Goldsmith comment: A friend of mine called me last night with "an incredible story." She was talking finance with her cabdriver in Manhattan on Sunday night… She works at a world-class asset manager in the city. The cabdriver, though not a professional, had some investing success over the years. He'd turned a $6,000 portfolio into $100,000 following the advice of a publishing company called… Stansberry Research.
My friend is familiar with our company. She told the cabdriver she knew me. He then gushed with praise about Stansberry and the quality of our information. Apparently, he even called me "smart." Mark… if you're reading today… we just want to say we're honored to have you as a client. And keep up the stellar investing. Perhaps we'll cross paths in New York one day…
Remember Mike Burry, the quirky genius Michael Lewis wrote about in The Big Short? Burry was among the first investors to short the housing bubble. He pushed banks to create credit default swaps on mortgage bonds in 2005. The original investors in Burry's hedge fund, Scion Capital, made nearly 500% after fees and taxes from 2000 to 2008, according to Lewis' book.
Burry is deploying capital again. His overall thesis is another big short: the U.S. dollar. Burry says lawmakers proved they didn't understand what was going on in the financial world when they gave the Fed and its chairman, Ben Bernanke, additional powers. Echoing our own viewpoint, Burry told Bloomberg, "Now, Bernanke is the most powerful Fed chairman in history. I'm not sure that's the right response. The result tends to tell me they're not getting it right."
This time, Burry is buying gold, small technology companies… and farmland. In an interview, the 39-year-old neurosurgeon-turned-investor told Bloomberg he's buying "productive agricultural land with water on site… [which] will be very valuable in the future."
I've found a great way for investors to put their money into the second-largest farm in Canada. It already has more than 90,000 acres of land under lease and/or management. They expect to get up to 225,000 acres under production in another year or two, making it the largest farm in Canada by a factor of more than two.
This farm has a special relationship with the owners of more than 2 million acres of land virtually off-limits to foreign investors and other competitors. It's also got contracts with the two biggest sellers of farm machinery at bigger discounts than anyone else. As the CEO says, "Anything any other farm can do, we can do cheaper." In the commodities world, the low-cost provider wins.
I was talking with a highly knowledgeable natural resources investor about the company that owns this farm. He said the company is "the single finest group of small-cap resource investors on the planet." I recommended this group's stock in Extreme Value in February 2009, and it's up about 70% since then.
I believe it's got a long, long way to go, too. It's a great little company, and farming is just one piece of it. It also owns more than 70,000 ounces of gold bullion, and has stakes in fertilizer, oil and gas, and other natural resources firms. In the new issue of Extreme Value, due out tomorrow, I'll show you its latest investment coup – making $5 million to $20 million secured loans for 1% a month interest.
More U.S. stocks are paying dividends greater than bond yields than at any time in the last 15 years. In total, 68 S&P 500 companies are paying dividends at a higher rate than the 3.8% average yield in the credit markets, based on data compiled by Bloomberg and Bank of America. The most recent time the number of S&P 500 companies paying dividends in excess of the corporate bond rate hit this level was in March 2003… just after the crash of 2000-2002, when the S&P 500 fell 51%.
Stocks soared from 2003 to 2007, with the S&P 500 rising more than 80%. I'm not saying stocks are going up 80% over the next four years. But when you find a fantastic business selling at an attractive price, there's nothing left to do but buy it. A few weeks ago, I had six World Dominating franchises on my weekly Extreme Value buy list. Now, only two are left in buying range. All the others have risen in price.
We've previously discussed how some blue-chip companies can borrow money, buy shares, and collect more on their dividend than they pay in interest. Our friend Whitney Tilson sent us this note over the weekend, breaking down the numbers for a Johnson & Johnson buyback (he credits the idea to his partner Glen Tongue):
JNJ generates very stable net income of $12 billion-$13 billion per year (free cash flow tracks this closely) and is currently paying out almost half ($6 billion annually) in dividends, equal to a 3.7% yield today.
Consider what would happen if JNJ cut the dividend in half and used the $3 billion to issue 30-year debt. Simple math tells you that, assuming a 5% interest rate, $3 billion pays the interest on $60 billion of debt (JNJ last month issued $1.1 billion of debt, half 10 year at 2.95%, and half 30-year at 4.5%; since then, the yield on 30-year Treasurys is down 15 basis points).
$60 billion would buy back 1 BILLION shares of stock at today's prices, equal to 36% of JNJ's 2.75 billion shares outstanding. Even after subtracting the interest payments (partially offset by tax savings), this would lead to a 38% increase in JNJ's earnings per share, even if net income remained flat. And the dividend yield, thanks to the share repurchases, wouldn't fall in half, but rather would still be a very robust 2.9%.This is a theoretical exercise due to JNJ's enormous size. The debt markets wouldn't support a $60 billion debt offering. But smaller companies in similar situations could repurchase large amounts of their shares with very cheap debt.
Tilson presented his JNJ idea on CNBC, but they didn't air it. The commentators thought it was ridiculous. They said companies always buy their shares when they're overpriced. And they sell shares when they're cheap. That's true most of the time. But done correctly, buybacks produce huge value for shareholders. And right now, blue chips are cheap. Tilson said someone on air even told him, "It never makes sense for companies to buy back their stocks because they're always efficiently priced." Ludicrous.
I've published a similar buyback idea about Microsoft. If Microsoft used its massive cash hoard as a down payment and issued bonds at triple-A interest rates for the rest of the deal, it could afford to buy all of its outstanding shares… and still pay a dividend of several billion dollars a year to its new owners. Again, it's a purely theoretical exercise, since nobody is going to issue nearly $200 billion in debt. But it shows you how cheap the stock is, especially in relation to bonds. It also underscores how much cash the business generates.
A few years ago, hedge-fund mogul Leon Cooperman told us former Teledyne CEO Henry Singleton was the best corporate manager in history at buying back stock. Between 1972 and 1984, Singleton repurchased 90% of Teledyne's outstanding stock… but only when it was cheap. Singleton made acquisitions with stock when it was expensive and bought shares back when they were cheap. Singleton never received more than $1 million a year in total compensation from Teledyne. But he became a billionaire by investing in his own company.
Matt Badiali's ATAC Resources is now up 702% in less than a year. ATAC is the second-highest returning recommendation in Stansberry Research's history. If the stock continues at this pace, Matt may take the No. 1 spot. The honor currently belongs to Steve Sjuggerud and his Seabridge Gold recommendation. Readers made nearly 1,000% on that trade in four years.
If you take a look at the Stansberry & Associates Hall of Fame, published at the end of every Digest, you'll see a trend. Almost all of the stocks are early stage resource and technology companies. While these companies are speculative, they are the best way to make hundreds of percent in a short period of time. That's why we created Phase 1 Investor for our most sophisticated investors. If you maintain a diversified portfolio of Phase 1 picks and follow strict stop losses, you have a good chance of making a fortune. The big winners – like ATAC, Rainy River, AuEX (the three junior miners Matt recommended in the November 2009 Phase 1) – will more than make up for the losers. If you'd like access to the latest issue of Phase 1, where Matt recommends three new junior miners, click here…
New highs: None… Markets were closed yesterday.
In today's mailbag… More fans of Extreme Value write in. Send us your e-mails. We read them all: feedback@stansberryresearch.com.
"Extreme Value… One of S&A Alliance's best publications written by one of its very best investment minds. Cancel it and I should be requesting a refund on my S&A Alliance 'life-time' membership." – Paid-up subscriber Stefan Brose
"Extreme Value picks are the core of my investment portfolio. Please do not cancel this service." – Paid-up subscriber Jim Zeeb
"I'd just like to add my 2 cents worth to the debate over EV. I am surprised that EV has one of the smallest subscriber bases, given his excellent track record. I am an Alliance member, so probably don't count in his individual base, but his recommendations are the corner stone of my portfolio – and, I suspect, of a significant number of other Alliance members. Keep up the good work, Dan!" – Paid-up subscriber Stewart Fergus
Ferris comment: I'm humbled by the praise that's come in after last week's Digest about Extreme Value. It's my privilege to write Extreme Value to such a fiercely loyal group.
I hope it doesn't seem crass to use such a solemn, humbling moment to plug Extreme Value, but I really do believe I've found a great new opportunity this month. Subscribers know I don't often say that. I haven't recommended a new stock since May. I've only recommended five new stocks in the last 12 months.
This month's new pick is one of those small resource companies that can go up several hundred percent, like Matt's ATAC pick. It's much safer than most little mining companies, though, as readers will learn. In fact, this little, out-of-the-way business combines the upside potential of a stock with the safety of secured loan contracts, and adds the benefit of a growing stream of income as well, a highly unusual combination, one you pounce on when you find it. The new issue of Extreme Value comes out tomorrow. Click here to sign up. And whether or not you sign up for Extreme Value, thanks for being a Stansberry subscriber.
"I have been 'involved' with car dealerships in Oklahoma as a vendor for the last seven years. My involvement is that of a service to used car dealers. I recondition the paint and the exterior of used cars before their sale. As a vendor, I work strictly at the whim of the dealer. There is no contract between the dealer and myself, so if the dealer is doing well, I do well. That has not been the case for the last several years. My business, as well as the car business in general, has been in decline since 2005. When you add to that the takeover of GM and devolvement of several of their lines and the 'cash for clunkers' debacle, the dealers that are left are barely hanging on. There have been several dealers in the city as well as outlying areas that are not in business anymore. My observation is that the car market is the first indicator of the economy. If the economy is doing well, then people will be buying cars, new and used. That has not been the case in Oklahoma and it does not look like it is turning around at this stage of the game." – Paid-up subscriber Kip Wint
"I am disappointed to see Matt Badiali's recommending big winners for Phase 1. I subscribed to his S&A Resource Report because he was an outstanding analysis. It looks like you have stolen him to help support Phase 1. This looks like a good result for your company, but a disservice to Resource Report customers." – Paid-up subscriber Bill Spence
Goldsmith comment: First off, Matt's Resource Report track record has been phenomenal this year. And the true disservice to Resource Report subscribers would be recommending these tiny companies Matt discusses in Phase 1. They're too small for the size of the Resource Report's subscriber base… Nobody could enter the stock at our recommended price. The surge of interest would cause the share price to race higher. Undisciplined investors would chase the stock up to astronomical heights, only to lose a fortune when the stock corrected.
We always receive this complaint when we discuss Matt's crossover picks in Phase 1. Unfortunately, it's currently the only way to provide our readers with these small-cap, junior miners. However, we are developing a new product with Matt that will focus solely on small-cap resource plays. This service will get you into every major bull move across a basket of commodities, while simultaneously avoiding big wipeouts like we saw in 2008. We're excited about the product… We've been distributing beta issues interoffice. The results are fantastic. Alliance members will be the first to gain access to Matt's new product. We'll also keep you informed about its development in the Digest.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
September 7, 2010