Every Investor Should Own These Stocks Now
An incredible investment that bears repeating... A peek at the latest issue of Extreme Value... The power of capital efficiency... Every investor should own these stocks now... The 'Magnificent Seven' can't lead forever...
Investors are too complacent about big risks in the market...
You probably know this. I (Dan Ferris) tell you this just about every week. As I wrote last Friday, I'm "a doom-and-gloom guy on overvalued securities"...
I know that expensive securities tend to be losers. So when I see them, I feel like it's my job to warn you – and help you navigate the heightened risk.
Some folks ask me why I keep recommending stocks in my newsletters if I'm so bearish. But as I've emphasized before, I'm a huge proponent of stock investing. The problem is that most people buy the wrong stocks... the overhyped, overvalued names that are bound for spectacular falls.
You probably know this, too.
So today, instead of telling you what to avoid, I'll focus on a particular type of investment every investor ought to own.
Longtime subscribers may have also heard about this investment before. I've written about it previously, as have a number of my Stansberry Research colleagues.
But just as the big risks I write about most Fridays are worth repeating... the best investments are worth analyzing and reporting on again and again.
Once you get to my age (62), you've hopefully figured out that most public companies aren't that great. Most of them aren't worth more than a brief trade every now and then... if that. Many should simply be avoided altogether.
Few are truly great investments that should be bought and held for the long term. It's even more unusual to find an entire category of such stocks.
When a stock like that is trading at a bargain price, that's exactly what I recommend in my Extreme Value letter.
And I shared such an opportunity with my subscribers this very evening...
Here's how I described it in the opening paragraphs of today's new issue of Extreme Value...
Close your eyes and think about the most productive person you know...
Now imagine paying them a one-time fee today... and collecting a share of every dollar they earn for the rest of their life.
As their income grows over the years, you won't have to invest another penny. And yet because your share is a fixed percentage, you'll earn more right along with them.
That may seem like an impossible, too-good-to-be-true fantasy. But it's really how royalties work...
Royalty companies provide funding up front to earn a share of the revenue from an asset or product later on. Doing so allows them to reap hefty rewards in the future without having to invest any new capital. It's like a perpetual bond.
For example, our model portfolio holding Altius Minerals (ALS.TO) owns royalties on roughly 20% of the world's potash supply. It doesn't invest in mining directly, which means it's far less risky than an actual mining company.
Altius doesn't need to pay a single cent for exploration, production, or expansion of the mines. It's responsible for virtually no operations except some basic accounting and administration. Instead, it just sits back and rakes in the cash from investments others are making.
As long as the mines keep producing and demand remains high, Altius keeps earning royalties.
It's similar for royalty-like businesses. The only difference is that these businesses need to reinvest small amounts of capital to grow their rewards. We hold several companies in our portfolio that fit this model. One of them is a royalty on the rising cost of health care in the U.S... Another is a royalty on the global economy... And another one is a royalty on global financial markets.
Longtime Extreme Value subscribers know we love royalties and royalty-like businesses. We currently hold nine in our model portfolio (including the four described above), each of which represents a real share in wealth creation from a particular property or product... without further serious capital investment once the royalty is acquired.
As superinvestor Warren Buffett once said...
The best business is a royalty on the growth of others, requiring little capital itself.
We live by those words. And when we find one of these rare businesses that's priced for good returns, we add it to the model portfolio.
This month, we're recommending the biggest private royalty holder in the world. It earns an effective 13% royalty on roughly $120 billion in global revenues in an industry that's patronized worldwide by billions of people every day.
You know this cash gusher well. You grew up with it. Its name and logo are ubiquitous. Yet you've probably never thought of it as a royalty holder. And we have rarely considered it an extreme value.
But today, this industry-dominating powerhouse is trading at an unusual discount as Wall Street ignores three significant avenues for growth in the coming years. We urge you to add it to your royalty portfolio now before the market catches on and our window of opportunity closes.
I won't share the company's name and ticker here in the Digest...
That information is exclusive for Extreme Value subscribers.
But I've publicly shared some of the excellent returns that other royalty companies and royalty-like businesses have generated for Extreme Value.
In an example that I've brought up a number of times, we're up 189% on Altius Minerals, and I fully expect shares to move up 500% or more over the next several years. (It's a great time to buy the stock right now, if you don't already own it.)
We've also logged gains of more than 90% since early 2018 on my current No. 1 recommendation, perhaps the most unusual mining-related play ever. Altius was my No. 1 pick until I found this one. If I find another No. 1, I'll certainly tell subscribers about it, but this excellent business – whose management team I've known for years – sets a high bar.
So far, we're up more than 800% on Automatic Data Processing (ADP)... a company that Digest readers see every day among Stansberry Research's top open positions. It's a royalty-like play on U.S. payrolls. As long as people need to work for a living, it'll be a great business. Threats to employment from AI are relatively meaningless to this company, which handles paychecks, benefits, and tax payments for roughly one in six of the country's paid employees.
We logged a 261% gain in less than a year on International Royalty, which held some 80 mineral royalty interests when we recommended it in March 2009. The company was acquired by Royal Gold (RGLD).
We also made a 66% gain in six months on IMS Health, a royalty-like play on health care. We recommended it in August 2009 and it was acquired the following February.
Most folks don't realize how many excellent royalty-like businesses are out there...
We recommended 11 stocks in Extreme Value in 2023...
Eight of these were royalty holders or royalty-like plays. One of them was a new royalty holder like Altius. The other seven were royalty-like plays on health care, local/state/federal government, scarce real estate in urban areas... We even found a royalty play on the value of every property at every listed address in the United States.
(By the way... if you're thinking that there are 12 months in a year and that recommending 11 stocks means we didn't recommend stocks in one of those months, you're absolutely correct. We only make a new pick when we've found something that's good enough and priced right. If we don't find one, we wait. We have a high bar for quality and we won't lower it, no matter what.)
We made most of those new picks in the past several months, so they haven't had time to work. But the first royalty-like business we recommended in 2023 (in February) is up 38% – more than double the S&P 500 Index's 17.2% return for the same period.
That's not all...
Last year, we initiated our Ultimate Commodity Hypercycle Portfolio for Extreme Value premier subscribers. These folks pay up front for a subscription, then get access to all our research for only a small annual maintenance fee. (Since Extreme Value specializes in finding great stocks to buy and hold for a long time, I wish we would only offer it this way.)
Two of the seven Hypercycle stocks are royalty holders. Many Digest readers probably think they know all the big publicly traded royalty companies, but I bet you've never heard of any of them. The whole portfolio (including dividends) is up 22.2% through Wednesday's close, compared with 20.5% for the S&P 500.
They're the safest, best companies in the commodities space, but you can still expect them to rise five to 10 times their current prices through a full commodities cycle.
That could take a few years... more than a decade... or somewhere in between. While I won't try to guess the timing, I can predict that these companies will perform well and carry less risk than just about any other stock in the commodities sector. They own the best assets, have the best management teams, and generate the best financial results among their competitors.
And as I showed you earlier in the excerpt from today's Extreme Value issue, we've started 2024 with a fantastic business that's a bit unusual... because it is both a royalty holder and a royalty-like business. (Once again, the details are only for paying Extreme Value subscribers.)
I'm sure we'll find other royalty-like plays this year and over the next several years. But even if we never recommend another royalty holder or royalty-like company, our existing portfolio holdings have already set our readers up for massive compounding over the next few years.
You could probably put $1,000 into every royalty holder and royalty-like stock in Extreme Value and earn back the cost of a subscription in dividends and capital gains within a year or two.
All royalty holders and royalty-like plays share a critical trait Porter Stansberry has been telling you about for years...
Capital efficiency.
That's a fancy term for any business that requires little (if any) new capital once you've made the initial investment to start it.
For example, once you build a mine, you must keep investing in it to keep it in good condition. You have to keep it from filling up with water, make sure the walls don't cave in... and probably 100 other things that could go wrong if you don't keep reinvesting the needed capital.
If a mine is well-run – like the Canadian potash mines Altius collects royalties on – it'll operate for a long, long time. When the mining company wants to expand production or produce from new areas of the mineral deposit, it will pay for the expansion with a new capital investment.
But the royalty holder won't pay a penny. The royalty holder will just keep collecting checks. Owning a royalty on a producing mine is the most capital-efficient way to invest in mining. In fact, most investors probably shouldn't invest in mining companies at all. They should just buy the best royalty holders, tuck them away in their portfolios, and forget they own them for a decade or more.
Royalty-like businesses are great, too. They gush cash profits and require little if any capital to maintain and grow the business.
Some of the world's best, most well-known businesses are royalty-like. For example, consider Microsoft (MSFT). More than a billion people use Microsoft Office worldwide, mainly in the white-collar workforce. And in their eyes – or at least in the eyes of their employers – there is no substitute for this product.
The product is software. Of course, software requires updates... new features, bug fixes, and security patches. But that kind of work costs a lot less than expanding a big mine... or any other business with lots of property and equipment to keep up.
Microsoft just needs to pay software programmers, and these folks need little more than a computer to keep Office's Word, Outlook, Excel, and PowerPoint applications humming along and improving over time. Nowadays, they don't even necessarily need office space. Microsoft Office required relatively little investment to start up, and it requires relatively little to maintain and grow – the definition of a capital-efficient operation.
High capital efficiency and a product that users can't work without make Office an effective royalty on global productivity of white-collar workers.
My favorite stocks won't always lead the market...
We've just been through a crazy year in which the average stock didn't do much, and seven mega-cap stocks roared.
In 2023, the Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla) accounted for most of the gains in the S&P 500 and Nasdaq Composite indexes.
And now, just in the past month, those seven have begun to falter. Three of them – Microsoft, Apple, and Tesla – have underperformed the S&P 500 over the past month. It's only one month, but we all know these stocks couldn't outperform forever. The higher they go, the harder they'll fall.
If you bought the Magnificent Seven, congrats, you nailed the trade of the year. And yes, they're great, cash-gushing businesses... as we mentioned with our earlier praise of Microsoft's software business.
But if you've already made money from the Mag Seven, or if you're thinking of jumping into the momentum trade... be careful. As I've written before, even the best companies are terrible investments at the wrong price. It's time to think about buying other great businesses that are much more attractively priced.
These companies won't usually rip higher. They're not speculations. But they have much less downside risk than the high fliers... especially if they're priced below what I call their intrinsic value.
We specialize in finding those situations in Extreme Value. The royalty holders and royalty-like plays are just the tip of a fair-sized iceberg of opportunity that most folks miss because the bulk of it sits below the market's sexy surface.
While everyone is ogling the Mag Seven or whatever is the current fad, great cash gushers with fantastic, capital-efficient businesses are passing them by.
If you'd rather find these great compounders while everybody else is falling for the popular thing of the moment, Extreme Value has you covered.
And what's more, for a limited time, Digest readers can subscribe to Extreme Value at 40% off our normal price. This offer includes a 30-day trial to browse my recommendations, model portfolio, and educational resources. Click here to learn more.
New 52-week highs (as of 1/11/24): Amazon (AMZN), Cameco (CCJ), Cencora (COR), Salesforce (CRM), CyberArk Software (CYBR), Dell Technologies (DELL), D.R. Horton (DHI), Franklin FTSE Japan Fund (FLJP), W.W. Grainger (GWW), Lennar (LEN), Eli Lilly (LLY), Microsoft (MSFT), NVR (NVR), Novartis (NVS), Palo Alto Networks (PANW), Parker-Hannifin (PH), PulteGroup (PHM), Spotify Technology (SPOT), Stryker (SYK), Travelers (TRV), Trane Technologies (TT), Tyler Technologies (TYL), Sprott Physical Uranium Trust (U-U.TO), Sprott Uranium Miners Fund (URNM), and Vanguard Short-Term Corporate Bond Fund (VCSH).
One quick housekeeping note before the mailbag... The U.S. markets and our offices are closed on Monday for Martin Luther King Jr. Day. After this weekend's Masters Series, we'll pick things back up here on Tuesday.
In today's mailbag, we have feedback for our Ten Stock Trader editor Greg Diamond. Incidentally, we'll be interviewing Greg on next week's episode of the Stansberry Investor Hour podcast, so if you're interested in hearing more from Greg – about how he trades and his outlook for 2024, stay tuned for that. And, as always, if you have a comment or question, e-mail us at feedback@stansberryresearch.com.
"I've been a subscriber for almost a year and I just wanted to send a brief note to express my gratitude for the service and [Greg Diamond's] regular commentary.
"Over the years I've spent countless time and money on subscriptions and the technical analysis theories but it never translated to results.
"I think as much as the recommendations, your timely updates helped me grow in my psychological approach to trading. Those updates provided me patience when I'd otherwise sell right before a big upswing, or get me to lock in profits when I'd normally continue holding only to see them evaporate. I think this is the first year in 15 years the actively traded part of my portfolio has seen such gains, so thank you." – Subscriber Chad A.
Good investing,
Dan Ferris
Eagle Point, Oregon
January 12, 2024