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

Psst, wanna buy a private-equity shop?... Trouble for taxman Jackson-Hewitt... Fire the best employees!... Ditching trailing stops?... You're a whore, too... More dividend grab questions...

Ring a bell at the market top: Weeks after Blackstone became the first private-equity group to announce an IPO, Apollo Management hired Goldman Sachs and J.P. Morgan to explore a possible public offering. Apollo, a New York-based private-equity firm, would offer only a small percentage of the company publicly, or approximately $1.5 billion.

A few years ago, we did very well by investing in individual private-equity funds from KKR and Apollo Management, which raised capital on the public markets. Our strategy was simple: We bought the funds (KFN, AIRM) when they were trading at a substantial discount to net asset value. It's hard to lose when you buy a fund for less cash than it has in the bank. But these new IPOs will be quite different. You'll be buying the fund management company, not the funds. And they will almost certainly be trading at a huge multiple of net asset value.

Goldman Sachs continues to announce record profits each quarter, led by gains in the firm's proprietary trading account. But where are the customers' yachts? The firm's flagship Alpha hedge fund fell 5.7% due to market turmoil in February. The drop leaves the fund down 2% on the year. Alpha lost 10% last year, too. But there is no end to the sucker's line leading to Wall Street... Alpha increased its assets under management by 48% last year.

The U.S. government sued 125 branches of tax-preparer Jackson-Hewitt. The second-largest preparer of U.S. taxes is accused of cheating the government out of $70 million through a "pervasive and massive series of tax-fraud schemes." Shares of the company fell 18.1% yesterday. Could be good news for Extreme Value pick H&R Block (HRB).

Circuit City aims to turn around its failing business by firing its best, most experienced employees... "The company has completed a wage management initiative that will result in the separation of approximately 3,400 store Associates. The separations, which are occurring today, focused on Associates who were paid well above the market-based salary range for their role. New Associates will be hired for these positions and compensated at the current market range for the job." Who in their right mind would apply for those jobs?

A Chinese labor union accused fast food restaurants McDonald's, KFC, and Pizza Hut of failing to pay their workers minimum wage. The minimum wage in Guangzhou, the city in dispute, is 7.5 yuan, or $0.97 an hour.

Shares of Zoologischer Garten Berlin, the operator of Berlin Zoo, gained 94% this week because of an abandoned polar bear. Speculators believe that "Knut," as the bear is known, could become a brand for the zoo equal to the likes of Winnie the Pooh. Since Knut's birth in December, German television stations have followed his every move, and he has become a hit with the national public. The stock, which only traded eight shares yesterday, is now four times more expensive than Porsche – the most expensive stock among the largest 100 German companies.

Sales of Toyota's Prius more than doubled to 19,100 units last month, pushing total hybrid sales for Toyota and Lexus to more than half a million. Meanwhile, U.S. sales at General Motors (a PSIA short-sell recommendation) fell by 7.7% year over year. Toyota's total U.S. sales grew by an identical 7.7%.

New highs: Anglo American (AAUK), Alex & Baldwin (ALEX), Allegheny Tech (ATI), FLIR Systems (FLIR), Macquarie Global (MGU), Annaly (NLY).

In the mailbag... lots of S&A Dividend Grabber questions. We miss the angry rants. Surely, someone out there is mad at us and thinks the worst of us. Send comments here: feedback@stansberryresearch.com.

"Yesterday, I invested in Dean Foods using a different strategy. I studied the Dean Food options chain, looking out to June (roughly 2 1/2 months to expiration date) and found that the June 50 calls were almost 50% undervalued, at $0.50. I bought 30 June 50 long call contracts at $0.50, for a total investment of $1,500 plus commissions. Today, the calls were converted to June 35 calls, with a closing price of $1.05! That was the easiest, quickest 110% overnight increase in value that I have ever experienced. Tomorrow, I will sell half of my calls, pocketing my entire investment plus a tiny profit (which will more than cover the commissions) and ride the other 15 contracts to still greater returns. Thank you, Sean Goldsmith. I had never thought to follow these types of special dividend stocks, but in the future will search for the same undervalued options opportunities a day or two before they go ex dividend." – Paid-up subscriber Bob Bonanno

Porter comment: We hope that works out for you. But we suspect you might find you owe another investor the dividend.

"Just wanted to say [the S&A Dividend Grabber] is an excellent program. Keep up the great work! Anyone who passes on this is really missing a great opportunity for growth and/or growth and dividends." - Paid-up subscriber George Dahl

"Is there a difference between S&A Alliance and Private Wealth Alliance and what is it?" – Paid-up subscriber David Mcmillen

Porter comment: We offer three different levels of infinity subscription packages – Private Wealth Alliance, True Wealth Alliance, and S&A Alliance. Private Wealth Alliance is our entry-level infinity subscription. S&A Alliance is our top level. With Private Wealth you receive a lifetime subscription to six of our most popular letters (True Wealth, PSIA, S&A Oil Report, S&A Penny Letter, The Big Trend Report, The 12% Letter). The True Wealth Alliance provides access to Steve Sjuggerud's newsletters – True Wealth and Sjuggerud Confidential. With the S&A Alliance, you receive a lifetime subscription to all of our letters. (You get everything except our conference call service, Phase 1). You also get any future letters we decide to publish, and you get an invitation to our annual get-together, which we put on at our expense.

"When you give suggestions for the dividend grabs (e.g. HR and TNS) could you please also include the 'buy before' date if one wants to participate in the special dividend distribution?" – Paid-up subscriber Alvin Manalaysay

Porter comment: We publish an ex-dividend date. If you want the cash dividend, buy before the ex-dividend date. If you want the projected capital gain, buy on the ex-dividend date.

"When I subscribed to Dividend Grabber, I expected to add cash by investing before the dividend and then selling when it went up. This seemed to be the best of both worlds. However, you recommend always buying on ex-dividend date and holding. Given the uncertainty in the U.S. stock market, would it be more advantageous for my IRA to grab the dividend and hold the stock till it goes up?" – Paid-up subscriber "P"

Porter comment: Unfortunately, we're not allowed to give individual, specific advice like the kind you're asking. Ask your broker. And understand that our recommendation is designed to produce the highest possible total return. You may have other goals (simplicity comes to mind, taxes come to mind).

"No offense, but the only difference I see between you writing term papers for other students (facilitating fraud) and Barney Frank's roommate doing what he was doing (facilitating prostitution, I guess) is that you were paid in cash." – Anonymous subscriber

Porter comment: What a lame critique. First of all, what else would you pay a hooker with?!? And there are a lot of other differences... Term papers take more than a few minutes to write... Writing term papers isn't nearly as much fun as having sex... Writing term papers isn't against the law...

The point you're trying to make is that term-paper writers are prostituting their minds, while hookers are prostituting their bodies – and that's essentially the same thing. Our society makes a legal and moral distinction, but I don't see all that much difference. I'm a "mind whore." I get paid to think, research, and write. Other folks (investors, hedge-fund managers, mutual-fund managers) take credit and get the profit from my ideas and my labor.

"Porter, I am a dedicated user of stop losses. However I question their real value since recently I have had two stocks tumble drastically through my stop only to rebound later in same day trading. Losses amounting to several thousands of dollars below my stop." – Paid-up subscriber Bill Neal

Porter comment: Stop losses won't maximize the gains you make in any one position. They will ensure that your portfolio as a whole isn't wiped out by any catastrophic loss. They are meant to serve as the initial step in learning how to be a risk-averse investor, and many, many people decide they are all the tools they need. The value of trailing stop losses may be hard to recognize or measure, because they only benefit you by preventing losses you'll never see.

However, there are other ways to protect against losses. Dan Ferris, in Extreme Value, doesn't use trailing stops. Instead, he goes to great lengths to understand the real, intrinsic value of each position. With this knowledge, he can control risk while ignoring price. This isn't for the faint of heart, the impatient, or for investors who don't know how to limit position size.

In my letter, PSIA, I use stop losses on positions I consider extremely safe, instead of trailing stops, to prevent the kind of sell you describe. But allowing more volatility in any position requires great discipline in original position size.

Here's the core principle to use when setting stops: Never allow any investment position to put more than 1% of your total portfolio at risk.

Best,

Porter Stansberry

Cockeysville, Maryland

April 4, 2007

Stansberry & Associates Top 10 Open Recommendations

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