Up nearly 100% in less than a week... Another 'home run' for Stansberry Venture subscribers... More on Wal-Mart...
Congratulations to our colleague Dave Lashmet and his Stansberry Venture subscribers, who are now closing in on their fourth "double" – or 100% gain – of the year so far...
Dave issued his latest recommendation in a special buy alert for subscribers last Monday. He said the tiny company – that is developing an innovative new cancer therapy – was about to become the target of a "bidding war" between two giant pharmaceutical rivals.
He recently visited the company's headquarters and saw that one of the rivals had buildings literally surrounding this small company. But the small firm had just cut a preliminary deal with the other drug giant.
Dave said it would only be a matter of time before one rival made a move. In fact, he expected news of an offer or acquisition could be coming within days, and urged subscribers to buy shares immediately...
Sure enough, that's exactly what happened...
Venture subscribers woke up to news of a huge deal late last week. One of the rivals offered a guaranteed payment greater than the small firm's previous enterprise value. As of Friday's close, subscribers were up nearly 100%.
Kudos to Dave on another "home run."
Last week, we discussed the latest selloff in retail giant Wal-Mart (WMT)...
Shares plunged more than 10% on Wednesday, their biggest one-day decline since 1988. That morning, the company announced its profits are expected to drop up to 12% each of the next two years, as part of a massive plan to revamp its stores.
Stansberry's Investment Advisory subscribers were stopped out of Wal-Mart shares for a gain of 32% that day, and analysts Bryan Beach and Mike DiBiase shared their thoughts on the selloff in last Thursday's Digest.
Today, we're sharing some thoughts from Extreme Value editor Dan Ferris.
Longtime readers may remember Dan was among the first analysts anywhere to recommend shares of the "World Dominator." He originally recommended Wal-Mart in October 2006, calling it "possibly the single best stock on Earth right now."
Extreme Value subscribers were able to safely compound their money at more than 8% per year over the past eight years. But earlier this year Dan did something unexpected...
In February, he told his readers to sell shares of Wal-Mart. As he explained in the February 24 Extreme Value weekly update...
Many readers will think what I'm about to tell you next is sacrilege. I promise you, it's not... We recommend you sell Wal-Mart. Before flying off the handle and sending me piles of hate mail, hear me out...
I've frequently said World Dominators are great, safe stocks you can hold on to forever. Forever is an ideal, not a realistic expectation. Value investing is about buying what's cheap and safe, and selling what's expensive and risky (overvalued).
We've pointed out many times that great businesses can become not-so-great or even terrible investments if they get expensive enough. For example, Coca-Cola peaked in 1998 and didn't break even for more than a decade.
So yes, you could continue to WMT forever, compounding your money at low single-digit rates. But we're targeting double-digit annual returns over the long term. WMT hasn't compounded at double-digit rates since we recommended it. And we have no reason to believe that will change.
Dan is a long-term value investor, not a trader. He'll be the first to tell you he doesn't try to "time" the market. But in this case, his timing was impeccable...
Extreme Value subscribers were able to sell the stock for more than $80 per share – near its all-time high – and locked in gains of nearly 100% (including dividends).
Since then, shares have trended lower. Including last week's plunge, the stock is now down more than 25% since he recommended selling.
Dan shared his latest thoughts on the company in a private e-mail this morning...
In February, we recommended selling Wal-Mart because we thought it unlikely to compound at double-digit rates. Nothing has changed since then to make me think otherwise.
Management expects earnings per share to fall 6%-12% in fiscal 2017 (most of which takes place in calendar 2016). It expects a 5%-10% increase by fiscal 2019, leaving fiscal 2018 in limbo. Put that all together, and you're still looking at flat to single-digit earnings growth. Wal-Mart is planning to buy back $20 billion of shares (more than 10% at the current market cap of $190 billion), but the lower share count won't make up for the profit drop.
Right now, the stock yields about 3.3%. I don't see Wal-Mart cutting its dividend, but I don't see it growing much the next couple of years, either.
As he noted earlier, Dan would only be interested in buying shares of Wal-Mart again if he could reasonably expect double-digit annual returns. And he still thinks that's unlikely...
It would need annual dividend growth of at least 6.7% before we could rationally expect double-digit annual returns. Last year's increase was a mere 2%, and Wal-Mart is predicting profits to fall next year due to increased investment in e-commerce. I don't see the dividend growth picking back up for at least a few years.
I'm sticking with my original thesis. Even from here, I don't see double-digit compounding (our goal in Extreme Value) happening over the next few years.
Like the Stansberry's Investment Advisory team, Dan noted that it's possible he could re-recommend shares of Wal-Mart at some point...
One event that might cause Wal-Mart to outperform other investments in the next few years would be if we had a big crisis like in 2008, when Wal-Mart generated a 21% total return. I doubt it would repeat that performance, but I bet it wouldn't get hit too hard, as folks who previously shopped at Trader Joe's and Whole Foods started shopping at Wal-Mart.
Another thing I like about Wal-Mart right at this moment is that so many investors seem suddenly to intensely dislike it. That counts a lot for me. It's really rare to have a true bargain without also having a reason why other investors don't like it. We know why they don't like it right now (the profit warning, and billion dollar investments to compete with Amazon in e-commerce).
But Wal-Mart will probably generate $80 billion in cash the next 3-4 years (management says three). Equity value is based on cash generation, so this equity will still have plenty of value. If it gets cheaper and more hated relative to its earnings power from here, I could get interested. Right now, it doesn't cost me anything to wait, except what I view as an unlikely lost opportunity. These days, I'm more willing to pay opportunity cost than to risk capital impairments.
New 52-week highs (as of 10/16/15): Activision Blizzard (ATVI), Chubb (CB), McDonald's (MCD), Altria (MO), and Sysco (SYY).
In the mailbag, three folks live up to their word and explain why they're going to continue to ignore Porter's advice about volatility-based position sizing... and one other would like to learn more. Are you a TradeStops subscriber? If so, shoot us an e-mail to feedback@stansberryresearch.com and let us know what you think of the software.
"I just flat out don't like the tone of your email. I feel like I'm being bullied. When I get bullied I hit back. I can afford this service but will decline just to show I won't be bullied. Whoever decided for you this is the way to encourage a sale of a product must be on something. Anyway, I don't think this would be necessary for my subscription to Retirement Trader which is all I'm interested in right now. Rethink your selling methods." – Paid-up subscriber Bob Buckley
Porter comment: Bob, please don't feel bullied. I'm just trying to break through the natural tendency to put things off... and to avoid learning something new.
"Porter, I am writing this email to convey why I am not taking your recommendations in today's Digest. I am not taking them because, as usual, it involves spending more money on your products, newsletters, etc. I for one feel your brand is cheapened by your constant self promotion and the barrage of emails to buy more products. Several of my friends have dropped out of your publications because they were so disgusted. I know you say it works, but to me you seem like a used car salesman." – Paid-up subscriber John Wolfe
"I have only recently joined Stansberry and already have an appreciation for your perspective and insight. I have made several adjustments to my portfolio based on the information provided by your company. However, every email in my inbox from you contains at least one (and often more) sales pitch for the latest and greatest. The opportunity for volatility-based position-sizing may be exactly as billed (and all the other opportunities as well) but I have become desensitized to the constant bombardment of advertising and frankly lack the energy to click the link to listen to yet another droning sales pitch. Please know that the concept of volatility-based position-sizing is intriguing to me and I will review my portfolio and relative risk in relation to position sizing; I just won't be utilizing someone's tool in performing this exercise (and likely leaving value on the table as a result).
"You asked for feedback of why I was not pursuing and I 'promised' to provide such feedback by reading the remainder of your article. I do appreciate what you do and will continue to learn from your company. I hope the feedback was useful." – Paid-up subscriber Robert E.
Porter comment: Thank you! You'll see a big change in our e-mail marketing strategy next year...
"Hi Porter, excellent information/advice re 'volatility based position sizing.' After a good study it makes a lot of sense to me. Why do you not lead with a good example of a 'Super Portfolio' based on this? I follow closely with all your model Portfolios and what came out of the Las Vegas symposium could be made to good use!
"A selection of some 25 stocks from your Resource Report portfolio, Investment Advisory portfolio, Pro Trader portfolio, Model Portfolio XLV and XLI, international portfolio/global elite monitor, capital efficient list, great business, insurance monitor, trophy assets, oil monitor, mining stock royalties, etc.
"I am 88 years old, live on level waterfront in Canada Straits of Georgia, am of Swiss descent, and one of those guys who believed advisors 'gold can never go down' at $1900. I want to follow your super portfolio with 70% of my investments and have fun with options, etc. with the rest of it. I am also a life member of your excellent service. Kind regards." – Paid-up subscriber Jakob Knaus
Porter comment: See the "magic portfolio" I discussed in Friday's Digest. It is exactly what you're looking for.
Regards,
Justin Brill
Cambridge, Massachusetts
October 19, 2015
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