the past: 1991, 2002, and 2009. Every time, high-yield bond prices absolutely soared in the following years. Take a look: |
As you can see in the chart above, high-yield bonds (black line) soared the past three times their spread over Treasurys (gray line) was so high. But in each of those past cases, the default rate on the bonds was more than 10%.
Today, the default rate on high-yield bonds is around 1.5%. "In short, high-yield bonds are priced as if the world is ending (as if the default rate were 10%) – but the world isn't ending (the default rate is near 1.5%)," Steve concluded. "This is a ridiculous opportunity."
Steve recommended shares of the Guggenheim High Yield Corporate Bond Fund (BSFJ) to take advantage of the opportunity. Shares of the fund hit a 52-week high last Friday. His readers are up about 4% on the recommendation. And the fund pays a 5.6% income stream, so subscribers have collected monthly payments with low volatility.
New 52-week highs (as of 8/31/12): Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), Franco-Nevada Corp (FNV), Western Asset High Income Opportunity Fund (HIO), iShares High Yield Corporate Bond Fund (HYG), SPDR Barclays Capital High Yield Bond Fund (JNK), Anheuser-Busch InBev (BUD), Constellation Brands (STZ), and Royal Gold (RGLD).
In today's mailbag…. Several readers respond to Porter's Friday essay on Peak Oil and why we'll never run out of oil in our lifetimes. If you missed this "instant classic," you can read it here. As always, send your e-mail to feedback@stansberryresearch.com.
"I call it the 'all in my lifetime syndrome.' Everything important in history will happen while I'm alive! William Faulkner sounded a similar note to yours at his University of Massachusetts commencement address in 1950. 'I believe that man will not merely endure, he will prevail. He is immortal. Not because he alone among creatures has an inexhaustible voice, but because he has a soul, a spirit capable of compassion and sacrifice and endurance.'" – Paid-up subscriber PF
"You are, of course, correct that we will never run out of oil, at least within the foreseeable future. In fact, Hubbard was wrong in many ways but there probably is (as you acknowledge) a fundamental limit to the amount that is reasonably recoverable. Because of the incredible ingenuity of humans, there will be oil in relative abundance for many generations into the future.
"Byron King, of Agora fame, has been a supporter of the Peak Oil theory and has revised it to Peak 'Cheap' Oil. He points out that there have been few discoveries of 'elephant' fields for 40-50 years and that while there have been many discoveries, most have been smaller and more 'unconventional,' requiring more expensive technology to exploit. So while there will always be oil available, it wont be available at $20/bbl or $40/bbl. While the deep-water and fracking technologies will probably get 'cheaper,' it will never be as cheap as the wildcat vertical wells of the past that gave us $4/bbl oil in the 1950s. So while the resource is clearly available, it will not be exploited if it costs $70/bbl to extract but the price at the wellhead is only $40/bbl." – Paid-up subscriber Scott Marshall
Ferris comment: I totally disagree. I think oil will be $10 a barrel (in 2012 dollars) within my lifetime… maybe even $1 a barrel (and I'm 50). If you doubt oil can fall 90% from here, how do you explain what happened to natural gas?
The idea that "there's no cheap oil left" is the same mistake Hubbard made. When you tell the world it's going to run out of oil, you're just saying oil will become permanently expensive. Oil will never be permanently expensive as long as tremendous demand exists. I mean… how can you miss the fact that planet Earth is overflowing with oil? Even tiny little Israel has a bunch of it now.
"As so often, you are absolutely right about the folly of Malthusianism. My friends Herman Kahn and Julian Simon applaud you from their graves." – Paid-up subscriber Felix Kaufmann
Ferris comment: I highly recommend Julian Simon's Ultimate Resource II. I read it some years ago when I was doing a lot of writing and research about energy. It'll do as good a job as any other work of showing you why Malthusian thinking is wrong. (Heck, even Thomas Malthus eventually recanted!)
"As a long time Alliance member, I am still amazed at your great ability to get to the meat of the matter.
"Too often, I think, even great minds compartmentalize their thinking. By this I mean, as a student of history I know all of the things you say about the feedback loop and the march of human progress are absolutely true. I also know that in my own life and business I am always searching for better, more efficient ways.
"But, where many of us fail in this respect is we get caught up in the many current problems of the world and certainly our federal and state governments. We see the inaction, the in fighting, the political posturing and it taints our current views of group progress. We have blinders on due to all of the seemingly huge and endless problems.
"Stepping back for a moment, reading and thinking about your views on progress and the feedback loop helps readers, such as myself, realize that with thought and hard work almost all problems are fixable.
"Too often even the optimists among us get swamped by so many things to fix with so little time, we forget that while I am working on the things I am best suited for a million others are simultaneously working on solving the other problems that they are best suited to solve.
"This is exactly why government and other monopolistic forces need to be kept small and out of the way. They impede and sometimes even stop this progress, this constant march forward. We need our freedom and the information from the price system to made good decisions and come up with better solutions.
"Thank you, Porter, for helping me step back and see, right now, what I've always known in my core. Enjoy this long holiday weekend. Take a moment to appreciate and give thanks for all of your labors that make you who you and and the CAPITAL that helped make it happen…
"PS: Keep up the Friday Digests. I always read the Digest daily, but Fridays are my absolute favorite." – Paid-up subscriber Mike Strzelecki
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
September 4, 2012