A 180-degree turnaround... Chanos' education short... P/E cigar-butt hunters... No deal at any price...
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What a difference a week makes. Last week, investor sentiment hit new multi-month lows. This week, investors are feeling bullish again.
The American Association of Individual Investors Sentiment Survey says more than 30% of individual investors surveyed are bullish this week, versus just 25% last week. Last week, 41% of investors were bearish, and this week, just 33% are bearish.
Investors are like that. They thought the world was ending in March 2009. Then they thought everything was wonderful for two solid years. Then they thought the dollar was disappearing from existence a month or so ago. Now, they seem to think everything's OK again.
Investors are constantly reacting (and overreacting) to the latest news stories. If there's a bad economic report, they sell. If they read a good report, they buy.
Investors have no patience. The average holding period for an NYSE stock is around six months. Investors look for short-term results by buying a piece of a business – even though equity investing is a strategy designed to take years to produce results. When the results don't appear immediately, they go back to reading the headlines, looking for the next bandwagon they can jump on.
The bandwagon of the day today is for-profit education companies. They're soaring... after crashing... which they also did after soaring some years ago...
We've been following the short thesis for the for-profit education sector for years – often quoting the industry's greatest skeptic, Kynikos Associates founder Jim Chanos. We first covered Chanos' secondary education short in December 2008. The stocks were trading near all-time highs then, but the value proposition wasn't there.
"Outcomes at these for-profit educators are not much better than the average community college, which is free," Chanos said. Community college isn't free anywhere I've ever lived (including the People's Republics of Maryland and Oregon). But it's cheaper than the thousands of dollars you'd spend at a for-profit college.
The bear case for secondary education is clear... The schools are expensive and deliver little value. Graduates depart with large debt loads and few job prospects. The school's recruiting is questionable. (Another short seller, Steve Eisman, says they recruit at homeless shelters.) And government grants account for some 90% of the industry's revenue. The loans the companies make themselves are ludicrous. As we wrote in a previous Digest…
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One loan for nearly $14,000 came with a $7,327 "finance charge" and a 13% interest rate. Career Education and fellow for-profit educator Corinthian recently told investors they set aside half the money allocated for private lending to cover anticipated bad debts. |
At the time, we said the shorts may have a rough time, considering the government backing:
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We can't remember a single bad idea the government didn't love – especially if it was expensive, had the backing of a lobby, and led to votes. State closures of community colleges are pushing more and more students into for-profit universities and trade schools. Enrollment has increased around 20% a year for the last two years (more than double the pace from 2001-2007). – Porter Stansberry and Sean Goldsmith, S&A Digest, March 15, 2010 |
Indeed, while the secondary education short is still profitable, it's been a bumpy ride for Chanos and Eisman... as you can see from this five-year chart of industry bellwether Apollo Group.
Most recently, for-profit educators plunged after the government said it may cut funding for the sector.
Value and distressed-asset investors are always looking for "cigar butts" – companies whose shares have been beaten down and have "one puff left" (one last opportunity for profit). The problem with this style of investing is sometimes stocks are in the dumps for a reason – like imminent default or obsolescence.
Warren Buffett, the poster boy for value investors, used to practice this kind of investing. But he soon realized it's much easier and safer to buy wonderful operating businesses at fair prices (like Coca-Cola or Johnson & Johnson). But some never learn that lesson. Take L.A.-based private-equity firm Gores Group, for instance...
According to the Wall Street Journal, Gores is in talks to buy more than 200 of bankrupt book retailer Borders' remaining 405 stores. The deal could be for as much as $200 million.
Some businesses we wouldn't buy at any price. Borders is one of them. The business model of selling expensive books from brick-and-mortar locations is dead (at least from the big-box retailer perspective). But Gores apparently has no fear.
It's hard to figure out what someone is up to when he appears to be making an obvious mistake. Maybe Gores is building an empire of distressed media businesses – a Who's Who list of what's rapidly disappearing. His firm recently bought Alliance Entertainment, a wholesale distributor of CDs and DVDs, whose biggest customers are Amazon, Target... and Borders.
Maybe we'll never be billionaires, like Gores founder Alec Gores. Maybe you can't be a billionaire if you aren't willing to lever up to buy declining businesses. Still, that isn't a business model we'd invest in.
If you'd rather invest in a company that dominates several global markets, generates record amounts of free cash flow, expands its profit margins by focusing on premium, high-margin products... and generally makes all the right moves, you should read the June issue of Extreme Value, which comes out tomorrow after market close.
I've found a new World Dominator stock. It's dirt-cheap, at less than nine times free cash flow. It's not a Big Tech or Pharma company, like many of the big, cheap stocks around today. Unlike other World Dominators, this one obviously has 50%-100% one-year upside potential. I'll show you how to value the business, and why I'm sure it'll generate even higher record cash profits in the coming year.
To access the report, click here.
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New 52-week highs (as of 6/1/11): None.
In today's mailbag... one subscriber describes his experience in buying bonds. And Dan writes about how to get started managing your money. Send your e-mails to feedback@stansberryresearch.com.
"I read the letter from the frustrated bond buyer in today's Digest. I have switched from Schwab to Etrade for buying the bonds that Mike Williams writes about. With Schwab, you had to call and talk to someone on the bond desk because the bonds were lower than investment grade (I don't like to call them 'junk'). On Etrade, if you go to their bond page, you just have to enter the CUSIP number and the bond quote comes up. Their commissions are lower too.
"Just be sure to set the parameters to look for bonds that are rated where these bonds are (BBB or lower, etc.). If you don't change the default rating screener, it won't find the bond for you even with the right CUSIP. It looks for the bond and the rating at the same time. Once I figured that out, I have had no trouble buying all the bonds I wanted. Hope that helps." – Paid-up subscriber Eric P.
"As a financial advisor, I'm always looking for opinions and research that don't necessarily agree with 'the street.' My firm's research department (based out of Baltimore as well) consistently beats the New York firms. In the past three years, our research department has finished either 1st or 2nd out of over 200 firms in the Starmine rankings.
"Despite their performance, however, I am still a little skeptical of sell side research. After being disappointed by other advisory letters, I tried Porter's Investment Advisory at the suggestion of a friend. A few months later I joined the Alliance, and have found it to be money well spent.
"On a side note, I find it surprising that you had subscriber mention that their broker couldn't find the bonds mentioned in True Income; one of my favorite letters. I have never had an issue finding these bonds, and their bond desk shouldn't have a problem either. Thanks for all your hard work." – Paid-up subscriber R. McCord Kilpatrick
"This is the best 12% letter I have ever seen, at least now we know where we're going, Thanks keep it up." – Paid-up subscriber FM
Ferris comment: Thanks, FM. Technically speaking, I don't know where the market is going... But I'd like to think I've laid out a simple, effective plan anyone can use to deal with the huge uncertainty created by the Federal Reserve's quantitative easing program. I've been writing about it in Extreme Value and The 12% Letter for a couple months now. It'll help investors preserve their capital and earn a good return without much risk.
"I am a new subscriber but I have a bad problem. I have no money to speak of. I have nothing in savings and nothing to work with. I live paycheck to paycheck and still cannot make ends meet. I want to join the private wealth alliance but cant because I have no money. I do love read the S&A Digest and Penny Stock and the Growth Stock Wire but have no way of getting in on the big deals. Any advise or help?" – Paid-up BM
Ferris comment: If I were you, I wouldn't worry about the Private Wealth Alliance just yet. It'll be there when you're ready for it. Right now, you need to learn to live within your means and start saving money. And you need to start right this minute.
The biggest mistake people make with savings is thinking they won't be able to save enough to mean anything. That's not the point of it at all. The real point is to establish the habit and discipline of setting aside some of what you make. In the beginning, it really doesn't matter how much. If it's only $25 a month, that's fine. Just put $25 a month into a regular savings account and don't touch it.
Don't let people tell you it's wrong or that you'll lose it all to inflation. You're not at that stage yet. Just keep saving that money. As soon as you can, increase it by any amount, even $1. Maybe each month you add $1 or $5 to the amount you save.
Take a step back and think about this for a minute. If you can't save a small amount of money... how on earth could you ever expect to make thousands of dollars quickly investing in complicated publicly traded companies? It doesn't make sense. You don't get a Ph.D. your first day at school. And you can't be an investor living paycheck to paycheck. You must have savings. You must accumulate capital.
Your first goal should be to save 10% of your income every year. If you bring home $1,000 a week, put $100 away as soon as you get paid. Then, focus on living on less than $900 a week.
That's a huge goal. It will take a while to hit it. But if you can do it, you'll have far less trouble getting rich as an investor than if you can't save any money. The first step to growing wealth as an investor is to accumulate capital. Without investment capital, you can't be an investor.
The next step is to learn every thing you can about dividend reinvestment programs (DRIPs). They're the cheapest and best way for investors with limited capital to participate in the stock market.
You also need to read a lot about investing. Read incessantly. Keep a dictionary nearby and look up every word you don't know. This is as important as saving money. Go to your local library and see if they have the following:
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The Intelligent Investor, by Ben Graham (Chapter 20 is the essential bit). I re-read this once a month. It's that important. |
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The Little Book That Still Beats The Market, by Joel Greenblatt. Read this one over and over until you understand it well. |
Start there. You're on an odyssey… one of the most important journeys you'll ever make in your life. It could mean the difference between comfort and misery somewhere down the road, so take it seriously. But don't forget to have fun with it every day, too. Life is barely worth living (if at all) without sufficient amounts of fun.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
June 2, 2011