A biology lesson... Prestige Brands taken out... Fitch downgrades Greece... A 763% bond... How to make a fortune in natural gas stations... How the government is confiscating your capital...
We start today's Digest with a short lesson in biology... a lesson Dan taught his subscribers in the May 2009 issue of Extreme Value. Why discuss biology in an investment newsletter, you ask? Because this particular lesson can help you become a better investor…
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The California condor is dying, and there's not much anyone can do about it. |
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The condor thrived in the Pleistocene era, between 1.8 million and 10,000 years ago. It's a carrion scavenger. Back then, giant animal carcasses covered the North American landscape. With plenty to eat, the carrion scavengers thrived. Those large animals disappeared, and so have all but 322 California condors. |
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Then, there are cockroaches. |
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The Earth is covered with cockroaches. About 4,000 species thrive in diverse climates all over the world. The few species we know as pests have proven particularly good at adapting to changing environments. Cockroaches can live for weeks without food. If they have to, they can survive on postage-stamp glue. They can recover after 30 minutes underwater. They can withstand several times the radiation it takes to kill a human being. Cockroaches have been around longer than humans and could someday outlive us. They're a lot tougher than most species. |
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I want to sell short California condor stocks. I want to buy cockroach stocks. |
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Cockroach stocks are the best long-term bets, the hardiest survivors. Think Coca-Cola, ExxonMobil, Procter & Gamble, Alexander & Baldwin... |
Buying the four "cockroaches" Dan cited above would have produced returns of 72%, 11%, 38%, and 124%, respectively, in the nearly three years since that issue was published...
Also in that issue… Dan recommended another "cockroach" stock, consumer-product company Prestige Brand Holdings. At the time, the company was trading for $6.23 per share, a little less than five times free cash flow (operating cash flow minus capital expenditures). Here's what he wrote at the time…
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Prestige is a cockroach company. And it's so cheap right now, it's worth at least twice and probably three times what it's trading for today. |
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Prestige owns several well-known consumer brands. All of its products are either personal health care products or household cleaning products, the sort of thing you find in grocery, convenience, and drug stores. |
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About 78% of Prestige's 2008 sales came from brands that were either No. 1 or No. 2 in their markets. Six of Prestige's 15 major brands are No. 1 in their markets. Four are No. 2. |
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Granted, Prestige Brands is not Intel. Intel has a little over 80% of its market. It's the target of antitrust bureaucrats the world over. Prestige Brands' biggest market shares are Doctor's NightGuard (68%), New Skin liquid bandages (46.6%), and Chloraseptic (42.9%). If they didn't have these products in their medicine cabinets, I doubt if the antitrust bureaucrats in the Justice Department and the European Union would know they exist. |
Yesterday, Mexican drug company Genomma Lab Internacional offered $16.60 a share for Prestige Brands, a 23% premium to the previous closing price. As of today, Extreme Value readers have made 161% on the recommendation... And that return could increase.
The offer "is a classic setup for a bidding war," Dan wrote in an e-mail to me (Sean Goldsmith) commenting on the offer. "A weak company (Genomma) that has done four acquisitions in three and a half years makes a lowball bid without telling us how it's going to finance an $834 million deal."
Dan said if a higher offer doesn't arrive, the stock still has upside potential… as it will continue to gush free cash flow. "Most of the time, you cut and run when an offer like this is made," Dan wrote. "But when you're absolutely certain you're holding onto a great business, one that gushes cash flow and could easily attract other, higher offers, you stay and wait. In short, you hold onto an excellent business as long as you can."
So much for yesterday's Greek bailout... Today, credit-ratings agency Fitch Ratings downgraded Greek sovereign debt from "triple C" to "C," saying default is "highly likely in the near term." Referring to the debt swap – whereby private investors holding Greek debt would exchange their bonds for lower-value debt – Fitch said…
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The exchange, if completed, would constitute a "distressed debt exchange" (DDE) in line with its criteria and consequently yesterday's announcements set in motion the agency's process for reviewing Greece's issuer and debt securities ratings. |
This downgrade is meaningless... We all know Greece is broke. If a nation (or any entity for that matter) requires a few hundred billion dollars in government assistance and a deal where private creditors take a 70% haircut to survive… it's in default (or a "D" in Fitch-speak).
While Fitch is a lagging indicator, the market is in real time. And the market is pricing one-year Greek debt at a yield of 763% (up from 638% five days ago). The surge in yield comes from the debt swap (current Greek debt will be replaced with less valuable, new debt), which is eroding the value of the bonds.
Last week, we discussed Frank Curzio's recommendation of Westport Innovations, which hit a 52-week high. The company makes natural-gas-powered engines for trucks and cars. It has partnerships with almost every major engine and auto manufacturer in the world... Shares are up nearly 200% in the past 12 months. Frank thinks the stock can still triple from here.
In today's Growth Stock Wire, Frank continues his discussion of natural gas as a transportation fuel... Natural gas as a transportation fuel is now 50% cheaper than regular gasoline. This huge price differential is causing some of the larger trucking fleets in the U.S. to switch from diesel to natural gas. And with more and more vehicles guzzling natural gas, there's huge demand for fueling stations...
According to the Census Bureau, the U.S. has more than 100,000 gasoline fueling stations (to serve 234 million vehicles). But we have only 1,000 natural gas fueling stations. We'll need thousands more to support the trucking industry's switch to natural gas...
Several U.S. companies are opening natural gas fueling stations... And most are trading at 52-week highs. But as Frank says, "We are still in the early stages of the natural gas infrastructure trend. In other words, investors can still cash in on this trend by investing in some of the companies building 'America's Natural Gas Highway.'"
Frank believes once these stations are built, major car manufacturers like GM, Ford, and Toyota will start manufacturing cars that run on natural gas. It's a huge trend... one that can make you rich. To receive a special report Frank just released discussing all the companies positioned to benefit from the U.S. switch to natural gas, click here...
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New 52-week highs (as of 2/21/12): ProShares Ultra Technology Fund (ROM), Westport Innovations (WPRT), Anheuser-Busch InBev (BUD), Prestige Brands Holdings (PBH), Microsoft (MSFT), and Philip Morris International (PM).
More words of wisdom from Dan Ferris in today's mailbag... What important investing lessons have you learned from our writings? Let us know at feedback@stansberryresearch.com.
"These two gems are worth the price of admission. If every investor understood these concepts, the markets would probably be much more efficient. Good thing they don't or we wouldn't have the opportunities we have. Actually, investors probably do understand this. It is the other 95% of people who buy securities, the speculators, who don't.
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This time around, my fresh perspective brings me to a simple idea we've visited before: never buy a bad business. If you focus all your energy as an investor on finding the very best businesses, and only investing when the price is reasonable, you'll never lose a wink of sleep, even if the market falls. You'll just keep buying because you know you're invested in wonderful businesses. You'll pass up on thousands of riskier investments. And over time, you'll make solid returns if you refuse to buy shares of a bad business and simply focus on excellent businesses. |
"And...
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The study of World Dominator stocks has totally changed my view on the stock market. I was once very fearful of stock market declines. Now, I welcome them as opportunities to buy my favorite stocks at better prices. The stocks in the following table are great buys today. But they'd be an even better deal if their share prices went down from here." – Paid-up subscriber MM |
Goldsmith comment: Thanks! Just to clarify… MM is quoting Dan Ferris in his most recent Extreme Value update. In addition to his monthly issues, Dan sends his subscribers a weekly e-mail commenting on market trends and news regarding his portfolio positions.
"So I guess Porter needs to bow down to the Money Honeys and apologize. Looks like OBAMA! and Heli Ben have fixed the economy. Dow hits 13,000; crisis avoided and all is well in the world. Well, except for that $16 trillion in debt with unending deficits and 10%-plus of real unemployment. Good to know we have nothing to worry about because if the DOW is up then everything is fine in the world." – Paid-up subscriber Trevor
Regards,
Sean Goldsmith
New York, New York
February 22, 2012