The S&A Digest

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

As of 06/27/2013

They totaled my car… The carnage begins in Miami… SAC for sale?… Weber on how to get rich… Lots of new lows… What happened to RYI?

"Sir… your car will be down in a minute. There was an accident in the garage..."

My wife (who is extremely pregnant) and I were waiting in front of the hospital for our car. But what the valet didn't mention was that the car involved in the accident was ours… and that it had been nearly totaled. Karma? Maybe I shouldn't have shorted GM. How do you total a car in a parking garage?

Yesterday was one of the worst days we've seen for real estate. Nearly every homebuilder hit a new low. Mortgage companies Countrywide and Opteum bottomed out. Every kind of REIT, and even Florida redeveloper St. Joe, hit lows. Condo builder WCI Communities and regional banks across the nation joined in as well.

Could it be a bottom? I profess no opinion about housing stocks… but my trip last week to Hatteras confirmed something I've suspected since late last year: It will take years, and probably more than a decade, for real estate prices to begin appreciating again, in real terms. (Nominal prices might bottom… but inflation will eat away at the real value of property for a long, long time.)

On Hatteras Island, which is three hours by car from the nearest major city (Norfolk), beachfront lots are still asking more than $900,000. Hundreds of enormous oceanfront, oceanside, and soundfront homes have been built, monstrosities with six or eight bedrooms. You can rent these in the summer for $3,000-$5,000 per week. Considering that visitors to this remote island find almost nothing to do there except fish, sail, and surf… a week or so is all that most families would use these properties. Also, the houses face the constant risk of severe storms, which wreck this small island (the eastern-most point of the United States) on average about once every three years. And… considering how big these houses are… it's easy for two families to share a house, reducing the rental cost substantially. We split a house three ways last week. I spent about $1,000. It was a great house… and it was for sale. They're asking $1.7 million. Who in his right mind would pay so much for a tiny piece of ground in the middle of nowhere… especially considering that you can rent properties like this, whenever you want, for almost nothing…?

When there's a property bubble on the Outer Banks of North Carolina… imagine what's happened in the high-demand places… like Miami. I predict the bloodbath in Florida will rival the 1920s land bust. According to Bloomberg News, 37 new high-rise condos (20,000+ units) are currently being built in downtown Miami. The resulting inventory will double the number of condos downtown. But sales of condos downtown fell 50% in May from last year. Confirming the news, a subscriber from Miami reports: "From my Brickell office window, I count 28 cranes and, within 1/4 mile radius of my office, there are 17 condo high rises UNDER CONSTRUCTION with no less than 250 units each (some as tall as 60 stories). Year end, the carnage will be amazing. I had a client buy a 50th-floor penthouse condo ON THE BEACH in Hallandale for [$625,000]. Original buyer walked from his deposit; original price $1.4M."

Late last year I went to Miami to see if there were any bargains… and it was still very expensive. But this December? I bet it will be a very different story.

Steve Cohen wants to cash in, too… After Fortress Investment Group and Blackstone Group executives pocketed billions from IPOs, hedge-fund wunderkind Steve Cohen is considering selling a 20% stake in SAC Capital to private investors. SAC has long been one of the best-returning funds in history, averaging 40% a year. It is also one of the most expensive, charging 5% of holdings and 50% of profits. SAC is said to be marketing to foreign investors including Asian state funds, such as Temasek of Singapore. It seems odd that foreign governments would use their U.S. dollars (which have inflated asset prices around the world) to buy an investment manager whose profits come from understanding the impact of the inflation better than others… Doesn't it?

I was reading my friend Chris Weber's latest letter this morning… and he reminded me of something that's easy to forget. There are only two ways (most) investors actually get rich. (I listen to Chris because he got rich investing, starting with only $650, and because he has never had a down year.) Investors can either buy into a bull market early, or they can get rich compounding their initial investment over the long term. Both strategies require knowledge, foresight, planning, perseverance, and patience. Think about how few investors have those qualities…

As we told you yesterday… We like to expand our knowledge of the equity universe one company at a time. Do this long enough, and you'll discover you know something about a lot of businesses. Today, we take a peek at Ladish Co. (LDSH), a $680 million metal producer.

Ladish offers products including jet engine parts, missile parts, and landing gear primarily to aerospace and defense companies. Ladish trades for 25 times earnings and 3.5 times book. The company has $2.6 million in cash and $46 million in debt. Its annual revenues are $370 million. It's a high fixed-cost business… that delivers subpar returns on assets, thanks to the commodity-like nature of its products. But, return on equity is high (18%) thanks to the miracle of leverage. The stock is up more than 350% over the last five years, as the military build-up led to increased sales.

S&A Penny Letter pick International Coal Group (ICO) plans to assume up to $207 million in new debt. The company will sell $180 million of convertible notes to institutional investors. The first buyer will have the option to buy an additional $27 million of notes. All notes are due in 2012. ICO will use the money to pay $90 million in existing debt. The rest is available for unspecified purposes.

According to The Wall Street Journal, the president's new fleet of helicopters is expected to cost $270 million each. That's more than the government spent on the 747s that fly the president around the world. The White House says it needs 23 of these helicopters, whose primary job is to ferry the president to Andrews Air Force base… 11 minutes from the White House. Thus, the government – with all of its wisdom – has decided to spend $6.1 billion… on a job just about any cab driver in D.C. could accomplish. "We're from the government… we're here to help…" Can't wait to see its health care solution, can you?

New high: UltraShort Real Estate ProShares (SRS). Sjuggerud timed the next down leg in real estate perfectly.

Ah… the bad news… For the first time since we began publishing the Digest, our new lows list far outnumbers the new highs… New lows: Ares Capital (ARCC), Borders Group (BGP), Duke Energy (DUK), Handleman (HDL), Healthcare Realty (HR), St. Joe (JOE), MCG Capital (MCGC), Newcastle (NCT), Opteum (OPX), USG (USG), Westlake Chemical (WLK), Citizens Republic Bancorp (CRBC).

In the mailbag. You've got questions. We've got answers. All topics are fair game: feedback@stansberryresearch.com.

"Death threats is serious bizness here in Arkansas. Why would I want to put on shoes and come huntin' fer ol' Porter? Far as I can see, the boy's onlyest fault is thinkin' he is ornrier, more arrogant and opinionated than me. I can't git rid of him fer that." – Paid-up subscriber Frank

"I would like to ask whether you are aware of the symbol change of AAUK to AAUKD? I was shocked when I checked my account online at Etrade this morning, please help while I'm waiting for an answer from my online broker." – Paid-up subscriber NM Soria

Porter comment: I asked Sjuggerud about this… "The new symbol is for just 20 trading days. A company called Mondi de-merged from Anglo American. Shareholders of Anglo American got shares in both Anglo and Mondi. Since Mondi doesn't trade in the States as an ADR, people who hold shares of AAUK in the U.S. get cash instead of shares of Mondi."

Here are the exact details: "Beginning July 25, 2007, ADR holders will be entitled to receive ninety one (91) new AAplc ADSs for every one hundred (100) old ADSs surrendered. The Bank of New York was able to sell the shares received from the demerger of the Mondi Group. In addition to new AAplc ADR certificates, holders will receive payment of the proceeds of sale of the Mondi shares upon surrender of the old AAplc ADSs."

The fall today of $1.80 roughly reflects the $1.637 in cash shareholders will get.

"Thank you for all your hard work! I learn something new each day… I have a couple questions. What do you think of Joseph H. Ellis' economic theory from his book Ahead of the Curve? Also, Porter had mentioned real estate in the Yucatan. I'd be interested in knowing how one might purchase real estate with their government restrictions?" – Paid-up subscriber Candice Hutton

Porter comment: I haven't read Joseph Ellis' book. What's his hypothesis? Regarding buying property in the Yucatan, the people I know who have done it say it's no big deal. You just have to work with a local lawyer to buy the property through a trust. Any reputable real estate agent should able to guide you through this process.

"This is an investment education question. In the case of GM shorting the stock, what will happen to a short position if GM declared bankrupt? Would you be able to get your money back? The fact is I'm making money by shorting the stock, right? Last one is about special dividends, why do companies like HMA take borrowings to pay shareholders in the form of dividends, what is the logic of doing this." – Paid-up subscriber NM Soria

Porter comment: When you short a stock, you borrow shares from another investor, and you sell them on the open market. You have an obligation to return the shares in the future. But, if the company goes bankrupt, you owe nothing. You've made 100% on your short. In real life, though, once you're up 50% on a short sale, it generally pays to cover the short and take your profits because your risk-to-reward ratio continually decreases as the price falls.

Regarding the logic of borrowing money to pay a dividend, the concept is similar to a home-equity loan. If your credit is good and rates are low, you might desire to use some of the equity in your home for other things that benefit your family. There are also tax advantages to doing so. But the real purpose of such maneuvers is to produce a higher return on equity and fend off attempts by private-equity firms to take over the company. Generally speaking, as long as such actions don't put too much of a debt burden on companies, such moves can increase the total return to shareholders substantially.

"Porter, I am seriously wondering if all your ducks are in the same pond. I became an Alliance subscriber based solely on the depth and consistency of the research at Stansberry and Associates after trying a few of your products. I would have to say that there isn't a research analyst employed by you whose work I don't respect. I find them all to be sincere, honest, and thorough; and that includes you. I am a value investor, so you can probably guess where my leanings are as far as to who my favorites are. My biggest problem is not letting my holdings get unwieldy, and yes I have been stopped out. But seriously, there must be something inherently wrong with someone who seeks an adversarial relationship with his subscribers. 'Send us your hate mail.' I guess I would find that a bit unprofessional. I think you can do better than that. If you give people a venue to complain, that's exactly what a fair share of them will do… I guess I now qualify; I hope that at least makes you happy." – Paid-up subscriber Greg B.

Porter comment: You make a good point… but we enjoy the banter too much to stop now. Negative feedback also helps me keep tabs on the quality of our work: If there's a problem, I'll find out about it almost instantly from our readers. Finally… we believe sharing our negative feedback with all of our readers and openly examining situations where our advice didn't pan out will help you get to know us better and help us improve our work. The combination should produce improved results for our subscribers, which is our top goal. There's no mystery to what we do: We do the hard work all investors should do before they buy any stock. It doesn't mean we'll be right every time. But it sure improves our chances.

"My question is regarding Rob Fannon's Phase 1 Investor. I am very interested in this service – please can you specify a rough percentage figure for annualized average gains on his previous recommendations?" – Anonymous

Porter comment: We don't report on annualized average gains. As a measure of a newsletter's portfolio, they can be very misleading. We've watched our competitors turn truly awful newsletter track records into gems, with just a few short trades that produced a minor gain in a few days. On an annualized basis that 10% gain in a week looks great. Too bad no one actually could bank anything like those numbers. Rob's average recommendation gained about 40% last year, which was his first year working for us on a full-time basis. If you'd like to annualize this figure, help yourself. His average holding period was about four months, through the end of last year.

"You stated, 'Every experiment with paper money in history has ended in an inflationary disaster, caused by excessive government spending – typically on wars. Sounds familiar, doesn't it?' When can we expect this inflationary disaster and how can we protect ourselves financially from the disaster?"

– Paid-up subscriber Mark

Porter comment: I like what Henry Ford said about protecting yourself: "The only real security that a man can have in this world is a reserve of knowledge, experience, and ability."

Of course, keeping about 10% of your net worth in things like gold coins won't hurt either. Neither will owning hard assets, especially if you can borrow against them cheaply at a fixed rate.

"Did you recommend WCI a month or two ago? The no-risk play? Would you like to update all the paying subscribers that trusted you? And how about RYI? How stellar is that?" – Paid-up subscriber Barry Hatfield

Porter comment: No, I never recommended WCI. Graham Summers did several months ago… but he stopped out and updated his subscribers accordingly. I imagine that the folks who trusted him understand that the real estate debacle has gotten worse than expected… and that small losses are normal in the course of speculating in growth stocks and special situations, which is part of what Graham does.

Regarding RYI… we've never written about that company in any of our publications, at any time. I don't even know what company that is…

"Upon my recommendation, buy the Eldorado and forget about the Lincoln. The Eldo is much more opulent and gets less MPGs than the Lincoln, so it earns the GWARMING license plate in my opinion. The car is a total waste of space, and the sheet metal is totally devoted to the engine and trunk – there is literally no room for passengers other than the two front-seat occupants. I owned an Oldsmobile (remember them?) Toronado, which is the clone to the Eldorado. It definitely fits the image you are looking to project. I got about 8 MPG (average) and had so much fun in that car with the sunroof open (and the engine idling sucking up precious oil) that you wouldn't believe it even if I could tell you in a public forum. I can only imagine how cool the red and white leather looks on the Eldo – I had cloth seats in my Toronado (but it still was a cool ride). I would be envious of you if you bought this car, but it's your choice! DO IT!!! Buy the Eldo from your paid-up subscriber, Lee Arnold!!! Al Gore would be proud of you – NOT!!! Buy the car and put an 'Al Gore for President' bumper sticker on it!!!!!" – Paid-up subscriber Tom Corjay

Regards,

Porter Stansberry

Baltimore, Maryland

July 25, 2007

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