An Answer to One of Your Biggest Questions Today
An answer to one of your biggest questions today... The lesson of Hershey... Why stocks should be a part of your 'bear-market plan'...
It's one of the most common questions we've received of lately...
Regular Digest readers know several Stansberry Research editors are cautious on the market today.
This list includes Extreme Value editor Dan Ferris, Porter and his team of analysts, and most recently, Dr. David "Doc" Eifrig.
I (Justin) am also concerned. In fact, as I noted three weeks ago, I believe there's a good chance a bear market may already be underway.
Given these views, some readers have asked us why we continue to recommend owning stocks at all.
After all, if we expect a serious bear market in the next year or two, wouldn't it be wise to move to cash now and simply wait for lower prices to get back in?
Of course, if you've been with us for long, you know we disagree...
There are a few important reasons for this.
The first should be obvious: We have no crystal ball.
The risks we've been tracking are real and significant. But there's no way to be certain when they'll finally "matter" to the market. Stocks could continue higher – potentially much higher – before they do. Selling all of your stocks prematurely would be foolish... and potentially costly.
For example, several bear-market warning signs emerged in late 2015 and early 2016. Yet, that deep decline ultimately proved to be just another deep correction in an ongoing bull market. Had you moved entirely to cash at that time, you would've missed out on a tremendous rally over the next three years.
But this isn't the only reason we continue to recommend stocks today...
You see, even if a bear market arrives sooner rather than later, it doesn't mean every stock will do poorly.
Longtime readers may recall Porter's recommendation of Hershey (HSY) as the quintessential example.
He originally recommended shares of the capital-efficient chocolate maker in December 2007, just weeks into the most severe market decline since the Great Depression. Between November 2007 and March 2009, the U.S. stock market – as measured by the benchmark S&P 500 Index – plunged nearly 60%.
This was one of the worst times in history to recommend buying a stock. And yet, Stansberry's Investment Advisory subscribers who took his advice still own shares today.
Despite the huge drop in the broad market, they never stopped out of this position. They've gone on to more than triple their money to date, and they're now collecting an annual dividend "yield on cost" of more than 7% and growing.
In other words, even the worst financial crisis in generations wasn't a good reason to sell a high-quality business bought at the right price.
Of course, this is an extreme example...
But we've seen this play out on a smaller scale during the recent correction as well.
Extreme Value analyst Mike Barrett highlighted one example in his Friday Digest last week. He and Dan recommended shares of international coffee-chain Starbucks (SBUX) in early August after their analysis concluded the company had become tremendously undervalued. As he explained...
Management had recently announced slower-than-expected same-store sales growth at the international coffee chain, and shares were down about 15% on the news.
Using our own price-implied expectations model, we quickly concluded that investors were overreacting. At $52 a share, investors were forecasting zero revenue growth for the next few years.
This made absolutely no sense to us.
Though sales in existing stores were slowing, they were still growing. Additionally, the company had big plans to launch new stores across the U.S. and China (and had the capital to do it), thereby creating new sources of revenue...
After developing a sophisticated valuation model of the business, we concluded that even if we dramatically dialed back some of management's lofty growth expectations, the stock could rise 40% over the next two years.
With shares already trading near three-year lows and the bar for growth expectations set low, Starbucks had limited downside and significant upside.
Of course, we know now that the broad market would peak roughly six weeks later...
After setting an all-time high of 2,940 on September 21, the S&P 500 would lose nearly 20% over the next three months. And even after the recent rally, the market remains nearly 7% below those all-time highs.
Yet, as you can see, Starbucks has absolutely trounced the market, rising more than 21% over that time...
All told, Extreme Value subscribers have made 34% in less than six months so far, during a time when the broad market has fallen.
Today, we see another great example in the Stansberry's Investment Advisory portfolio...
Porter's team originally recommended shares of media giant New York Times (NYT) back in December 2017.
At that time, they had noticed something few others had: The company was rapidly transforming itself.
While it was still widely-known as a newspaper company, it was already well on its way to becoming a capital-efficient digital-subscriptions business. As they explained in that issue...
The Times again began offering digital subscriptions in 2011... Nonsubscribers could only see up to 20 online articles per month for free. (Print subscribers could continue to view an unlimited number of online articles.)
The idea was to give readers a taste of the content and make them want to sign up once they reached their limit. The free content was the bottom of the marketing "funnel."
In 2012, the Times cut the number of free online articles per month down to 10. And just today... the Times cut it again, down to just five free reads a month.
The number of digital-only news subscribers has doubled within just two years... In total, the Times now has nearly 2.5 million digital-only subscribers.
The sky is the limit, too... NYTimes.com has around 85 million unique website visitors per month from the U.S. and 122 million globally. So the Times' audience is much greater than its current 2.5 million digital subscribers.
And yet, despite this progress, the market was still valuing the company as just another failing newspaper company. Porter's team believed this presented a tremendous opportunity for investors.
When we checked in on the company last fall, the news had gotten even better...
As we wrote in the November 1 Digest (emphasis added)...
Today... the news giant reported better-than-expected earnings per share of $0.15 versus analyst expectations of $0.11, and revenues of $417.3 million versus expectations of $408.8 million.
But the real standout in the earnings report was that the company added 203,000 new digital-only subscribers. That brings the tally to nearly 3.1 million digital subscriptions, a 24% increase from the same period a year ago...
In short, digital subscriptions are making up a bigger piece of the New York Times "pie" in an increasingly digital world.
Yesterday, the Times reported another stellar quarter...
The company added more than 265,000 digital subscribers over the final three months of 2018. This its largest quarterly gain since 2016, and it now brings the company's total digital subscriber base to 3.4 million customers.
The Times reported another notable milestone as well: Digital advertising revenue jumped 23% in the quarter to $103 million, officially surpassing its print advertising for the first time in its history.
All told, the company earned more than $709 million in total digital revenue for the year, putting it well on target to reach its goal of $800 million in digital sales by the end of 2020.
Shares rallied 10% on the news yesterday and gained another 3% today... closing at a new 13-year high of more than $30.
It's still early...
But the market is clearly waking up to the company's real value.
Stansberry's Investment Advisory subscribers are now up more than 60% in a little more than a year. And as you can see below, like Starbucks, the company has dramatically outperformed the market over the past five months...
New 52-week highs (as of 2/6/19): New York Times (NYT) and Sandstorm Gold (SAND).
Do you agree that high-quality, capital-efficient stocks should have a place in your bear-market plan? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
February 7, 2019