I (Dan Ferris) spent a half hour on the phone yesterday talking about consumer-electronics maker Apple with a reporter from U.S. News and World Report.
I told him Apple is a great company. (He questioned that.) I think your grandchildren's grandchildren will be using Apple products decades from now. They will talk on iPhones, listen to iTunes, and use iPads (or whatever Apple's newest creation will be by then).
Then I told him the same thing I've been saying about corporations and taxes since last November: It's a mistake for corporations to make tax efficiency a priority over serving their customers, employees, and shareholders.
Apple should do what I recommended Microsoft do last November: They should talk to Expeditors International CEO Peter Rose.
Expeditors is a third-party logistics firm. It's essentially a travel agent for freight. The company fills planes and ships with goods and gets them from point A to point B, crossing international borders. The business is all about the knowledge and skill of its people. Expeditors dominates the Asian channel to North America, but it operates in more than 60 countries all over the world.
Expeditors' corporate culture is unusual, and other companies ought to study it. The company refuses to make large acquisitions or let another company acquire it. Expeditors won't fire its employees, who are paid much more than those of its competitors.
I highly recommend reading Rose's thoughts on the subject of so-called repatriation of foreign-earned cash. "Fear of paying U.S. taxes is not a factor in how we temporarily deploy cash," he writes. "At the end of the day, foreign earnings will all become U.S. taxable income."
Expeditors has done a brilliant job of creating shareholder value. Through yesterday's close, it has compounded 18.9% per year since 1990. Investors have doubled their money on this stock about every four years for more than 20 years.
You rarely have the chance to buy shares of Expeditors for an enterprise value (market cap plus debt minus cash) below 20 times free cash flow. Meanwhile, Apple and Microsoft continue to trade at enterprise values below 10 times free cash flow. There are other issues depressing Apple and Microsoft's valuations. But one of them is definitely the excess cash on their balance sheets.
The market tends to pay $1 or less for every $1 of idle capital. I've seen it time and time again. The market is never going to assign a premium valuation to companies that refuse to put idle capital to work.
Japan's Nikkei Index fell 7.3% today. It was the largest one-day drop in two years. And the market is trying to attribute the fall to various economic factors...
China announced a surprise slowdown in factory activity... Europe – China's largest trading partner – is also slowing down... And Federal Reserve Chairman Ben Bernanke spoke last night. He had nothing new to say... but he still spooked markets (more on that in a bit).
In reality, Japan's decline was simply an overheated stock market taking a breather – a natural correction.
As you know, we're at the Greenbrier in West Virginia for our annual Spring Editors' Conference. I (Sean Goldsmith) had the opportunity to speak with our resident Japan bull Steve Sjuggerud about the drop. Here's his response...
I chuckled to myself when I saw the headlines regarding the Nikkei's drop... as if it was the end of the world. This is a natural correction. My readers were up 57% in five months... Now you're up 46%. Mrs. Watanabe (Japan's "Jane Doe") got slapped... She started to believe the hype.
This is like the dot-com bubble in 1999 – two years before the top – in Japan... There will always be volatility on the way up. Japan still trades around 1.4 times book value and 16 times forward earnings. It's still not expensive, especially considering a zero-percent interest-rate environment with Prime Minister Shinzo Abe "Bernanke on steroids." Japan is still cheap.
Also, permabear Marc Faber – editor of the Gloom Boom & Doom Report – predicted a Japanese correction in an interview on Yahoo's Talking Finance three days ago. "I think we need a correction here on the downside [in Japan]," he said. "But on a correction on the downside, I would probably accumulate some Japanese shares."
We also had an interesting day in the U.S. markets yesterday...
The S&P 500 was up nearly 20 points midday... Then Bernanke told Congress that the Fed is monitoring the economy and it could add or subtract stimulus at any time. The S&P 500 ended the day down 14 points – falling from a high of 1,687.18 to 1,655.35. That's a major whipsaw... and it only happened because Bernanke opened his mouth.
No one should have that kind of influence on the market. This is still more proof today's market is not trading on fundamentals... It's trading on the rumors and whims of one man with the power of the purse strings. But his purse does contain unlimited funds...
Still more news for the energy companies in the Stansberry's Investment Advisory portfolio...
As part of Porter's December recommendation of natural gas liquid transportation firm Targa Resources, he explained how private-equity giant Warburg Pincus does business...
Targa is backed by private-equity firm Warburg Pincus. We've written about private-equity firms before... We follow that space fairly closely. And we can tell you Warburg Pincus is top-shelf...
We must admit, Warburg's involvement in the stodgy old energy business seemed a bit odd. You see, Warburg Pincus isn't interested in 10% returns. And neither is it swinging for the fences looking for overnight moonshots. When Warburg Pincus takes an interest in a company, something big is getting ready to happen... something that requires a lot of capital and takes years to develop... something that will make the firm many times its money.
Ten years after taking a stake in Targa, Warburg Pincus is taking some profits. Specifically, Warburg is cashing out most of its stake in Targa – reaping $1.8 billion in profits on its initial $400 million investment. Meanwhile, Targa is a "hold" in the Investment Advisory portfolio. Readers are up 40% on the position.
New 52-week highs (as of 5/22/13): DCP Midstream Partners (DPM), Enterprise Products Partners (EPD), KBR (KBR), Teekay LNG Partners (TGP), and Walgreens (WAG).
In today's mailbag, one subscriber claims Dan is "smearing" Apple. Send your vitriol to feedback@stansberryresearch.com.
"With your $499 I-Phone purchase Apple collects nearly $100 in taxes for the government. Without the corporate tax the I-Phone could cost $399 and yield the same amount of profit to Apple. So, dear Senator Levin, how do you explain that to your middle class constituents? BTW the rich pay exactly the same dollar amount as the do you – talking about fair share, ha, ha,ha. Taxes decrease a company's competitiveness internationally and Apple does business worldwide, so who gets it on the chin when sales are lost to foreign competition – right, you lose your job. As I always say, politics is the art of deception." – Paid-up subscriber Erich Kellner
"After reading the latest S&A Digest Premium, I was so incensed that I had to respond. Your and Dan Ferris's comments regarding Apple's totally legal minimization of taxes reeks of hypocrisy. I don't know if Dan has ever run a company, but, as someone who has run several, I can tell you that every CEO and CFO has an obligation to take every legal action to minimize taxes. If they don't they should be fired.
"I am not an Apple fanatic, but I applaud them for their results. Dan's comment about 'screwing around with taxes' is just off the wall. As you noted, the Senate Committee agreed that Apple had done nothing illegal.This was just another grandstanding attempt by our anti-business politicians (who are the ones who have been 'screwing with taxes' forever) to attempt to smear a great company, and you and Dan got on the train. I am sure that you wouldn't think of trying to minimize YOUR taxes!" – Paid-up subscriber Tom Kavanagh
Ferris comment: I haven't smeared anyone. I've called Apple a great business more than once. I just don't like how it prefers tax policy over creating shareholder value. I've been writing about this issue since November, when I wrote a letter to Microsoft's board of directors about it. I guess you think I'm smearing Microsoft, too, since I've made the identical criticism... even though I've recommended the stock many, many times since 2006.
I assume you're aware that minimizing taxes is never any business' top priority. I promise you, leaving tens of billions of dollars in the hands of corporate managers who don't know how to use it productively is similar to flushing the money down the drain. Whether the lever is pulled today or 10 years from now hardly matters.
Bringing foreign-earned cash home to the U.S. and paying it out to shareholders via buybacks and dividends minimizes taxes... provided you're running a great business on behalf of your shareholders, customers, and employees. Apple is leaving shareholders out of the equation by leaving $102 billion sitting offshore earning nothing.
As for my own personal situation, I have paid more taxes than I could have because I don't believe in wasting $0.65 in order to save $0.35 in taxes. My accountant tells me every year, "You need to spend more money." I have the most wonderful tax problem of all. I can't spend enough of my income in so-called tax-efficient ways. I don't believe buying things I don't want is a way to build wealth. I think building wealth starts with saving, followed by investing.
Read Peter Rose's comments. Should he be fired?
Regards,
Sean Goldsmith and Dan Ferris
White Sulphur Springs, West Virginia
May 23, 2013
The huge run up the Japanese stock market had been enjoying this year is a wonderful example of the power of central banking. Right now, everyone is convinced that central banks can inflate asset prices safely and with no negative consequences. But most people have absolutely no knowledge of history. Every time this has happened in the past, it's led to a complete disaster.
There is no doubt the same exact thing will happen in Japan and in all the Western countries where central banks are trying to bail out bankrupt governments by printing money and manufacturing a boom. The signs of this will be very clear. They're the same signs that have always happened…
Whether people realize it or not, savings and capital investment are the foundation of wealth. Until you have savings and capital investment, you cannot have any actual increases to productivity and no real increases to wealth. As savings and investments break down in favor of gambling and speculation, the means of production will become fewer and farther between. Things will start to break down.