An update on Porter's latest 'no-risk' investment...
An update on Porter's latest 'no-risk' investment... Why shares soared 8% on Thursday... How to get paid no matter what happens... Your most important job today...
So far, investors who bought [this business] way back in 2006 – again just before the worst financial Armageddon of our lifetimes – have already made nearly 200% on their money. I'm confident that based on its current share price, similar (or even superior) returns are currently available to any investor wise enough and patient enough to buy the stock today.
There's essentially no risk to this investment at this price, given [this company's] brand, locations, price point, margins, and capital efficiency. So... if you're looking to protect your wealth during a financial crisis (you should be), look no further than the oldest recommendations still sitting in our Top 10 list. These types of companies are a great way to get rich, no matter what happens to the economy or to the stock market. – Porter Stansberry in the April 10 Digest
You may have guessed that Porter was referring to fast-food titan McDonald's (MCD). He shared his latest thoughts on the recommendation as part of his market update in Friday's Digest...
I still think we're heading into a bear market. If that's true, you might wonder why I don't sell all of the stocks in my model portfolio. You might wonder why I don't short dozens of stocks. The answer is: Because the timing on all these things is impossible to pinpoint, and because – and this is harder to understand – many of the stocks in our portfolio will perform well despite a bear market.
Look at McDonald's, for example. Yesterday, the stock soared – as we told subscribers it would. I invite you to go back and read our most recent recommendation – in the April 10 Digest. I explained in detail why most investors don't understand how capital efficient McDonald's is and how it's therefore able to support its investors through large dividends and share buybacks. Since then, the Dow Jones Industrial Average is down 3%. McDonald's is up 14%. I don't want to sell a great business that is paying us dividends and is sure to survive the next bear market... whenever it arrives.
As Porter noted, McDonald's soared on Thursday. Shares closed the day up more than 8%... a huge one-day move for a "boring" blue-chip business. Today, we'll take a closer look at the reasons behind the move...
McDonald's released its third-quarter earnings announcement before the market opened that day. Stansberry's Investment Advisory lead analyst Bryan Beach summarized the company's announcement for us in a private e-mail...
This is a story about comparable sales, mainly in the mature U.S. market. "Comp sales" is one of Wall Street's favorite metrics for retail and restaurants, and always seems to move the market.
In the past, McDonald's comp sales consistently increased every quarter. Between the second quarter of 2010 and the first quarter of 2012, U.S. comp sales increased an average of more than 5% per quarter. That's incredible for such a mature market. Then in the second quarter of 2012, comp sales fell to less than 1% and stayed at that level for the rest of the year.
Comp sales staggered throughout 2013 and hit rock bottom in Q3 2014, with comp sales actually decreasing around 3%. In fact, comp sales decreased every single quarter from Q4 2013 to Q2 2015. As we reported earlier this year, the Board finally took our advice and canned the old CEO. Nice guy... but obviously in over his head.
Last week, in his second quarter as CEO, Steve Easterbrook announced U.S. comp sales rose 0.9%. While that wasn't record-breaking, it was a welcome sign... especially after seven consecutive quarters of negative numbers. Analysts were expecting another decline. The news was even better around the rest of the world. Total global comp sales increased 4%, and revenues are up 7% in constant currencies. By any measure, it was an impressive third quarter for McDonald's.
Easterbrook's innovative ideas appear to be working so far. Under his watch, McDonald's recently rolled out a long-awaited all-day breakfast menu. McDonald's has also tested out customizable menu options and announced it wants to eliminate human antibiotics from its chickens in the next two years. Easterbrook also wants to sell 3,500 of its company-owned locations to franchisees.
McDonald's is one of a relatively small number of special businesses Porter calls "capital efficient" – companies that are able to return a large amount of their profits to shareholders without requiring much capital to maintain their businesses. (Longtime subscribers will remember chocolatier Hershey is also on this list.)
McDonald's sells high-margin products at low prices and is practically immune to recessions and economic troubles. And as Porter explained back in April, despite the missteps of its former CEO, McDonald's business was actually doing surprisingly well... and much better than Wall Street was giving it credit for...
The stock is cheap because McDonald's has been suffering from a bad CEO for several years (who was recently replaced). Because of this, McDonald's has seen revenues slow and even shrink slightly. And Wall Street worships growth above all else.
How does McDonald's perform on our capital-efficiency tests? Last year, its gross margins were almost 40% and its operating margins were an incredible 28% on sales of nearly $28 billion. And that was a "bad" year.
One "secret" to McDonald's success – which allowed it to earn fantastic returns despite poor management – is that it primarily franchises its locations, rather than owning and running them directly. In other words, it simply collects "royalties," so to speak. More from Porter...
Incredibly, over the last three years (all of which came during the previous CEO's reign), McDonald's was able to return more than $15 billion to its investors via dividends and share buybacks... without growing. Even at this reduced pace, McDonald's shareholders will receive capital returns (via dividends and buybacks) equal to the entire value of the company today in about 17 years.
This fact alone would have been reason enough to recommend buying shares. At the time, the stock was incredibly cheap... trading for a little more than 10 times cash earnings (or "EBITDA").
But Porter also predicted the company's new CEO would get the company back on the road to growth sooner than most folks expected, and said buying shares at the time was virtually risk-free...
Of course, it won't actually take that long. The new management team will reboot the company's franchise. Perhaps it will buy growing burger chain Shake Shack, similar to its previous stake in burrito chain Chipotle. Or maybe it will create some new product or promotion that takes off. Brands like McDonald's don't just go away. They come back. There's a big growth spurt at least once a decade. And when that happens, these cash distributions will soar.
My prediction is that over the next decade, McDonald's shareholders will receive returns of capital worth at least $100 billion – more than the entire business is worth today. If you're a shareholder, do you have to worry about what the stock price will do tomorrow or next week? Nope. You're going to get paid no matter what happens. And even after you've been paid back more than 100% of what you put up to buy the business, you'll still own a piece of the company, which by then will surely be worth a lot more.
While the earnings announcement was only one quarter of positive results, the business appears to be turning around under Easterbrook. McDonald's shares are now up more than 15% since Porter's April Digest, and just hit a new all-time high today.
Kudos to Porter for the bullish call... and to everyone who took his advice and bought shares in April.
But more important, if you weren't able to take advantage of the recommendation – or if you were too fearful to do so – we urge you to take some time now to go back and re-read the April 10 Digest (along with the other information on capital-efficient businesses we linked to earlier).
There will be opportunities to pick up other high-quality businesses at absurdly cheap prices in the months and years ahead. Your No. 1 job today is to make sure you're willing and able to take advantage of them when they arrive.
Of course, as we've discussed, we believe some of the best bargains won't be in the stock market. Instead, some of the safest, most profitable opportunities will come from the bond market. As Porter reminded readers on Friday...
Over the next 24 to 36 months, investors who buy the right distressed bonds at the right prices will end up owning trillions in high-quality assets. Lenders will become owners. And that's a trade I'll be helping investors make with a new product we're launching next month, Stansberry's Credit Opportunities. Keep an eye out for information about it.
New 52-week highs (as of 10/23/15): Automatic Data Processing (ADP), Activision Blizzard (ATVI), Chubb (CB), Expeditors International (EXPD), National Beverage (FIZZ), Lancashire Holdings (LRE.L), McDonald's (MCD), Microsoft (MSFT), and Sysco (SYY).
In the mailbag, a comment about Porter's announcement on Friday and a question about our track record. Send your questions and comments to feedback@stansberryresearch.com. Remember, we can't provide individual investment advice.
"Porter – congratulations on the launch of Stansberry Asset Management. Your asset threshold is low enough to attract a lot of potential clients. I have no doubt that this venture will not only be very profitable and professionally gratifying, but it is absolutely a perfect complement to your brand. You have, what? 500,000 subscribers? Many are constrained by the limitations of the 9:30-4 trading window, or are simply overwhelmed by the volume of value your research team cranks out. Your obvious integrity is the answer to any suggestions of conflict of interest and your loyal subscribers know this going in. Any carping will be the standard fare from the usual suspects.
"I only wish my broker/dealer could offer SAM as a managed money option for my clients! Bravo on continuing to scale up while consistently adding value! (Didn't mean to suggest that $500,000 is a 'low' asset amount, only that it will attract substantially more clients than the qualified investor threshold of $1 million.)" – Paid-up subscriber LAF
"Hi Porter. I have been reading your newsletter for a few months and see some very good insights. But one thing that worries me is why you do not publish overall results (winners and losers) so readers can assess whether your performance exceeds that of other newsletters. Appreciate if you would respond to this either privately or in your daily newsletters." – Paid-up subscriber Mark Iwanowski
Brill comment: Actually, Porter publishes the annual Report Card every January, where he grades the performance of each of our newsletters. Here are the reviews of our monthly newsletters and our trading services. Plus, most of our analysts include a portfolio review at the end of each monthly issue.
Regards,
Justin Brill
Baltimore, Maryland
October 26, 2015
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