A Lesson You Can Take to the Bank
The most valuable advice I've ever received... Why I wasn't afraid to recommend a financial company at the peak of the 2008 crisis... A lesson you can take to the bank... The best 'ice cream business' in the market today...
Lee Garfield's 'ice cream businesses' advice didn't just guide me to companies selling inexpensive consumer goods...
As I (Dan Ferris) explained in yesterday's Digest, the owner of the ice cream shop I worked at in college taught me a simple but valuable lesson: No matter how bad things get, people can always afford ice cream.
This mantra ended up teaching me more about business than he probably realized.
It also helped me spot essential businesses intertwined in our daily lives, even if users weren't as aware of them as they were of beverages or medications.
Payroll processor Automatic Data Processing (ADP) is a good example...
It's the highest-returning stock among all of Stansberry Research's current open positions, up roughly 570% (including dividends and spinoffs).
ADP processes about one-sixth of all the paychecks in the United States. It's the largest company of its kind. It takes in funds from your employer and sends your tax withholding to local and federal tax agencies and payments to benefit providers. Then, it deposits your net pay into your account.
I first recommended ADP in October 2008 – during the depths of the financial crisis. That didn't scare me at all. As I told Extreme Value subscribers in my initial recommendation...
I love bear markets. Without them, my job would be damn near impossible. Without times of great financial turmoil, it's hard to make a lot of money in stocks. We need bad times to buy stocks cheaply enough to make us rich over the long term.
With newspaper headlines stoking fears of a global financial meltdown, I showed readers ADP was a phenomenal business...
ADP charges a royalty on the movement of money from employers' pockets into employees' paychecks... and from there to insurance companies and tax collectors. Whether it's people or money, when transportation is necessary, somebody has to build the road to accommodate the travelers. ADP is a toll road in the global financial system.
ADP collects employer funds and holds them overnight in its bank account, where it earns interest. It moved $1.9 trillion of client funds last year and earned $467 million of interest on those funds.
That's $467 million of pure cash profit that requires no extra expense or capital investment...
Like I told readers back in 2008...
Imagine all the thousands of people at each company, getting a paycheck every week or two. ADP gets a piece of that action and collects interest on the tax money every time.
Imagine what happens when interest rates rise (which they likely will over the next several years). ADP could easily earn several times that amount – perhaps billions of dollars falling straight to the bottom line without requiring the company to spend a single extra penny.
Like Prestige Consumer Healthcare (PBH) – formerly Prestige Brands – and Constellation Brands (STZ), investors weren't at all interested in ADP when we recommended it. The stock was trading more than 30% off its 2007 highs. Lehman Brothers had gone bankrupt less than a month earlier. Nobody was interested in buying anything, let alone another financial company.
Here's what the share price did before we recommended it...
I described ADP as "one of the most financially sound companies of any kind in the world." It had $1.7 billion in cash and just $52 million in debt. It was obvious ADP could never have the kinds of problems the big banks were having.
We recommended shares in October 2008, and we're still in it today. In 2014, ADP spun off its auto-dealer services business, CDK Global (CDK). Readers made more than 80% in a little more than a year with that part of the position.
Here's how ADP has performed since we recommended it...
Last August, we recommended another classic Lee's Ice Cream-style business...
We told Extreme Value subscribers why coffee-shop giant Starbucks (SBUX) was a no-brainer back then. Even if folks can't afford fancy new clothes or a $1,000 smartphone, they're still willing to shell out a few bucks for a cup of coffee.
We applied our price-implied-expectations model to Starbucks and found that its share price assumed zero revenue growth for the next few years. We thought that was way too pessimistic, especially since we knew management was planning to continue expanding the business in China, a market with massive growth potential for coffee shops.
The stock is up about 60%, including dividends. We expect to recommend holding it for many years to come.
I've learned many lessons over the years...
But few have made the deep, lasting impression Lee Garfield made on me more than three decades ago.
That lesson has helped me see past all the bad news that tends to scare other investors away from stocks that are priced to become massive, triple-digit winners.
It is a lesson you can take to the bank... I believe Extreme Value subscribers are going to be extremely happy with the results over the next several years, as growth investors struggle with big losses and value investors earn huge returns.
So how can you put this lesson to use for yourself today?
I believe there's no better way than with my current No. 1 recommendation.
It has a "royalty" on one of the safest, highest-demand assets mankind has ever produced. And it has that same "low cost, high demand" mojo Lee Garfield taught me to look for...
It gushes free cash flow, has a great balance sheet with lots of cash and little debt, and it's run by some brilliant folks, one of whom I've known for 20 years. In fact, I've told subscribers I'll never use a trailing stop on it because I believe I understand the management team's abilities and strategy so well.
I expect Extreme Value subscribers will see at least a triple in the next couple years, even if nothing "exciting" happens... But if the world goes the way I think it's going, they could see as much as 20 times their money over the next several years.
As of this week, this stock has pulled back to within pennies of my maximum recommended "buy" price. But I don't expect it to stay there for long. If you're not already reading Extreme Value, click here to learn more about this time-sensitive opportunity now.
New 52-week highs (as of 6/10/19): Automatic Data Processing (ADP), American Express (AXP), Blackstone (BX), CME Group (CME), Invesco Value Municipal Income Trust (IIM), Nuveen Preferred Securities Income Fund (JPS), MarketAxess (MKTX), Microsoft (MSFT), NVR (NVR), PepsiCo (PEP), ResMed (RMD), and W.R. Berkley (WRB).
Several readers wrote in to share their own experiences with Lee's Ice Cream-style businesses. As always, send your comments and questions to feedback@stansberryresearch.com.
"I owned RJ Reynolds for 20 years (until BAT bought them) and Starbucks for longer. I would consider them to be much like your Lee's Ice Cream. Two of the ladies in my office have smoked for many years and they all go to Starbucks daily. Good years and bad are always the same." – Paid-up subscriber John C.
"Mine is a cautionary tale. I bought Constellation Brands (STZ) shortly after your recommendation using a limit order at $20. If you look on the chart, it hit a plateau around $80 for part of 2014, and I sold at a quadruple. Had I ignored my emotion, and waited for your instruction to sell, I would have achieved roughly an octuple. Thus, I learned to let the winners ride. It can make a significant impact on overall portfolio results. Older and wiser..." – Paid-up subscriber Ben T.
"Dan, I bought 200 shares of FISV on 7/9/04 for $36.75 each for a total cost of $7,372.95. After splits, now have 800 shares worth $71,792.00 as of close 6/7/19 for a gain of 873.72%. Even bigger was my buying 10 shares of BNI back on 10/15/73 for $379.45 based on a column in Forbes by Lucien Hooper touting the land/mineral rights associated with the railroad. After several splits, spin-offs of BR/EPG, I ended up with 120 shares of BNI at a cost of $108.71 Dividends in the later years of BNI totaled more than my cost basis! Then BRK came along and took over BNI giving me 148 shares of BRK.B and cash-in-lieu for a total cost of $99.98 Still have them with a valuation on 6/7/19 of $30,459.88 for a gain of 30365.97%. Have several gains over 400%. My problem is I seldom sell as I seem to marry the stocks!" – Paid-up subscriber Doug O.
Regards,
Dan Ferris
Vancouver, Washington
June 11, 2019