An Investment for No One... Not Even Cockroaches

A familiar refrain about 'no-brainer stocks'... One recent example is down 30% since July... An investment for no one – not even cockroaches... Capital as permanent as the land itself... Apparently, 97.5% is the magic number... A more pointed question about the 'tax them until they drop' rhetoric...

'Owning the best businesses won't save you'...

I've delivered this message more than once at our annual Stansberry Conference in Las Vegas. This simple concept should sound familiar to regular Digest readers, too.

I've shared my favorite example from the past in these pages before...

Internet "plumber" Cisco Systems (CSCO) was the "no-brainer stock" to own during the dot-com bubble in the late 1990s... Ten of the top 10 mutual funds held shares. Then, the bubble popped... and Cisco's stock fell victim. As I explained in the September 13 Digest...

Cisco got crushed in 2001 after many of its dot-com customers went bust. That caused a sharp drop in revenue, which led to a dramatic plunge in its share price.

The stock plunged nearly 90% in the ensuing bear market. It still hasn't recovered to its dot-com peak of $80 per share. Today, the stock trades at roughly $47 per share.

Cisco was – and still is – a good business. In the July 18 Digest, I noted...

[Cisco] definitely was well-managed, way ahead of all its competition, growing rapidly, and gushing cash earnings. But everybody thought it was the greatest business on Earth.

When everybody on Earth thinks an investment is a no-brainer, you should question it.

That brings me to one of the supposed no-brainer companies today...

I'm talking about cloud-software company Workday (WDAY).

Over the past nine years, Workday's revenue has grown at an amazing clip – from $68 million in 2010 to $3.2 billion over the past four quarters. That's a rate of about 50% per year. Investors ate the company's incredible growth up, pushing its stock higher for years...

The company went public in October 2012 at $28 per share. It hit an all-time high of about $226 per share in July... That's a 700% return in less than seven years.

But as I've said in the Digest in recent weeks, growth stocks aren't what they used to be...

Even though Workday's revenue continues to grow, the company still can't turn a profit. Its earnings before interest, taxes, depreciation, and amortization ("EBITDA") came in at negative $185 million in the most recent four quarters.

(EBITDA is the most generous measurement of cash flow. Private company investors value companies by comparing EBITDA to "enterprise value" – the value of the company's stock plus debt minus cash. EBITDA is usually just a mass delusion by which Wall Street bankers get to pretend a money-losing company is not losing money so they can sell financing packages and buy Ferraris with their commissions.)

This week, Workday's status as a no-brainer stock took it on the chin...

During the company's user conference and meeting with analysts on Tuesday, it warned about slowing growth in its core human-resources-software business. Workday expects the segment to account for 80% of its revenue in fiscal year 2020.

The stock fell more than 11% yesterday, closing at $160.46 per share. It's down nearly 30% from its July peak.

Back then, the stock traded at a price-to-sales ("P/S") ratio of 16 times. It's still at a rich 10 times sales today. To put that into perspective... Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Facebook (FB) are the greatest businesses to ever exist – each with market caps between $500 billion and $1 trillion. They trade between four and eight times sales.

I know what you're probably thinking... "This dog is one of the best businesses?!"

Not in my opinion. But remember, over the past several years, many investors have believed that vision and growth were adequate substitutes for profitability.

The bloom is coming off that rose, and speculators in high-growth companies that light money on fire are only just beginning to feel the pain.

Speaking of companies with big growth and matching losses...

At the Stansberry Conference, I also spoke about one of our favorite "whipping boys" – troubled coworking company WeWork. As I told the crowd at the Aria Resort & Casino...

WeWork securities are not appropriate for the portfolios of mammals, reptiles, marine animals, or birds.

During my presentation, I noted that the price of WeWork's 7.875% May 2025 bond dropped to around $840 last week. I said only cockroaches could own the bond because any animal that can survive a week without its head or 30 minutes underwater could handle the pain.

The bond is looking even worse this week... On Tuesday, it dipped to less than $800 and was priced to yield 13% to maturity, according to Bloomberg data. It's at about $832 today.

On Tuesday, the Financial Times reported that the bond's latest drop occurred because JPMorgan Chase (JPM) – the company that failed to take WeWork public a few weeks ago – was putting together a bailout package. And it was turning out to be expensive... The roughly $5 billion package includes about $2 billion in unsecured debt bearing 15% interest – essentially double the May 2025 bond's interest coupon.

At the same time that JPMorgan is working on its bailout, news reports indicate that international conglomerate SoftBank – WeWork's largest shareholder – has hired Wall Street bankruptcy specialist Houlihan Lokey to figure out ways to reduce WeWork's liabilities.

Earlier this month, global credit-ratings agency Fitch Ratings slashed WeWork's rating by two notches, down to "CCC+" – deep into "junk" territory. Fitch's definition of the CCC rating leaves little to the imagination: "Default is a real possibility."

With the WeWork bond yielding 13% and JPMorgan pricing part of its bailout package at 15% interest, the market has thoroughly embraced the full meaning of the CCC+ junk-level rating. Given that a bankruptcy specialist is now involved, I feel compelled to change my earlier advice...

Even cockroaches should sell their WeWork bonds.

It's now clear that WeWork's securities aren't appropriate for the portfolios of any earthbound life forms. Maybe there's some guy on another planet who can breathe carbon monoxide through his skin and doesn't need to eat for a year at a time... He can own them. Otherwise, sell or avoid.

In addition to ranting about WeWork at the Stansberry Conference, I had a ton of fun...

For me, one of the highlights was our keynote speaker – comedian Dennis Miller. I've been a fan of Miller's since his stint on Saturday Night Live from 1985 to 1991. The flow of ideas and cultural references in his presentation were as clever and funny as I've come to expect.

At one point, Miller said former presidential candidate Hillary Clinton had been cheated on more times than a blind woman playing Scrabble with gypsies. The crowd erupted in laughter. So did I, even though I had heard Miller tell the joke backstage before his talk!

Miller couldn't have been more gracious and engaging before his presentation... Folks walked right up to him and said they loved his work. He seemed grateful to hear it all. Miller handles his fame and success like a gentleman (a word I rarely use to describe anyone).

The conference also gave me a chance to catch up with some of my favorite people in finance... like Grant Williams – the author of financial newsletter Things That Make You Go Hmmm..., and co-founder of the Real Vision media group. Whenever I talk with Williams, I learn something. He and his business partner, Raoul Pal, have featured interviews with huge names in finance... like Stanley Druckenmiller, Mark Mobius, and Howard Marks.

This year, at the annual Alliance cocktail party on the final night of the three-day event, Williams was talking about a legendary investor I bet most Digest readers have never heard of... Tony Deden of investment holding company Edelweiss Holdings.

Deden is like no other investor you'll ever meet...

His emphasis on preservation of capital is unique in the asset-management world, where portfolio managers too often take more risk with their clients' life savings than they should.

Deden's portfolio currently holds a salmon farm, a wine barrel maker, and other "natural monopolies and economic niches with high barriers to entry, pricing power, scarce economic substance... in the production of chemistry and technology of food, aquaculture, materials, forestry, resources and various industrial and engineering endeavours."

Edelweiss started in 1985 as a family operation... became a fund in 2002... and a holding company in 2015. Its mission and values have never changed. In addition to the above investments, the portfolio also holds "substantial reserves in the form of physical gold."

Deden views his clients' assets as "permanent" and "irreplaceable" capital.

At the conference, Williams told the story of a typical business that's right up Deden's alley...

A date farm that Deden once visited. (I'm talking about the edible fruit, not where a bunch of people would go looking for love.)

According to Williams, the farmer explained to Deden that when you plant date trees, it takes several years to grow one large enough to begin producing dates (nine years, if memory serves). But it takes 40 years for the tree to produce the highest-quality dates.

Forty years.

At that point, Williams recalled that Deden asked the obvious question... "Why plant trees when you know you'll never see edible dates in your lifetime?" The farmer smiled and pointed to a few nearby fields, simply replying: "Well, my father planted that field... and my grandfather planted that field... and my great-grandfather planted that field..."

That is permanent capital... as permanent as the land itself. The farmer was Deden's kind of guy.

Of course, owning a date farm is just one way to employ capital permanently...

Building a business you can pass along to your heirs is another.

According to the most recent presentation on Edelweiss' website, from last year, Deden had 60% of his money in publicly traded equities and 35% in gold. It had roughly 4% in cash and 1% in unlisted investments.

Deden (and perhaps investing legend Warren Buffett) have demonstrated that it's possible to keep a lot of your money in the stock market for an indefinitely long time... as long as you pick the right stocks. But it's another matter entirely to have enough conviction and guts to ride out the storms that seem to blow into the markets once a decade or so.

For example, you never know what sort of storm you might have to ride out – say, four to eight years at a time, during a president's tenure. And as we inch closer to the critical 2020 presidential election, some candidates are leaving nothing to the imagination...

'Tax something and you'll get less of it,' the old saying goes...

But today, at least two Democratic presidential candidates believe that if you can steal enough from the folks who earn the most, everything will go swimmingly for the rest of us.

Vermont Sen. Bernie Sanders and Massachusetts Sen. Elizabeth Warren are stumping for the culture of larceny. Each claims to know precisely how much to steal from the wealthiest Americans...

On Sunday, Bloomberg reported about a new interactive website from a pair of professors at the University of California, Berkeley. If Sanders gets his way, they concluded that the 400 richest Americans, on average, would be taxed at an effective rate of 97.5%.

Not 97% or 98%, mind you... 97.5%. Yeah, that's the magic number that will make society work like a well-oiled machine.

Warren's tax plans would be slightly better... According to the two professors, her proposals would only promise to exact a mere 62% from the financially better off among us.

The projections for both candidates include a combination of income and wealth taxes.

A wealth tax would be like the government showing up every year and saying, "We're going to take 5% of your total net worth. One of the core principles that gets us elected and re-elected is larceny. Everything we do begins and ends with it... and you're the target du jour. So pay up, or we'll turn you into a criminal, even though you've done nothing wrong."

Years ago, I was in the room when Berkshire Hathaway Vice Chairman Charlie Munger said taxes are the sinew of civilization – what holds it all together. I'm not as impressed with Munger as everyone I've ever met, but the idea that we all need to pitch in isn't a bad one.

It's when folks start getting as nasty and extreme as Sanders and Warren that I start objecting...

Sanders believes billionaires shouldn't exist. At all.

Imagine taking away from the most successful people only because others aren't as successful...

If that's the kind of world you want to live in, I'll start the collection to send you to that planet where they breathe carbon monoxide and buy WeWork bonds.

Even though I'm not one, I love that billionaires exist. They're the financial equivalent of Olympic athletes and Nobel Prize-winning scientists.

Besides being a financial guy, I'm also a classical guitarist. Without the inspiration and examples of John Williams (not the Star Wars guy), Manuel Barrueco, and David Russell, I doubt I'd be nearly as interested in playing.

Sanders and Warren want to look around, see who inspires entrepreneurs and investors... and draw and quarter them in the public square. It's medieval.

Penalizing people for being better at business than everybody else is like saying you only want humans to get rich as long as their prosperity doesn't offend anyone. Such anti-mind, anti-life philosophy lies at the core of what many politicians try to sell us.

Too many folks don't get that, blinded as they are by the quest to vote themselves as much free stuff as possible. Humans need each other... for inspiration as much as anything else.

But I have a more pointed question about the 'tax them until they drop' rhetoric...

Would Sanders and Warren tax a productive uber-wealthy person at the same rates and in the same way they would tax someone like Lloyd Blankfein, CEO of "The Vampire Squid of Wall Street" – also known as Goldman Sachs?

Blankfein and his fellow squids take fees and commissions for standing next to a massive pile of other people's money... knowingly shoving the odd dose of pure toxic waste down investors' throats (again, for a tidy fee), all while claiming it's safe.

Meanwhile, other Americans – the people in Sanders' and Warren's sights – get rich from building and making things, satisfying various wants and needs, and treating diseases. They've done nothing that deserves to be penalized in the manner Sanders and Warren suggest. They shouldn't have their wealth raided by government jackboots.

As far as I can tell, the culture of larceny has no such filter.

How could it? When your whole shtick is to gain as much as you can in as unfair of a way as possible, the idea of penalizing ill-gotten gains probably doesn't feel right... if it even registers at all for diehard larcenists like these two.

Also, let's face it... This isn't about what's right. It's about what gets them elected.

Sanders, Warren, and their ambitious ilk are mostly concerned with making the biggest splash among the most people. They pick terms like "wealth tax" and numbers like 97.5% for their promotional value, not because they believe it's actually good for anyone.

Hopefully, getting rich and preserving the wealth you've generated will never become the crime Democrats want to turn it into. Besides real estate or businesses you own and operate, I still recommend that your portfolio should include plenty of cash right now... stocks purchased on a one-at-a-time, bottom-up basis... and gold.

My No. 1 way to profit in gold recently dipped back into 'buy' range...

I believe this company is the best gold business on Earth.

This little-known stock trades at a huge discount to the underlying value of its business right now. It represents the biggest margin of safety you'll ever find in the market. Even better, this stock has the potential to become the biggest winner in Stansberry Research history...

It's the single greatest opportunity I've seen in my 20-plus years in the investment-newsletter business. This stock has excellent potential to become our firm's first-ever "20-bagger."

If that sounds like something you might be interested in, I encourage you to take a few minutes to watch the special presentation we've prepared with all the details right here.

New 52-week highs (as of 10/16/19): Celgene (CELG), Home Depot (HD), iShares U.S. Home Construction Fund (ITB), Lennar (LEN), Masco (MAS), NetEase (NTES), and TAL Education (TAL).

A quiet day in the mailbag. What do you think about the Democratic presidential candidates' tax proposals? We'd love to hear your comments at feedback@stansberryresearch.com.

Good investing,

Dan Ferris
Vancouver, Washington
October 17, 2019

P.S. In this week's episode of the Stansberry Investor Hour podcast, I interviewed macro investor and former U.S. Department of the Treasury economist Mark Dow...

We discussed the recent hysteria surrounding "repurchase agreements" ("repos") – a form of short-term, secured lending that saw its rates briefly spike as high as 10% last month. He also explained why he believes people are eating up the roughly $15 trillion worth of negative-yielding sovereign debt in the world. You can listen to the episode right here.