The S&A Digest

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/01/2013

Why Tulum will boom... Buffett buys tech... Ferris bullish on mortgages... As Sjug predicted, Japanese real estate moves higher... Nokia recap... S&A Dividend Grabber illegal?... Readers' big gains...

First up... please accept my apologies if you've had problems accessing the Stansberry Research website this week. The reason for the trouble? All I can manage to squeeze out of our IT group is "technical difficulties." We're back up and running today.

Yesterday, I promised to tell you about Tulum, which has the most beautiful beach I've ever seen. It's about two hours south of Cancun's International Airport, but the road is almost new, and there are police at every single intersection – it's very safe. I won't waste a lot of time here with all of the details... but Tulum has the hallmarks of a developing real estate boom. It's easy to reach, it's gorgeous, it's cheap, it has first-world infrastructure and plenty to do (fishing, golf, restaurants, shopping). And Tulum has plenty of beachfront land and an exclusive vibe to the place that's drawing in wealthy, high-end developers.

To show you what I mean, look at these two quick pictures. First, here's the beach at Tulum. It's wide with fine, white sand. The water is as blue as you'll find anywhere, and the reef protects bathers from the waves, making it very safe and easy to use.

Right now in Tulum, most of the accommodations are simple local places that don't have air conditioning. (You don't really need A/C because these places sit right on the beach, and the breeze blows night and day. Temperatures here are surprisingly mild – highs in the mid-80s and lows in the lower 70s. It's not nearly as hot as in Nicaragua). But... big-time developers have discovered Tulum. Signs lining the beaches announced new luxury projects, including this one:

You can still buy affordable beachfront property around Tulum. I saw many lots available for less than $200,000. But... my bet is that in 10 years this place will be one of the most desirable vacation spots in all of North America. If you're looking for a good real estate deal, you should take a week and look around here.

Warren Buffett on the move... Berkshire Hathaway, Warren Buffett's holding company, just purchased the privately held electronic-component maker TTI. The company, which has annual sales of more than $1 billion, says that it provides 85% of the circuitry on any circuit board inside a computer or other electronic device.

In leveraged sectors of the economy, like mortgage banking, even minor downturns spell calamity. So far this year, roughly 40 subprime lenders have shut their doors, including some very big firms. Now another big subprime lender, Fremont General (FMT), announced it would sell $4 billion worth of loans at a pretax loss of $140 million and exit the subprime business. Fremont is firing most of the 2,400 employees in its mortgage department.

While most mortgage investors are running for the exits... this kind of carnage looks like a sunny day in Bali for our team of contrarian analysts. Our thought? As the inept and the incautious firms are forced out of the business, pricing will firm up, and the folks who know what they're doing and have always done business responsibly will make a killing. As the Lion King explained... "It's the cycle of life, Simba."

Our own Lion King – Dan Ferris – has been frothing at the mouth, via e-mail, this week about the mortgage industry's blowup. "The mortgage lending business is like a Victoria's Secret model who says she's wants to have my children and doesn't care who else I go out with. How can I say no? Have you seen JER Investors Trust (JRT)? It's selling for 1.3x book, yielding 9.5%, and the founder/CEO has bought $6 million worth of stock since last August. He now owns about 3% of the company. Dreman, Franklin Resources, and Third Avenue (three of the top 10 investment groups in the world) collectively own about 21% of it."

More from that evil Wal-Mart... Extreme Value pick Wal-Mart (WMT) will award more than $529.8 million in bonuses to 813,759 of its nearly 1.2 million employees. Wal-Mart declares today "Associate Celebration Day."

Credit Suisse is issuing a "trading buy" for PSIA pick Nokia (NOK). Because of Motorola's lackluster performance, CS analysts believe that Nokia will capture more of the market and see up to 4% growth this year. Wall Street firms crack me up...

I've got no idea what a "trading buy" is, but if you go back and read my PSIA letter about Nokia, what you'll find is one of the best-run, most efficient, and most innovative manufacturing companies in history. Nokia earns close to $0.25 on each dollar it generates selling phones. It spends most of this cash buying stock and paying dividends. It's a truly world-class, long-term investment... that we first recommended at $14.50 in July 2004. If you remember, that was just after Motorola introduced the incredibly popular Razr slim phone. The crowd piled into Motorola stock. It was on the cover of magazines and in the pages of several newsletters. Meanwhile, Wall Street had "sell" ratings on Nokia. Since then, including dividends, Nokia's stock has risen about four times as much (108%) as Motorola's (27%). Fad products are no match for shareholder accountability, fiscal discipline, and steady R&D progress.

Sjuggerud did it again... His big prediction for 2007? Japanese real estate.

There were more than a few chuckles and stifled laughs in the office when he came up with this one... "Sjug, don't you know Japanese real estate is in a 20-year bear market, the population is aging, the government is highly indebted, there's no immigration... don't you know Japanese real estate is 'dead' money?" Folks said the same kind of things when Sjug pitched us on rare gold coins, timber stocks, mortgage REITs (way back in '02, before they took off), Icelandic bonds, housing stocks... all things that most investors wouldn't touch, if they'd heard of them at all.

And now, after only two months or so, lo and behold, land prices rose in Japan for the first time in 16 years. Tokyo, Osaka, and Nagoya rose 8.9%, while housing prices in the same area rose 2.8%. Luckily for all of us, Sjuggerud is a profoundly modest person... otherwise we'd be hearing about this for months...

No, no, no... we're not breaking the law... we're not "selling dividends."

In what I assume was a reference to our new S&A Dividend Grabber letter, a True Wealth subscriber, Jay Allen, wrote to us: "... keep in mind that 'selling dividends' is an illegal activity. Please keep this in mind and stick with your value plays on your equity recommendations."

Jay's comment refers to the nefarious stockbroker tactic of selling an open-ended mutual fund based on its impending cash distribution. The disbursement of capital from a fund logically results in a matching decrease in net asset value (NAV) – the price at which the fund must be bought or sold.

However, buying stocks based on an announced special-dividend payment is a wholly different situation. Unlike an open-ended mutual fund, equity in a business is typically valued at a multiple of its earnings – not on its NAV. Ergo, paying out the excess cash from its balance sheet does not necessarily cause a lasting decrease in a stock market capitalization – its price.

What we've found in studying these situations and recommending them over the last few months, is that after an initial decrease in the stock's price, the shares almost always rebounded by more than the amount of the special dividend, usually in about three months. We've also seen stocks that pay special, large dividends tend to be good cash-generating businesses and tend to be very shareholder-friendly – a combination that leads to good performance over time. So, please, don't imagine that we're "selling dividends." We're simply using special-dividend payments as a starting point in our analysis – and so far, it's working incredibly well.

One more thing about S&A Dividend Grabber... In all my years as a publisher, I've never seen a simpler investment approach that has more quantitative proof showing it works. I've also never seen an approach so misunderstood, maligned, and misused.

We must not be explaining our approach in the right way. It can't be so hard to understand... it all boils down to this simple realization: Companies don't need all of the cash on their balance sheets to create future earnings. Paying out the cash to shareholders shouldn't fundamentally diminish a stock's future valuation... and yet, immediately after paying a big dividend, the market cuts the share price by the exact same amount. This provides rational investors with the opportunity to purchase shares at a wide discount to intrinsic value.

We're eyeing an upcoming special dividend that would pay 85% of the company's market capitalization. And we're offering a half-price subscription through April 2.

New highs: Anglo American (AAUK), Marathon (MRO), Annaly (NLY), Oneok (OKE).

Now... our favorite part of the day... the mailbag.

A skeptical reader asked this week if any subscribers really made the kind of big returns we display in our Hall of Fame (closed positions) and in our Top-10 list (open positions). Replies poured in. Normally, we don't print these kinds of e-mails. We've never had much use for the Rush Limbaugh, "ditto"-style, "everyone's-happy" customer feedback. We learn a lot more from your criticisms... and they're much more fun to read. Nevertheless, I think you'll learn something from our customers' positive experiences. Next week, we'll return to the much more entertaining vitriol, libel, accusations, and bombast. Help stock our shelves by sending in your complaints: feedback@stansberryresearch.com.

"I have held shares of Seabridge ever since Steve S. recommended them. I have sold some, repurchased some on dips, but my core holding in this incredible company is from the original recommendation date... I am thrilled with my Alliance subscription (buy once, buy right) and have made hundreds of thousands from your services in the past three years. I buy only on your talented staff's recommendation." – Paid-up subscriber Harold Gear

"I generally follow your various newsletters' recommendations to the letter, ie I buy/sell short when you say buy/sell short, and I sell/buy to cover when you say sell/buy to cover. So, YES, I have pocketed (or am still sitting on) many of the gains indicated in your tables (in particular, ACP, SA, KHDH, ALEX, IDBE, CELG & ELN)." – Paid-up subscriber Mike L.

"I bought Celgene on August 13, 2003 at a split-adjusted price of around $9. Still hold it for over a 500% gain. IDBE and Elan were big winners for me as well. Great picks." – Paid-up subscriber Gregg

Porter comment: Over the years, we've heard from several hundred subscribers saying much the same – that our ideas, position sizing, and risk-management advice have led them to invest profitably, often for the first time in their lives. Given our track record and the volume of positive testimonials, we've always suspected that folks who aren't able to use our letters profitably simply aren't following our advice. It seems strange that people would buy expensive investment research... and then ignore it. But we see it happen all the time...

Once, for example, a subscriber berated me for recommending JDSU – one of our best-performing recommendations ever. He bought it months after I recommended it and at a much higher price. He didn't follow our position-size guideline (never more than 4% of your portfolio in any one stock) and then refused to use a trailing stop loss (surely it will bounce back, he thought). If he had followed my advice, he would have made money. Instead, he sold for around $2... on the way down from $120. He blamed us for his huge loss.

We can handle the abuse... but we worry about the investors in these situations. If you won't take responsibility for your own investment decisions, if you refuse to acknowledge your mistakes, how will you ever learn to be a better investor?

"The best I have done was with Akamai. I bought it right away when you recommended it and had about an 80% profit when I got stopped out of it. [Note: the reader used a 20% trailing stop, not our recommended 25% stop.] Unfortunately it immediately went right back up above where I was out... The reason I will always subscribe is because I was a subscriber back in 1999 and 2000. You were the only one I know of that forecast the plunge we took. Unfortunately, I didn't listen and I paid the price. I was taking 4 newsletters at the time, and you were the only one that called the fall." – Paid-up subscriber Aden

Porter comment: I've found that selling too soon can be even more expensive than selling too late.

"George Earhart wanted to know why he should pay $500/year for The [S&A] Dividend Grabber when the information is publicly available. To me, it is very simple. I pay an accountant approximately that amount of money to prepare my taxes using rules that are available to the public and financial information that I provide him. I do this because he is an expert in the field, and I am not. I pay him to take the time that I do not have available to be an expert and do my work for me. I still review what he does just as I review investment suggestions from newsletters before I put my resources at risk... Not all investment advice is for everyone, and, if you lack the funds to earn enough return to justify a $500/year subscription, stick with PSIA, which is very inexpensive and unbelievably profitable." – Paid-up subscriber Ken McGah

"Mr. Stansberry, your comment to George is exactly why I am willing to pay $500 for the [S&A] Dividend Grabber. I am a small investor who wants to be able to sleep at night knowing that I have the information I need to make the decisions as to whether or not to invest in a particular stock, etc. I am new to your services, and this will make the fourth newsletter I'm receiving from your company. I can't tell you how much I've learned in the short time I've been subscribing. I appreciate not only the services your company provides, but the expertise from the people who work for you." – Paid-up subscriber Yvonee Bails

"I subscribed to the new [S&A] Dividend Grabber newsletter after getting over the initial sticker shock, which took about 2 minutes. How did I get over it? Simple, I did a quick mental calculation... Let's say my time is worth no more than what a 'burger flipper' here in Silicon Valley earns, $10/hr. Using the $500 initial subscription fee, that comes to 50 hours, or roughly 4 hours a month." – Paid up subscriber Ron Mueller

Porter comment: It's a safe bet that the vast majority of our subscribers earn more than burger flippers. Our analysts certainly do.

"Enough of Jim Cramer. I can usually listen to him for about five minutes. I think if you are going to give him a chance to persuade your readers, they should at least know his track record. The Motley Fool keeps a complete scorecard on all of Jim Cramer's picks. Go back in time and you'll see – he's no Louis Rukeyser! Better that I have my money in your newsletters. Win or lose, I love reading them." – Paid up subscriber Peter Lipke

Porter comment: It's impossible for any one person to pick GREAT investments every day... or even every month. I feel lucky to come up with five or six really great ideas each year. But... keeping your eyes and ears open for good ideas from guys like us, like Jim Cramer, and like the Motley Fools will help you find lots of good investments. Considering the value of one great investment idea, it has always made sense to me to buy several trusted sources of investment insight – and I know most of our subscribers do.

Regards,

Porter Stansberry

Tulum, Mexico

March 22, 2007

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame