A critical reader sets Ferris off... UniCredit's a drag... UniCredit's CEO "confident"... BlackRock cuts losses... Ghizzoni issues the death signal... Hungary still matters...
We get plenty of mail criticizing our advice and viewpoints. One of the most persistent complaints goes like this...
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I can't believe the ongoing recommendations to buy Microsoft. The stock has been stagnant for years, and the company shows no indication that they will share their huge pile of cash with their stockholders. I can't see buying it in the hope that the leopard will change its spots. |
I love it when they say that. It's like complaining that Jerry Lewis isn't goofy...
Microsoft is a fantastic business. It has a 90% share of the PC operating system market. It earns consistently thick margins, with gross margins pushing 80% most years. Any economist worth the space he takes up will tell you that's impossible to do year-in and year-out like clockwork, unless you're creating tons of value. No matter what anyone says about Microsoft Windows, it's enormously valuable. So is Microsoft's Office productivity suite. The world does business in Microsoft Word and Excel. Nobody who uses those two programs has any desire to switch to anything else. That's a huge competitive advantage.
As a result of all this, Microsoft is perhaps the single-most cash-gushing miracle in business history. On sales of about $69.9 billion last year, it generated free cash flow of $24.6 billion. That's a margin of about 35%... enormous. It earns 40% on shareholders' equity. It has one of the few true triple-A balance sheets in the world, with less than $12 billion in debt and more than $50 billion in cash and securities. Interest income exceeds interest expense, meaning sales could go to zero and its financial condition would still be triple-A.
If you were buying Microsoft in 2000 or even in 2001, you were paying way too much, as much as 68 times earnings. It's impossible to make money buying stocks at the top of the biggest bull market in history, and it's rational to expect stock prices to go nowhere for a decade afterward. The overwhelming majority of stocks were horribly overpriced a decade ago. Of course, the price has gone nowhere. You'd be a fool to expect otherwise.
But Microsoft's business has gone a whole lot of somewhere during that time. Since 2001, revenues have nearly tripled, the dividend was initiated and has risen 10-fold, earnings per share are up more than 200%. Windows 7 is by far the fastest- and biggest-selling operating system in history.
So refusing to buy Microsoft based on past stock price history make no sense. It's the sort of thing you notice if you don't understand that a stock is a piece of a business, not a lottery ticket.
The complaint that Microsoft's management won't share its huge cash pile is similarly invalid, though even I would like to see the company do more in this area.
Microsoft raises its dividend every year. The latest dividend increase was 25%, an enormous raise. It also buys back billions of dollars worth of stock. During the last two fiscal years, it reduced the share count by about 5%. Microsoft has about $12.2 billion left on a $40 billion share repurchase program. So... spending close to $28 billion on share repurchases doesn't strike me as a refusal to part with cash. Quite the opposite.
Microsoft and other global companies do have a little problem. If they try to repatriate foreign earnings, they'll get hit with a big tax. Folks in Washington D.C. have been talking about possibly getting rid of that. Ron Paul would try to do so if elected. (I'm not saying he has much of a chance.) But the tax problem hasn't stopped Microsoft from sending billions of dollars to shareholders over the past decade, as its business has continued to grow.
If you share my view in this regard, and want to get access to an entire list of stocks that have fantastic businesses, gush billions of dollars in annual cash flow, buy back their shares, and raise their dividends at huge, inflation-beating rates every single year, click here.
I promise you won't be disappointed. Writing about stocks like Microsoft is the best thing I've done in 14 years in this business. (If you are disappointed, you know how it works: You get your money back, and we part as friends. But I urge you to click on that link and check out this opportunity.)
Shares of Italy's largest bank, UniCredit, halted trading yesterday following the rights offering. Shares were trading again today... And it's a bloodbath. As I write, shares are down around 17% (following yesterday's 15% fall). UniCredit is now at its lowest point since the bank was formed through mergers in 1998.
The market is intent on reducing the market value of UniCredit shares to match the new shares the bank offered, 3.41 euro (a 69% discount to the pre-offer price).
UniCredit's woes dragged the entire European banking sector down (and the euro, which broke $1.28)... The European banking stock index fell 1.6%. Italian banks were among the biggest losers. Spanish bank Banco Santander, the only bank that needs to raise more capital than UniCredit, fell 4.6%. Deutsche Bank, the German giant, fell 4%.
Federico Ghizzoni, UniCredit's CEO, told Italian newspaper II Sole 24 Ore he's "optimistic" the market will take up almost all of the rights offer (currently, only 24% of shareholders accepted). With such optimism, we're not sure why UniCredit would enlist as many as 27 banks to handle its offering. (The number of banks involved lowers the risk to any individual bank that the offer might not be taken up.) For comparison, the Federal Reserve uses only 21 primary dealers for its bond sales.
Days before the rights offer, U.S. asset management giant BlackRock cut its UniCredit stake from 4% to 1.7%. And Ghizzoni admitted other large U.S. investors have dumped. "But we still have important U.S. and Anglo-Saxon funds among our shareholders... And many have shown an interest in investing," he said.
You may have noticed a pattern throughout the financial crisis... Whenever a CEO speaks publicly to refute negative news, it's usually a lie. And Ghizzoni's track record of public statements is poor... A few months ago, he said UniCredit would only need around 4 billion euros of capital (half the amount ordered by the ECB).
While Ghizzoni is assuring markets, Italian Prime Minister Mario Monti unexpectedly boarded a plane today to Brussels, the home of the European Union. His office gave no details on whom he plans to meet or what he plans to discuss.
In the August 2011 issue of Stansberry's Investment Advisory, we said that if UniCredit fails, Italy would fail. We'd guess Monti has come to a similar realization. Now, he's going on hand and knees to beg for capital.
In June 2010, Porter wrote an issue of his Investment Advisory titled "Hungary Matters." He discussed the difficulties the non-headline-grabbing European nation was facing:
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Last week, the Hungarian forint lost about 5% against the value of the euro and about 7% against the Swiss franc. About 45% of Hungary's foreign debt is denominated in foreign currencies, so the forint's collapse impairs the Hungarian government's ability to service its debts. It costs the Hungarians significantly more forint to pay the same debts they were paying just weeks ago. |
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A weak economy is undermining a weak currency, which further weakens the economy. In a rare moment of clarity and honesty, Peter Szijjarto, the Hungarian president's spokesman, told reporters, "I don't think it's an exaggeration at all to talk about a default..." |
Last week, Hungary held an auction for three-year bonds. The government rejected all bids... There was no market for Hungarian government bonds. Today, Hungary tried again. The government held a one-year bill auction, which sold just $140 million... And the yield is 9.96%, over 200 basis points (a basis point is one one-hundredth of a percent) above the yield for the same maturity debt sold on December 22.
Hungarian credit default swap spreads reached a record 750 basis points today. Credit default swaps are insurance contracts that pay out in case of default. So right now, it costs a huge 7.5% more to insure Hungarian government debt than German debt, the benchmark for low risk in Europe.
And who do you think is the largest lender in Hungary? UniCredit...
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New 52-week highs (as of 1/4/12): MSDW Insured Muni Income Trust (IIM), Keyera (KEY.TO), Enterprise Products (EPD), short of Salesforce (CRM).
In today's mailbag, you'll learn the difference between gold stocks and options on gold stocks... and the advisory services that recommend each. And as usual, send your feedback to feedback@stansberryresearch.com.
"I'm wondering if I'll be seeing this great gold stock recommendation of Jeff's where I would expect and hope to see it, in the newsletter I DO subscribe to, Matt's Resource Report?" – Paid-up subscriber Dan Blank
Ferris comment: Jeff Clark's S&A Short Report service is about trading options on all types of stocks... including gold stocks.
But keep in mind, Jeff's typical holding time is less than two weeks. Thus, Jeff is looking for stocks with the potential to rise in the very short term... which is a different approach than most of our other services use, including Matt's S&A Resource Report.
Good investing,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
January 5, 2012