The S&A Digest: This Year's Largest Share Sale

Are you an investor?... The race to the bottom in Florida... Ross: "too early for subprime"... Gross: "depression"... The condo vulture... Drunks in the mailbag... PetroChina too pricey for Buffett…

We've said it many times over the last two years: If you don't own shares of Verizon (VZ), you shouldn't call yourself an investor.

The company is spending about $18 billion per year to install passive, optical network connections directly to homes. In short, Verizon is replacing an old, expensive-to-maintain copper network with a vastly more efficient and incredibly long-lived fiberoptic network that's almost costless to maintain. (The company also owns a majority stake in the best American wireless provider, Verizon Wireless.) In the third quarter, revenues were up 6% and operating income reached $4.2 billion, up 20% from last year.

Wall Street has criticized Verizon for its huge capital-spending budget. As a result, the stock is trading for peanuts: about six times cash flow. Where else can you buy a blue-chip stock, growing earnings at 20% per year, for less than six times cash flow?

What is Wall Street missing? It will be incredibly difficult for any competitor to replicate Verizon's new fiber network (called FiOS), because the amount of bandwidth that fiber can deliver is essentially unlimited. By building the first fiber-to-home network, Verizon is building itself a new monopoly. To me, that's worth all the money Verizon is spending. Besides, despite its large capital budget, the company is treating its investors well, too. In the first nine months of this year, it paid out cash dividends of $3.5 billion and bought back another $1.7 billion worth of stock. On an annual basis, that's a synthetic yield (cash dividend + buyback) of around 5%.

Subscribers who bought the stock at $31 early in 2006, when I recommended it in my newsletter, will earn more than 8% this year in synthetic yield alone. So, through Verizon, we're building a national fiber-to-home monopoly, and we're getting paid 8% a year (and growing) during the construction. Sooner or later, Wall Street will wake up to the value of these assets – and we'll be holding a ten-bagger.

In the race to the bottom between Corus Bankshares and BankAtlantic, it now appears BankAtlantic will be the surprise winner. Both banks grew rapidly between 2002 and 2006, thanks to heavy real estate lending in Florida. Corus focused on lending to condo-tower builders in Miami, which is probably the most grossly overbuilt real estate category in the entire country. As such, Corus was the odds-on favorite in the sprint to $0 a share.

Meanwhile, BankAtlantic focused on "commercial real estate developers" in South Florida. That doesn't sound as risky... until you realize these are really land speculators who sold options to homebuilders. What happens when the homebuilders decide not to exercise their options? Typically, the land speculator isn't prepared to continue servicing the debt on the property and he defaults. The personal guarantee on the mortgage is usually worth the paper it's printed on, not much more.

Combined, the two banks' recent growth strategies are reminiscent of a shotgun's two loaded barrels... pointing at shareholders' heads.

Last week, Corus announced that nonperforming loans soared to $199 million, from only $36 million last year. But... at least Corus is still profitable. BankAtlantic reported it lost $30 million in the third quarter and saw nonperforming loans rise from $21 million to more than $165 million. BankAtlantic has more than $450 million in loans outstanding to land developers the bank now says have direct exposure to the decline in Florida real estate prices – i.e. land that was optioned. Around $230 million of these loans are already either in default or are "classified assets," which means the assets fail to meet bank regulators' credit standards. As of June 30, BankAtlantic's total shareholder equity was only $512 million.

We know there's at least one person making millions in Miami today. Tom Dyson tells us about him in today's DailyWealth.

Billionaire investor Wilbur Ross may have jumped on subprime too soon. The bottom-feeder admitted in a Bloomberg interview that the subprime mess will take years to clear up, but we doubt he's too worried. Ross bought subprime lender American Home Mortgage last week for a bargain-basement price. And as our own Dan Ferris says, value investors "never, ever worry about mere timing."

Bond King Bill Gross gave his dour outlook on the economy today: "With banks and their shadows in retreat and modern day 'world saving committees' relatively impotent, Bernanke must do some heavy lifting as opposed to the light housework required of Alan Greenspan in 1998. An increasingly recessionary looking U.S. economy will likely require... 3.5% Fed Funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s or, to be honest, Roosevelt's depressionary 1930s." To read the full outlook, visit PIMCO.

Shares of Quant Trader pick Google (GOOG) passed $700 for the first time, in premarket trading this morning. In less than a month, shares of the search-engine behemoth added $100, for a total $31.5 billion to the market cap.

New highs: Advisory Board Company (ABCO), Covanta (CVA), Google (GOOG), Icahn Enterprises (IEP), Sigma-Aldrich (SIAL), SonicWALL (SNWL).

In the mailbag, drunks dominate. Apparently, our discussion of Ann Coulter drove many of you to the bottle – we don't blame you. The hundreds of positive notes we've gotten further our belief that all the positive feedback must be written by drunks, relatives... or drunk relatives. Despite the slobbering, the stuttering, and the poorly focused eyes we sense between the lines of your notes, we appreciate your kind words. And we promise, no more comments about Ann Coulter. Send your feedback here: feedback@stansberryresearch.com.

"Although I don't usually respond to newsletters and other mass produced info this is a good exception. I place your newsletter in the genuinely useful info, partly because of the nuggets I can pull out occasionally that have made me more knowledgeable as well as adding to my bottom line net worth. But, also, it keeps me awake long enough as I read through it to find those nuggets, as opposed to putting me to sleep on page 1 regardless of how pertinent and accurate the info may be. Thanks for your sense of humor and enjoyable format, coupled with sound advice." – Paid-up subscriber Kay Fisher

Porter comment: I wish it were mass produced... I've got to write the damn thing every day…

"I thoroughly enjoy reading your S&A Digest every night when I get home from work. Your insights are great and you always leave me thinking when I am finished." – Paid-up subscriber Stephen A. Kelley

"PLEASE, PLEASE talk as negatively as you like about Ann Coulter and all her fundamentalist ilk who don't care to study history, open their minds, or consider the options. They, and we, desperately need it. Since starting to read and consider the fine contrarian publications you and some of your brethren produce my portfolio returns and view of the financial world have both dramatically expanded, with good results for my wealth and mental health. Here's to your continued and vigorous goring of sacred cows of every persuasion." – Paid-up subscriber Dawn White

"The Digest provides some very good information and entertainment, not all of it confined to investments... I particularly want to thank you for mentioning Legacy of Ashes: The History of the CIA by Tim Weiner. I read the book after reading your column; it was fascinating and eye opening. I hadn't thought I was particularly naive, but I was shocked at some of the things our government has done through the CIA. Every American should read this book. No wonder we are hated in many parts of the world. One only has to imagine how we would feel if we were on the receiving end of some of these outrageous (and in many cases, just plain stupid) activities."

– Paid-up subscriber Scott C. Bush

Regards,

Porter Stansberry

Baltimore, Maryland

October 31, 2007

This Year's Largest Share Sale

By Ian Davis

It's no secret that the year's largest share sale is taking place in China…

And look at PetroChina Co. (PTR), specifically. The world's second-largest company will raise 66.8 billion yuan ($8.9 billion) through the sale of an additional 4 billion shares.

This is actually less than investors wanted... according to Bloomberg.com, "Investors applied for $441 billion of stock."

One look at this chart shows you why investors are so smitten. The stock has given investors a 16-fold return since it went public in 2000...

At least, most investors are smitten…

Warren Buffett's Berkshire Hathaway (BRK) just sold all 2.4 billion of its PetroChina shares.

Buffett said his reason to sell was "100 percent" because of PetroChina's share price.

As the following chart shows, PetroChina's price-to-book value recently soared to 8.19x. Compare that to ExxonMobil's (XOM) price to book of 4.64x. Royal Dutch Shell's (RDS-A) is 2.47x, and British Petroleum's is 2.84x.

PetroChina's share price would have to fall by nearly half for its price-to-book value to be equal to ExxonMobil's (the most expensive of the other big three oil companies).

PetroChina Too Expensive... Buffett Jumps Ship

However, PetroChina could moderate its valuation in another way... by growing its book value faster than its share price.

According to Bloomberg.com, "China's largest oil producer has been adding new reserves at an average annual rate of 5 percent for the past three years, a faster pace than Exxon Mobil, Shell and BP."

So... whether or not PetroChina deserves its inflated price to book is still to be seen. However, if you're a value investor, you may want to take a cue from Warren Buffett and look for opportunities elsewhere.

Good Investing,

Ian Davis

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As of 06/25/2013