Why you must hedge today...
Why you must hedge today... Even bears need 'insurance'... Two longs to consider now... 'Great deals like this don't come around often'... Why Steve Sjuggerud is 'going big'... A huge opportunity is coming...
In today's Digest, an idea you might not have considered...
Regular readers know we recommend holding plenty of cash today. As we've explained, that doesn't mean selling all your stocks. It just means selling enough to sleep well at night... and to have enough "dry powder" available to pick up bargains if a crash occurs.
Even if we don't see a crash, we're confident that patient investors with cash will have much better opportunities to buy down the road.
But as Porter has explained, we think the risk of substantial declines in stocks and bonds is greater than many folks believe. So we also recommend "hedging" your portfolio.
If you're not familiar, hedging just means adding some positions that are meant to act like insurance for the rest of your portfolio.
For most investors (who are generally 100% long stocks and bonds) this means adding a small number of short-sale positions and/or "pairs trades" – where you're long one stock and short another. (You can learn more about the basics of short-selling in the Stansberry Research Education Center right here. And Porter shared a great example of a pairs trade in the October 9 Digest.)
The general idea with these hedges is simple...
If the market falls, these positions are likely to fall further than the broad market and the (hopefully) high-quality stocks you're still holding. These gains will help offset your losses elsewhere.
But if you're wrong and the market continues higher, you'll still have exposure to the upside that you wouldn't have if you were entirely in cash... even if the small number of hedges offsets some of your gains.
But there's another side to hedging you need to consider as well...
We know some of our readers are even more worried about the market than we are. We've heard from several folks asking for the best ways to short the market through inverse exchange-traded funds ("ETFs") and put options.
We think that's a mistake. It's still too early to get extremely bearish. As Porter noted in the October 2 Digest, he first became concerned about the bond market in mid-2013. If he had sold everything back then – or worse, gone heavily short – he would have lost a huge amount of money.
Instead, he started hedging his portfolio. And while this insurance hasn't paid off yet, it hasn't cost his Stansberry's Investment Advisory subscribers much, either. They've still profited from the rally of the past two years.
Still, we know some folks will likely short the market no matter what we say. If you're one of them, we hope you'll keep one thing in mind...
If you're going to bet heavily against the market today, you need to hedge your portfolio, too. In fact, because stocks have historically gone up most of the time, it's even more important for you.
It may seem counterintuitive, but just as we wouldn't recommend being long today without a little insurance on the short side... we wouldn't dare bet short today without some hedges on the long side, either.
One hedge we'd recommend is buying high-quality stocks trading for good prices.
After the rally of the past six years, these bargains are getting harder to find. But there are still a handful of great opportunities available if you know where to look. In fact, one of the biggest is "hiding in plain sight" today...
Our colleagues Brian Hunt and Ben Morris updated subscribers on this opportunity in yesterday's DailyWealth Trader...
The long-term trend has turned down... And stocks are in a sort of "no-man's land." It's a good time to be cautious... and to stick to conservative positions in very high-quality stocks... just like the one we're featuring today.
It's an iconic brand... Its sales are through the roof... It generates incredible amounts of cash... And its stock is dirt-cheap. If you miss out on this opportunity, there's a good chance you'll be kicking yourself for it down the line.
The stock in question will sound familiar to regular Digest readers... It's consumer-electronics giant Apple, the world's largest publicly traded company and the world's most valuable brand, according to Forbes. More from the issue...
Apple has grown its sales at an average rate of 38% a year for the last 10 years, with sales of $224 billion over the last 12 months. That's $615 million in sales, on average, every day. It has a thick, 23% profit margin. And the company generated $69.6 billion in free cash flow over the last 12 months. That's more than Google, Microsoft, Facebook, Intel, and Oracle (the next five largest tech companies by market cap) combined.
Not surprisingly, Apple is in great financial shape, too. It has a massive $202 billion cash pile and only $54 billion in debt. It uses lots of this cash to buy back shares – which makes each remaining share more valuable – and to pay a 1.8% annual dividend.
Perhaps most important, Brian and Ben say Apple is dirt-cheap today according to two of the most important valuation metrics investors use...
One compares Apple's market value to its earnings... It's called the "EV/EBITDA" ratio. The other compares its market value to its cash flows... This one is called the "EV/FCF" ratio.
Even though Apple's share price has risen nearly 160% (from $44 to $114), shares are far cheaper today than they were five years ago. Today, Apple has an enterprise value of $500 billion... an EBITDA for the last 12 months of $77.9 billion... and a free cash flow over the last year of $69.6 billion. So its EV/EBITDA works out to 6.4 and its EV/FCF is 7.2. For both ratios, a value of 10 or below is a great deal for a great company.
Apple isn't just cheap relative to its five-year history, though. It's cheap relative to other stocks in the market today... Apple is at least 42% cheaper than the average tech stock today, and at least 47% cheaper than the benchmark S&P 500 index. Yet Apple is a far stronger company than the average company included in these indexes.
Brian and Ben aren't the only ones who believe that. As we've discussed, Apple is a favorite of some of the world's greatest investors – names like Ray Dalio, David Tepper, David Einhorn, Carl Icahn, and others – and is a top recommendation in several other Stansberry Research publications like Extreme Value, Stansberry's Investment Advisory, and Retirement Millionaire.
As Brian and Ben said on Tuesday...
Great deals like Apple today don't come around often. And when they do, they don't usually last long. In Apple's case, there's been plenty of time to act. So if you haven't already made your trade, we suggest you don't wait any longer.
We agree. If you don't already own Apple, you still have a great chance to buy it today.
Another good way to hedge a bearish portfolio from the long side is with high-conviction speculations... calculated bets where the risk-to-reward is heavily tilted in your favor. And we know of no better speculative opportunity today than the one in gold stocks.
Our colleague Steve Sjuggerud updated readers on the situation in today's edition of our free DailyWealth e-letter...
Most investors know that gold is far from its 2011 highs. But I don't think folks understand how far gold stocks have fallen.
The benchmark gold-stocks index – the NYSE Arca Gold Bugs Index (HUI) – is down 75% in four years. Meanwhile, the price of gold only fell 30% in four years. That's a big divergence. And it has led to a major extreme in the gold-to-gold-stocks ratio.
This ratio is simple... It's the price of the HUI Index divided by the price of gold. Gold stocks are cheap compared with the price of gold when the ratio is low. And they're expensive relative to gold when the ratio is high.
With gold stocks crashing 75% and gold only falling 30%, this ratio recently hit an all-time low. Take a look...
As Steve explained, the two major bottoms in this ratio led to huge returns. You can see those bottoms – in 2000 and 2008 – in the previous chart. And we could be approaching another major bottom, this time from even cheaper prices. More from Steve...
If you'd bought gold stocks at each of those bottoms and held for three years, you would have made 418% and 226%, respectively.
We can't know exactly when we've hit bottom. But this shows how much gold stocks can soar when they get going. And after a 75% decline, these kinds of gains are absolutely possible when the next move higher begins.
Importantly, the next move could be here – today. The easiest way to own gold stocks is through the Market Vectors Gold Miners Fund (GDX). It's up 20%-plus since last month's low.
We can't know for sure if this is the next big move in gold stocks. But they've been crashing for four years, they're now dirt-cheap, and in the last month they've been moving higher.
Again, this situation isn't news to regular readers. But what you may be interested to hear is that Steve is "putting his money where his mouth is" and betting big on gold stocks with his own money.
If you know anything about Steve, you know he's conservative. He doesn't buy penny stocks, he doesn't day trade, and he hates to lose money. In fact, he has only made two other big bets like this in his entire career. Steve sent us a private e-mail this morning explaining why he decided to make another one today...
I've only "gone big" two times personally in my investing career. The first was in 2008, near the bottom of the financial crisis. I borrowed money against my home to invest in stocks. I knew we were near generational lows and I leveraged up to take advantage of it. I ended up doubling my money in roughly a year and closing my home equity loan.
My next "big bet" was on real estate in 2010 and 2011. Once again, after a massive crash the value was obvious. I've spent years buying trophy properties where I live in Florida. I recently purchased 70 acres of intercoastal land. And I believe that property – and the others I've purchased – will be fantastic investments when I sell them.
I really didn't expect to find another opportunity to "go big" again this soon. But that's exactly what I'm doing right now. This week, I put $100,000 into a basket of small gold companies. This market has been obliterated since 2011. But that's turning around now. I believe this $100,000 could turn into $1 million by the time the market peaks.
I'm putting my money where my mouth is. And I'm recommending my readers do the same. This is one of the best opportunities I've seen in my investing career. And I believe it will lead to fantastic gains in the coming years.
Steve has put together a special report featuring his three favorite gold stocks for his True Wealth Systems subscribers. To view Steve's brand-new video presentation detailing this opportunity – and find out how to take advantage of a special offer to True Wealth Systems – click here.
Finally, whether you're leaning bearish, bullish, or are 100% in cash today, we believe one of the best opportunities of your investing life is approaching. This is the kind of opportunity that only comes around a couple of times every generation. We expect you'll have the chance to safely pick up discounted corporate bonds for pennies on the dollar.
New 52-week highs (as of 10/21/15): Chubb (CB), Altria (MO), Sysco (SYY), and Travelers (TRV).
In today's mailbag, another subscriber shares his thoughts on last week's Stansberry Conference Series event in Las Vegas, and two more weigh in on TradeStops and Porter's Friday Digest challenge. Send your comments and questions to feedback@stansberryresearch.com.
"I'm watching the streaming version of the Vegas conference and just finished watching the Not Impossible Labs presentation. All I can say is WOW. What an incredibly INSPIRING presentation. When I read the synopsis on the promo page I shrugged 'This one will be boring' but I couldn't have been more wrong. This presentation alone was worth the price of access to the broadcast.
"Seeing this makes me realize MAYBE there is still hope for humanity. Thank you Stansberry Research for making this available. P.S. Altucher is great too. I appreciate your company bringing an abundance of LEARNING opportunities to your readers that isn't just stock picking. Even if you do have to litter our inbox with sales pitches. I'm not complaining one bit." – Paid-up subscriber Matt Vestrand
"Blessings, Porter... I am a newbie to your company and its services. I have money to both invest long-term and trade short-term. I'm very pleased with all the balanced, daily information being posted. I have already subscribed to two Stansberry Research newsletters, and I'm journaling many of the key points being shared and researching the archives to gain more knowledge for my mother and myself.
"When I read your challenge 1 week ago, it reminded me of a former DI (Drill Sgt.) who pulled me aside on the 1st day of boot camp saying, 'Do all I tell you and you'll make it through!' And, it was with that vivid memory in my mind that I clicked to buy a copy of Trade Stops, life-time, so that I'm doing everything correctly from 'jump-street' to build wealth!" – Paid-up subscriber K.F. Love
"I cringe to think of how much money I have left on the table or unnecessarily lost because Tradestops wasn't a part of my portfolio plan." – Paid-up subscriber Lyle K.
Regards,
Justin Brill
Baltimore, Maryland
October 22, 2015
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