A 'good enough' outcome for the Fed... Metals rally: Steve and Jeff nailed it... Matt Badiali's silver call... Why royalties have outperformed other metal stocks... An Eagle Ford update... Our No. 1 Eagle Ford stock... The "Cadillac" of fracking...
Yesterday, the Federal Open Market Committee released minutes from its last meeting. The Fed policymakers think another round of easing will come "fairly soon," unless we see an improvement in the economy.
St. Louis Federal Reserve President James Bullard told CNBC the economy is stronger since the meeting – which may delay more printing – but another round of quantitative easing is still on the way.
"If we were to resume, which I think we will, 2% growth – maybe a bit stronger than that – unemployment ticks down... That is not a great outcome. But to me, that is a good enough outcome to keep us on hold," Bullard said.
The market expects more quantitative easing (aka money printing). And it reacted accordingly today... Silver jumped $0.73 an ounce to $30.56 as of this writing – the first time it has been above $30 since May 3. And gold shot up around 1.9% to $1,672 an ounce.
As you may recall, we've been predicting a rally in metals. In the August 14 DailyWealth, Steve Sjuggerud said you could potentially make 200% in gold stocks right now...
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The last time gold stocks were this cheap, they soared 172% in eight months... |
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Today, by my favorite measure, gold stocks are record-cheap again... |
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They have only been this cheap once in the last decade – and that was in late 2008, when gold stocks (as measured by GDX, the main gold-stock fund) bottomed out at $17. |
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Just over two years later, shares of GDX reached $60 a share, for a phenomenal profit. |
The stage is set for similar gains today...
And just two days ago, Jeff Clark told Growth Stock Wire readers "a new gold rally could be just days away."
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Platinum broke out last week. |
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Silver exploded higher yesterday. |
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Now it's gold's turn to bust out to the upside. |
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We took a look at the shiny yellow metal just three weeks ago. But based on the action in the other precious metals, we ought to keep a close eye on gold. It's on the verge of an explosive move that could happen any day. |
In his S&A Short Report, Jeff recommended several options trades to profit from a breakout in the metals. Today, he told readers to sell the second half of their Barrick Gold trade for a 145% profit. (The blended return for the full trade is about 128% in two weeks.)
Jeff's silver trade – buying calls on Pan American Silver – has also yielded great profits for subscribers. They closed out half the trade earlier this week, locking in a 105% gain. The remaining half is currently up 114%.
Our resident resource expert, S&A Resource Report editor Matt Badiali, has also been predicting a boom in metals. And in his latest issue, he told readers, "A rare and powerful 'buy signal' just flashed."
The big speculators in the silver market were bearish. And negative sentiment was at an extreme. Here's what he told subscribers.
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Since 2000, if you bought silver when the net futures positions of speculators hit less than 11,000 – meaning they were bearish – you never lost money. Not one time... |
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We hit that extreme 10 times in the last 13 years. Silver was in a bear market from 2000 to 2002, so the bottoms came more frequently (five times in two years), and they preceded smaller gains. But you still made money. |
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After 2002, silver entered a bull market. Including today... we've hit five major sentiment bottoms since then... and each has heralded a big gain... |
The silver miner Matt recommended to his readers is up nearly 20% in less than three weeks.
Another sector of the precious metals market – the so-called "royalty companies" – are also enjoying a big bull market. Matt holds a few of these in his S&A Resource Report, so I asked him for his take...
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While most traditional gold miners are struggling due to high costs for fuel and material, one class of "mining" company flourishes. These companies don't really mine. Rather, they own royalties. Owning a royalty means the company owns a portion of the mine's production, usually for the life of the mine. |
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These "royalty" companies – like Royal Gold (NYSE: RGLD) – invest capital when miners need it most... typically, during construction or when the mine needs cash to develop a new section of ore. In exchange, the royalty company receives a small, 1% or 2% royalty from the mine's production. |
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Come hell or high water, the miners must pay the royalty company. So while the miners are fighting high costs, the royalty companies don't care. They get their 1% or 2% no matter what. And when you have royalties on many big mines, the cash flow becomes enormous. |
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That's why we're seeing royalty companies' shares soar right now, when other miners' stocks are struggling. |
S&A Resource Report readers are up 36% on Royal Gold since April 2012.
Today, the Commerce Department announced new home sales increased 3.6% in July to a seasonally adjusted 372,000-unit annual rate – a two-year high.
Also, the Federal Housing Finance Agency announced U.S. home prices rose 1.8% in the second quarter from the first quarter of 2012... That's the biggest quarterly increase since prices jumped by 2.2% in the fourth quarter of 2005. Prices were up 3% from a year ago.
We discussed our bullish housing stance in yesterday's Digest.
Longtime Digest readers are familiar with the Eagle Ford shale... Porter first started writing about the Eagle Ford – a giant oil and gas discovery in south Texas – in the April 2010 issue of his Investment Advisory.
Here's what he told readers back then...
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I expect Eagle Ford to yield more than $2 billion in oil and gas by 2013 and to increase steadily for at least 20 years. These numbers mean Eagle Ford will probably produce hundreds of billions worth of oil and gas over the next 30-40 years. |
Our friend, Texas oil wildcatter Cactus Schroeder, alerted us to the opportunity... He thought the Eagle Ford would become the largest oilfield in U.S. history. To give you an idea of the money being made in the area, Cactus recently sold his Eagle Ford operations to Norway's Statoil for $1 billion.
Mike Barrett – a research analyst for Extreme Value and The 12% Letter – sent us this update on the Eagle Ford...
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After observing drilling results that were DOUBLE comparable data from the Bakken – a much better-known, oil-soaked shale play lying beneath portions of North Dakota, Montana, and Canada – energy consultant IHS recently concluded that Eagle Ford might be the best shale play in the U.S. |
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Oil producer EOG agrees. Just two weeks ago, it reported the best quarterly results ever for "monster" wells – those with initial production of more than 2,500 barrels of oil per day, plus natural gas and natural gas liquids. |
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EOG completed 16 such monster wells in the Eagle Ford last quarter. One turned out to be the largest well anywhere in the Eagle Ford to date... and produced so many hydrocarbons, it pushed the upper limits of the company's test facilities. |
I (Dan Ferris) have one of the best Eagle Ford stocks in my Extreme Value portfolio right now.
The company is what's known as a "fracker." It uses a new drilling technique called "hydraulic fracturing," which has opened up vast new supplies of oil and natural gas in places like the Eagle Ford. And this company has 80% of its fracking equipment there.
The company performs other services in the Eagle Ford, too, in addition to fracking. According to its customers, it performs them better than just about any other company operating there... It's doing such a great job of outclassing the competition, one of its customers recently called it "the Cadillac" of its industry.
This isn't a speculation, either. It's a highly profitable business. It's making money hand over fist... It just filed its latest quarterly report earlier this month. It earned a 29% profit margin last quarter. Most businesses wish they could earn margins that thick.
The company is small now. But I doubt it will be for very long... Its business is growing like a weed. Sales and profits were both up about 60% over last year's second quarter. And I expect both to be even higher by the end of the year.
So how much would you pay for a company that's got 80% of its equipment operating in one of the biggest oil shale plays in the country, grows profits at 60% a year, and whose customers call it "the Cadillac" of its industry?
Fifteen times earnings? 20 times? 30? Facebook is trading for 66 times earnings today, and we all know by now it's been way overvalued from Day 1.
Our new company trades for less than six times earnings. It's so cheap, it could easily afford to take itself private – a classic Extreme Value signal. That's right. The stock is so cheap and the business is so profitable, it could afford to pay the interest on enough bonds to buy all its outstanding shares at current prices. I defy anyone to find a business this good at a price this cheap.
One of the main mistakes investors make is paying too much for stocks. But if you buy this stock, there is no way on Earth you're going to get anywhere near paying too much. It could double and still be cheap.
Sooner or later, the market is going to figure out that it's made a huge mistake with this stock... and it will soar. This stock is a low-risk way to make a 50%-plus gain... Maybe even 100%.
We saw those kinds of gains with another one of my recommendations recently...
I said Constellation Brands was dirt-cheap, and the stock sat there for months without doing anything. Then it rose 24% in a single day on a big acquisition announcement. Extreme Value readers are now up more than 50% in just over one year. The profits on a $20,000 investment in Constellation would pay for more than 10 years of Extreme Value.
Everybody knows I've recommended big, safe World Dominating companies – like Wal-Mart, Berkshire Hathaway, and Microsoft – in Extreme Value. But those aren't the only stocks we're looking for. We love to find companies like our new, small oil and gas services company that's highly profitable, dirt-cheap, and growing.
To learn more about Extreme Value – and to access our latest research on this small "fracker" and other cheap, profitable companies – click here.
New 52-week highs (as of 8/22/12): Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), Sandstorm Gold (SSL.V), Royal Gold (RGLD), and Brookfield Asset Management (BAM).
Have you had success investing in the massive oil and gas trend? We want to know your story. Shoot us an e-mail to feedback@stansberryresearch.com.
"If you have a stock whose high has been 40, your stop loss would be 30. Suppose you got a $1.00 per share dividend. How and what would adjust to reflect the dividend? Would you increase the high value since it presumably would be $1 higher if it hadn't paid the dividend?" – Paid-up subscriber DM
Ferris comment: If you want to adjust the share price, simply reduce it by the amount of the dividend. So the high is now $39, not $40. The stop for $39 would be $29.25.
"Dear Porter: Thank you for setting out your grades and the analysis for the grades. As a new Alliance member (and the first female caller to your radio show –when you headed to the Bahamas), this review helped me understand the different strategies. I read everything that comes from Stansberry, and act on much of it, but this will help me be more selective and deliberate about investing. My own report card should improve when gold and silver prices increase. Otherwise, I've focused on the World Dominators, as well as smaller positions in Devon and MGM.
I look forward to your radio shows, both for the substance and the joy of two good friends riffing on lots of topics. It makes me sad to hear you rag on Baltimore, though. I lived there for 7½ years – lets just say awhile ago. Maybe its gone downhill since then. I used to play piano at the Hyatt Hotel at the Inner Harbor and had a great time, even though my friends at Peabody looked down their noses at me. But hey, I was making money, even if I had to be a lounge lizard to do it. Enough, thanks again." – Paid-up subscriber Christine Clark
Good investing,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
August 23, 2012