It's been a volatile few weeks for one of the biggest companies in the world...
On July 17, after the market closed, software giant Microsoft reported earnings... The stock fell more than 11% the next day.
The market was concerned that declining PC sales – and Microsoft's inability to successfully navigate the mobile space – would doom the company. But Extreme Value editor Dan Ferris, who holds Microsoft in his World Dominator portfolio, was still bullish on the stock.
After all… the company is still producing nearly $30 billion of cash a year. And it has nearly $80 billion of cash on its books.
Plus, Dan argued, individuals' waning interest in PCs didn't hurt Microsoft as much as everyone believed. In the August 2013 issue of Extreme Value, Dan wrote:
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Then on August 23, Microsoft CEO Steve Ballmer announced he would step down within 12 months. Ballmer's been lambasted for some poor acquisitions (which we'll discuss later) and failing to compete in the mobile market. The market applauded his departure, sending shares up 7% on the news. But Dan wasn't as down on Ballmer as the rest of the market. In an August 26 update to Extreme Value readers, he wrote:
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Dan said Ballmer's departure was neither great nor terrible. And Microsoft's intrinsic value didn't increase 7% with his departure (just as it didn't drop 11% following the earnings announcement).
Microsoft announced it would buy Nokia's devices unit for $7.2 billion. Nokia is the struggling Finnish cell-phone company that failed to "break through" into smartphones.
Nokia CEO Stephen Elop will move to Microsoft following the transition and represents a possible successor to Ballmer.
The deal with Microsoft takes Nokia completely out of the handset market. It's left with a pile of cash and NSN – the company's maps and advanced technology division (basically research & development and various patents).
One of my contacts, a senior executive in the technology space, wrote me this morning with his thoughts on Nokia's current situation...
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The stock jumped 40% initially on the news...
As for Microsoft, it's clear the software giant is making a big push into smartphones... It's hoping its scale and technology combined with Nokia's mobile know-how will help it compete against the likes of Apple and Samsung. But the market isn't so sure... Microsoft is down nearly 6% on the news.
The market has good reason to question Ballmer's latest acquisition – his potential final black eye for capital misallocation. He hasn't made the best decisions in the past...
In 2007, Microsoft bought digital marketing and service provider aQuantive for $6 billion. Late last year, Microsoft took a $6.2 billion write-down to its Online Services Division. The write-down was related to the goodwill from the aQuantive acquisition.
Acquiring companies carry goodwill on their balance sheet equal to the amount paid above the target company's book value... And Microsoft wrote down the whole lot (and then some).
Microsoft also spent $8.5 billion in October 2011 to buy Internet phone service provider Skype – more than three times what eBay paid for Skype in 2005. (And eBay couldn't make the investment profitable even at the lower price.)
Time will tell how the Nokia acquisition works for Microsoft... But the company has a spotty history of acquisitions. We'll keep you updated as Dan releases his thoughts on the deal…
Microsoft is a classic example of the kind of business Dan calls a World Dominator. These rare businesses sell the No. 1 product or service in their field… They have tremendous competitive advantages over their rivals that make it nearly impossible to compete with them… They generate consistent and often thick profit margins and generate tons of free cash flow year after year. And many pay generous and growing dividend streams.
Dan tracks 14 World Dominators in his Extreme Value portfolio. We've mentioned many of these businesses in past Digests – names like consumer-products giant Johnson & Johnson, global beer maker AB-InBev, and retail colossus Wal-Mart.
Simply buying and holding these companies in your portfolio is one of the surest and safest ways to make money in the market.
It's no surprise… when Porter writes about "capital efficient" companies, his analysis often leads him to the exact same universe of World Dominators. In the August 26 Digest Premium, Porter noted that many people think these stocks only outperform over the long term, but that's not true...
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The key, of course, is buying at the right price. Any investment – no matter how strong the business – will struggle if you pay too much for it.
Most of the time, you don't have the chance to buy stock in well-run and highly regarded businesses for a bargain… But when you do, you should load up. Our Editor in Chief Brian Hunt wrote about World Dominators in the June 6 Digest. As he said at the time…
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And right now… Dan says four of his favorite World Dominators are trading for less than the buy-up-to prices he's set for them.
In deference to Dan's readers, we can't name them here… But we encourage you to learn more about Extreme Value and gain access to Dan's valuable research on World Dominator stocks. To find out more about subscribing to Extreme Value and which World Dominators represent exceptional bargains right now, click here.
The Microsoft/Nokia deal isn't the only big acquisition making headlines today...
Verizon agreed to pay $130 billion to purchase the 45% stake in Verizon Wireless owned by European media giant Vodafone. It's the second-largest acquisition in history. Verizon is down a little more than 3% today.
You should take a couple insights from this deal...
Verizon is rushing to pull off this huge deal (which will require an estimated $50 billion in debt financing) before interest rates rise further.
Also, these mega deals usually happen closer to a market top than a bottom...
Consider the largest deal in history – Vodafone paid more than $180 billion for German telecom Mannesman. This happened just before the market top in 2000.
New 52-week highs (as of 8/30/13): Fluidigm (FLDM).
In today's mailbag, one subscriber has learned the wisdom of cutting losses short... while another asks about more sources for financial and investing insights. Send your comments to feedback@stansberryresearch.com.
"In looking at the math on using trailing stops it is terrific. You can adjust the numbers to suit your particular levels of risk. If you put no more than 5% of your portfolio into a trade then use a 25% trailing stop loss your max loss is 1% of your portfolio.
"That's me, I don't want to lose more than 1% on a trade. So I started using that model. The thing I didn't count on emotionally was when the trade did not go your way and the stop loss was at 25% of your initial price. So I'm in [a short position] right now [that] it never quite hit the stop loss, till Friday. But it didn't just end the day a little above the stop loss. It ended about a buck and a half above the stop loss price on the short trade. So I will now be disciplined and close it out Tuesday. But in the past, because it was such a big jump and because I only wanted to lose 1% I have let my emotions run wild and thought I'd wait till it got back to that 25% stop loss before I took it off the table.
"Emotions are a terrible thing. But the point is, I have not seen warnings that the stock can jump significantly past your trailing stop all of a sudden but that is to be expected. Sometimes you will lose a little more than the 1% you had targeted. DO NOT LET THAT STOP YOU AND DO NOT WAIT TO GET BACK TO THE STOP LOSS POINT. I know that seems obvious as all heck now that I've had it happen but perhaps my mistake and the subsequent warning might help someone." – Paid-up subscriber Bill Pennock
Goldsmith comment: Glad you're learning to work with trailing stops, Bill.
The "math on using trailing stops" Bill refers to is from our August 9 Digest, which you can read here.
We have long advocated trailing stops as an important tool investors can use to limit their losses. Just as Bill says... emotions can override judgment when you see the losses growing in your brokerage statement. Trailing stops help eliminate your emotional attachment to losing positions.
Longtime readers know we've often pointed out the software TradeStops, developed by our friend Dr. Richard Smith, as a good tool to help manage your trailing stops. We've always believed his program to be a valuable tool for investors... so much that we recently invested in his company.
Now, we are working with him to build out a software program that will allow you to easily apply statistically valid, dynamic trailing-stop losses to every investment in your portfolio. To learn more about these new tools, be sure to sign up today with TradeStops.com. You can learn more here.
"Your point on inflation and after tax returns is spot on. I have been a successful real estate investor buying distressed apartment complexes and repositioning them for enhanced value and cash flow, but never experienced much success in the equities markets. I am faced with investing excess cash into the market at valuations which look pricey to me. Reading your Digest has been helpful however I am looking for more. Do you recommend any web sites, or sources such as Barron's for regular reading?" – Paid-up subscriber Mike Blankenbaker
Goldsmith comment: I'd add Bloomberg, the Financial Times, and the Wall Street Journal – all the big boys. I also enjoy (as does Porter) Grant's Interest Rate Observer.
Regards,
Sean Goldsmith
Miami Beach, Florida
September 3, 2013
Gold prices have rebounded from less than $1,200 an ounce in late June to more than $1,400 an ounce today. And gold stocks – as measured by the Market Vectors Gold Miners Fund (GDX) – are up 25% over the same period.
So the trend seems to be turning up… but I (Porter) don't think we've seen the absolute bottom yet. I have been cautious on gold for some time. I don't believe a 12-year bull market in gold will be followed by just a six-month selloff. That's not how markets tend to work.
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I don't view gold as an asset to be traded... I view the precious metal as money. It's something to buy and never sell... Unlike fiat currencies, gold is no one else's liability. But again, most investors don't understand that.