A Year's Worth of Gains in Just Four Months
Another big win for Stansberry's Credit Opportunities subscribers... A year's worth of gains in just four months... In the mailbag: Porter answers your bond market questions...
February has been a great month for Stansberry's Credit Opportunities subscribers...
As Porter detailed in Friday's Digest, Stansberry's Credit Opportunities recommendation Iconix Brand Group (ICON) secured new financing last week, just as he and his team had predicted last November.
Folks who followed their advice will lock in a gain of 31% when the bond matures next month... good for an annualized return of 85% in the "boring" bond market.
This week, the good news continued...
Back in October, Porter and his team recommended a distressed bond issued by drugstore operator Rite Aid (RAD). They also recommended buying beaten-down Rite Aid shares, creating what's known as a "synthetic convertible" bond position.
If you're not familiar, a convertible bond is simply a type of bond that can be "converted" into shares of the company's stock. While the upside in a traditional bond is typically limited to $1,000 – or "par" – convertible bonds can offer significantly higher returns. Unfortunately, most bonds aren't convertible. But when a company's shares are cheap enough – as was the case with Rite Aid last fall – buying the stock directly can offer similar upside potential.
Rite Aid has a history of expanding too fast and taking on too much debt. But it has always eventually returned to its conservative "roots" and turned things around. In fact, longtime Digest readers may recall that our original bond-market advisory True Income took advantage of this cyclicality several times.
We recommended our first Rite Aid bond in the second issue of True Income in March 2008. That bond earned subscribers a 56% return in about three and a half years.
Our second Rite Aid bond recommendation in February 2009 went on to become the second-best recommendation in our company's history. You'll find its 773% return in the Stansberry Research Hall of Fame at the bottom of every Digest.
And the third – in October 2011 – returned 89% in a little more than two years.
Porter and his team believed a similar outcome was likely this time around...
They expected the bond to return to par and shares to rebound sharply as the company paid down debt and got back on track once again. But they won't have the chance to find out...
Yesterday, privately held grocery and pharmacy chain Albertsons announced it is buying Rite Aid (RAD) for approximately $2.50 per share, sending the prices of both its stock and bonds sharply higher.
Stansberry's Credit Opportunities editor Mike DiBiase shared his thoughts on the news with us in a private e-mail this morning...
The acquisition isn't surprising. Drugstores and health care companies fear the threat from online giant Amazon (AMZN). So do grocery stores. They're consolidating and trying to get bigger so they can cut costs and compete with Amazon.
The market clearly liked the news. The price of our Rite Aid bond surged 9% before ending the day 6% higher. Rite Aid's stock price jumped 8% before ending the day 3% higher.
But in Stansberry's Credit Opportunities, we don't always agree with the market. That's how we make money... we jump on opportunities where we think the market has it wrong. And we think the market is wrong about this deal.
As Mike explained, they liked Rite Aid because it had just sold around 40% of its least-profitable drugstores to Walgreens (WBA) last year for $4.4 billion. It was planning to use this cash to pay down its debt. But this new deal could derail those plans. More from Mike...
The Albertsons acquisition changes things.
Private-equity firm Cerberus Capital has loaded the company with more than $12 billion of debt since taking it private. So it's even more highly leveraged than Rite Aid. More important, it doesn't make any money. Albertsons hasn't made a profit for the last three years, and same store-sales are falling.
This means our bond will become much riskier once the deal is complete... and the stock is likely to be worth very little. So we're recommending Stansberry's Credit Opportunities subscribers take advantage of the market's positive reaction and sell both positions today.
Stansberry's Credit Opportunities subscribers are officially up 17% and 12% as of today's close, for annualized returns of about 47% and 34%, respectively. But because the bond traded well below their official buy-up-to price following the recommendation, we suspect many subscribers have done even better.
Kudos to Porter and his team on another great call.
Again, if you're not already reading Stansberry's Credit Opportunities, we urge you to reconsider...
We believe it is the best, most valuable research service we produce, and we're certain anyone who tries it will agree. In fact, as Porter often says, once you buy a bond and see how easy it is to beat the stock market with far less risk, you may never want to buy a stock again. Click here to learn more about Stansberry's Credit Opportunities.
New 52-week highs (as of 2/20/18): Amazon (AMZN),
A busy day in the mailbag: More on our annual Report Card... And several subscribers respond to Porter's Friday Digest on bonds. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.
"I agree with Porter that Kirk's comments on the report card are petty and not worthy of any consideration. If he stopped reading the grades long ago how does he now know what the current grades are??" – Paid-up subscriber Bob Elder
"Porter, your cavalier dismissal of Kirk's comments about an A with pluses as petty misses the point. He is spot on. The pluses are a glowing indicator of grade inflation, as he said, and you should take his critique seriously. And perhaps you were too hard on yourself a while back by assigning yourself an F. Maybe it should have been an F+." – Paid-up Stansberry Alliance member Jim Henslin
"Forgive me if my email sounds even a bit snarky. It is not my intention. I read the daily emails and I 'hear' the
Porter comment: Tom, no snark taken.
When we do our Report Card, we aren't judging our "predictions." Predictions aren't precise. For example, last August I predicted we'd see a significant correction in the market within 12 months. I was right. But so what?
Likewise, in October, I predicted that the "short volatility" trade would blow up and at least one of the short volatility exchange-traded funds would go to zero. That happened two weeks ago. But again, so what? I didn't tell you which one would go zero (because I didn't know) and I didn't tell you when (because nobody can forecast market events with precision).
So how can you accurately judge the value of these predictions? You can't. And thus, we don't try. We will tell you in general when our views were right and when they were wrong.
But in my opinion, what matters isn't whether our broad expectations panned out. What matters is how our recommended investments have performed. Our track records show in precise detail how we put all of the information we're publishing – including our macro predictions – to work.
If we're bearish, we can hold cash, hedge the portfolio, or even sell short stocks. If we're bullish, we can "
All of these choices influence our recommendations and model portfolios. And they can all be measured accurately.
One of our products
Our investment-research products provide thoroughly researched investment ideas on a monthly basis. These ideas flow continuously and don't have a specific start or end date. And they don't specify the amount of capital at risk, so they can't be compared directly with a stock index.
To approximate the comparison, we've chosen the most conservative approach, which greatly handicaps our returns. We use the simple average of our returns, adjusted for the holding period. This ignores the effect of compound returns as real investors would move capital from one position to another. Our measurement system assumes every new position requires additional capital.
Even so, our Report Cards clearly show that the average results of our advice have been from different time periods. We've published them annually since 2006. So there shouldn't be any mystery about the quality of our advice.
One more thing...
Oftentimes, people expect that all of the views we publish will be the same. But that's impossible with a staff full of highly intelligent, competitive people. If we always agreed, you'd know we were lying.
Our senior analysts (Steve Sjuggerud, Doc Eifrig, and me) all look at the markets through different lenses, and with different experiences.
Since we're all focused on different things, we're all going to have different views. Sometimes we agree, sometimes we don't.
"In response to Porter's Friday Digest about Stansberry's Credit Opportunities: The. Best. Advice. You. Publish!" – Paid-up subscriber Jim Bean
"Porter and team, I want to add my thanks to you for the Stansberry's Credit Opportunities recommendations. I bought some of the Iconix bonds late last year around $820 per bond. In early February, they were trading around $750 per bond. So I bought more. Forget the paltry interest (1.5%), I will make a 33% return in 6 weeks! That is an annual return
"Yes, there was some risk of default, but as you so carefully pointed out, that was very low. I also bought the stock on your Golden Triangle recommendation. That's up more than 20% already. Needless to say, Credit Opportunities is awesome!" – Paid-up subscriber Kirk H.
"Hello Porter; Looking back now, the Stansberry's Credit Opportunities issue that contained the initial Iconix Brand Group bond write up appears that you folks had a crystal ball or could time travel. The events played out exactly as stated. It was another great piece of analysis and thanks to that I have another profitable bond experience under my belt. I've been interested in your bond recommendation from the very beginning, back when I was able to about triple my investment with those Rite-Aid bonds from years back. Thank you very much for the education over the years and for not abandoning this facet of investing!! All the best!" – Paid-up subscriber Steven H.
"Hi Porter, I read with interest your Friday Digest on bonds as well as the Report Card daily issues and I have a question. How is it that the win rate on bonds in [Stansberry's] Credit Opportunities is only 77% with binary outcomes? I can't imagine that 23% went bankrupt and you still could average more than 21% returns. Thanks." – Paid-up (and very happy [Stansberry] Portfolio Solutions) subscriber John Hales
Porter comment: We decided to sell some bonds before maturity, resulting in a loss. We did so because we lost confidence in the company's management teams and outlooks.
"Porter, for quite a while now I've read and reread your rant on how every investor ought to understand bonds and become successful at buying them before ever buying a stock. You repeat repeatedly that investors would earn better returns more safely with bonds than with stocks.
"Believe me I'm sold. Yet for the life of
Porter comment: There's this incredible new website called Google. You can just type your questions there, and presto, the Internet will provide answers...
I'm just kidding, of course. But seriously, there are lots of free guides to bond investing. Just poke around. Here's a reasonable place to start.
"I jumped on the Iconix bond recommendation the day you sent it to us. Imagine my frustration on finding out my broker, in their infinite wisdom, chose not to offer that bond to their clients because they considered it 'too risky.' Not naming names, but they are the largest brokerage in the country, with $5.4 trillion in accounts. Fortunately, I manage an account for my mom at another broker, and my order for her went through. Next month, she'll collect a nice fat 20% return when the bonds mature.
"I feel like sending the bond gurus at my brokerage a subscription to Stansberry's Credit Opportunities. They could definitely learn a thing or two from you guys about risk, reward, and what a good bond trade looks like. I've had great returns on several of your other SCO recommendations, though. Thanks for the great research and analysis." – Paid-up subscriber L.B.
Porter comment: Ask the same broker if he will allow you to buy the stock. I bet he will. Now, explain that to me...
Regards,
Justin Brill
Baltimore, Maryland
February 21, 2018