Ben Graham vs. 'what's hot, what's not'... HP: Once hot, now not... Prestige Brands up 220% since May '09... Seven 'Undiscovered Gems'... Miami real estate is hot... Paulson and Soros buying gold... Gold-stock investor going 'all in'...
Benjamin Graham, the father of modern security analysis, was fond of quoting Horace's Ars Poetica, which said, "Many shall be restored that are now fallen, and many shall fall that are now in favor."
On a related note... in our mailbag today, a reader asks if we can help him find "what's hot and what's not."
Had you been looking for what was hot in January 2010, it would have been hard to find a hotter stock than Hewlett-Packard. It was up more than 65% off its 2009 bottom and more than 350% off its 2002 bottom. It was the world's No. 1 maker of personal computers (by units sold).
Of course, that was the moment to either sell short or avoid HP completely. Since then, HP shares are down almost 80%. It's like Ben Graham said, "Many shall fall that are now in favor."
Looking for hot stocks is a horrible idea, even if they're not a has-been commodity producer disguised as a technology dominator, like HP. You shouldn't look for hot or cold stocks. Before you do anything in the stock market, you should learn the characteristics of a great business, and then look for those.
Hewlett-Packard's PC business was not a good business. Anyone can make Windows-based PCs. There's no reason why another company couldn't undercut HP... You may have heard of brands like Acer and Asus, both of which sell much cheaper laptops than HP.
In contrast... there's Prestige Brands Holdings (PBH). It was definitely not hot in May 2009, when I (Dan Ferris) recommended it in Extreme Value.
Back then, Prestige was trading for less than $7 a share, having peaked at $21 a share about four years earlier. Its market cap was just $309 million. It had $385 million in debt and less than $28 million in cash. As I told readers at the time, "Prestige is not a financial fortress."
But it has something HP doesn't: Durable, popular, brand-name health care products (like Chloraseptic, Cutex, Murine, Compound W, and Clear Eyes) and household cleaning products (like Spic 'n Span and Comet). Many of these products are No. 1 or No. 2 in their markets. Some of them sell in more than 90% of stores where similar products are sold. They're impossible to get away from.
That's different from selling the No. 1 PC. Consumers tend to be a lot more loyal to a personal health care brand that only costs a few dollars, than to a PC brand that costs upwards of several hundred dollars. You can switch brands and get a great PC. But if you're taking care of your health, you'll tend to stick with the brand that works for you, rather than looking to save a few pennies.
Even better... Prestige owns only the brands. It outsources the manufacturing and distribution (the low-margin, high-cost parts of the business). It's like a royalty on popular consumer brands.
At the time, the business was generating more than $60 million a year in free cash flow. I could hardly believe the market had allowed such a fantastic business to trade at a market cap of around five times free cash flow – a super dirt-cheap price for such a good business.
You've probably never even heard of Prestige before today, though you've likely heard of the brands it sells. At the time I found it, I said, "I consider Prestige Brands something of an undiscovered gem." I also said it was an easy double from its then-low share price. I was wrong. It was more than a triple.
Today, Prestige generates about $88 million in free cash flow – 48% higher than when I first found it. The stock has responded to the growth in the business. It's up about 220% since I recommended it.
Prestige now trades for more than my buy limit. But right now, on the back page of Extreme Value, I've got seven small, "undiscovered gems" rated as a "buy" (meaning they're safe for new investment). All of them have similar potential to what Prestige Brands had in 2009. And most of them are less risky than Prestige was.
Two of them are small financial stocks with market caps of less than $200 million... They've been hand-picked by the Federal Deposit Insurance Corporation (FDIC) to get sweetheart deals on failed bank assets. And they're two of the best-capitalized banks in the country, with financial fortress balance sheets.
Another three of these undiscovered gems are mining exploration-related stocks. They're loaded to the gills with liquid assets like cash, stocks and bonds, and gold bullion. And all three of them contain several huge upside "kickers" that could cause their share prices to double in the next year or two. I look at thousands of companies every year. If there's safer triple-digit profit potential than these three stocks out there right now, I haven't found it yet.
Finally, in my Extreme Value list of "undiscovered gems," you'll find two energy companies. They're around $700 million to $1 billion in market cap. They've got excellent financial conditions. And in both cases, management has done a brilliant job of riding out the fall in natural gas prices. If natural gas prices rise at all in the next couple years, these two stocks will soar.
I'll publish the whole list of "Seven Undiscovered Gems" in next Monday's weekly Extreme Value update (for subscribers only), with a brief description of each one. I'll also highlight which Extreme Value issues and updates to read for the full story on each one.
It is an extremely difficult time to be an investor. There's no bull market to rely on, like there was in the late 1990s. Today, you MUST be a good stock picker, or you're going to lose money.
If you're buying stocks and bonds for your own individual account, you MUST have an edge. If you don't know what your edge is, you don't have one. In Extreme Value, our edge is simple. We are patient value investors. We don't recommend a stock unless it's a fantastic, safe deal with plenty of upside potential. So far this year, I've recommended only three new stocks. That's because the market simply isn't as cheap as it was in 2009, when I found stocks like Prestige Brands Holdings at such cheap prices.
From October 2008 – when the market had already been crushed – to August 2009, I recommended 11 new long positions. As a group, those 11 positions have averaged gains of more than 28% a year since then. The S&P 500 has risen about 11% a year during the same period.
At 28% a year, you're doubling your money in less than four years. Doubling your money in a short period of time without taking much risk is very hard. But if you maintain your discipline, you'll only pick stocks that are safe enough to keep your money out of harm's way and cheap enough to double your savings every few years.
I think the best way to double your money safely in the next few years is to invest in the kind of "undiscovered gems" described above. You'll sleep easy owning these stocks, and you'll likely make more money than with any other type of stock.
Extreme Value isn't for everyone. It's a deeply researched, highly selective stock-picking service. If you're more interested in "what's hot and what's not," Extreme Value is probably not for you. But if you're in the stock market to safely compound your money at high rates, Extreme Value is what you want.
You can sign up for Extreme Value without taking any risk. If you decide it's not for you within three months, we'll refund your money (minus a 10% handling fee). So it's virtually risk-free for the first three months.
To learn more about Extreme Value – and get access to my "undiscovered gems" as well as the next 12 issues – click here. (You won't have to watch a long promotional video.)
It might sound a little strange, but several months ago, residential real estate was an undiscovered gem...
And we've been urging you to buy residential real estate all year...
Low prices, strong rental yields, and record-low mortgage rates make U.S. housing one of the best investments you can make today.
Steve Sjuggerud, Porter, and Dr. David Eifrig are all bullish on the asset. And they're personally investing considerable assets in real estate.
Steve recently bought a property that was under contract for $14.4 million in 2008 for less than $1 million... He also bought a beach condo in Florida for $124,000. Similar units sold for $400,000-plus in 2006. He's going to fix it up, rent it, then sell it.
And Porter has been investing in multifamily units in South Florida, in addition to buying homes in Pennsylvania and Miami.
According to one of the largest real estate firms in the country... Miami – one of the hardest-hit cities in the downturn – is the place to invest today.
"There's a boom in Miami that we've never seen before," Stephen Ross, chairman and founder of New York-based real estate firm Related Cos., said at the Bloomberg Commercial Real Estate Conference this month. "Miami is probably the hottest real estate market in the U.S. from a residential perspective."
Related Cos. and several other developers are building amid a shortage of rental properties in Miami... The average rent for a two-bedroom increased 6%, to $2,568 a month, in the third quarter from a year ago.
Real estate research firm Witten Advisors forecasts Miami-Dade County will add as many as 3,000 rental units per year through 2015 – more than double the average pace of the past three years.
Jonathan Gray, the global head of real estate for Blackstone, also spoke at Bloomberg's conference. He urged investors to buy a home in the next two to three years, before discounts disappear...
"Prices are starting to move faster," Gray said. "That's one of the risks that emerge as more people like us get into the space and as individual homeowner confidence grows. Frankly, buying a home today is pretty compelling."
And a slew of new data is out this week confirming that the trend in housing is up...
Purchases of existing homes jumped 2.1% in October to an annual rate of 4.79 million, exceeding expectations. The median price of an existing home increased 11.1% to $178,600 from October 2011 – the biggest year-over-year gain since November 2005.
And inventory is shrinking... Previously owned homes on the market decreased 1.4% to 2.14 million, the fewest since December 2002. At the current sales pace, it would take 5.4 months to clear the inventory, the lowest figure since February 2006.
Also homebuilder confidence hit a six-year high in November... The National Association of Home Builders/Wells Fargo sentiment gauge increased from 41 in October to 46 this month, the highest level since May 2006.
Finally, home-improvement retailer Lowe's announced a 76% increase in earnings for the third quarter. Home Depot, the largest retailer in the space, also beat estimates, and hit a new high last week.
"Housing prices have bottomed now on a national basis, and in some markets you are seeing some good appreciation," Lowe's CEO Robert Niblock said in a telephone interview with Bloomberg. "People are going to feel better about spending on their homes believing that in the future they're going to be worth the same or more than what they are today."
Hedge-fund manager John Paulson now holds more gold than Brazil, Bolivia, or Bulgaria...
Paulson, who became a billionaire with his bet against sub-prime housing in 2007, now holds 21.8 million shares (around $3.67 billion) in the SPDR Gold Trust (GLD) – the biggest gold-backed exchange-traded fund. According to the most recent regulatory filing available, that makes him the biggest shareholder, with 4.9% of the fund. His holding represents about 66 tons of gold… meaning he controls more gold bullion than countries like Brazil, Bulgaria, and Bolivia hold in their reserves. Paulson also owns $1 billion of AngloGold Ashanti stock, in addition to smaller stakes in many other gold-mining stocks.
Paulson has been bullish on gold for years... He even has a fund that's denominated in the precious metal. And he understands the correct way to view gold...
"We view gold as a currency, not a commodity," Paulson told Bloomberg in June. "Its importance as a currency will continue to increase as the major central banks around the world continue to print money."
Legendary investor George Soros' Soros Fund Management also upped its gold holdings by 49%. The fund now holds 1.3 million shares of GLD.
Paulson and Soros aren't the only ones who think gold is a good idea right now.
Michael Mullaney, a chief investment officer at Boston's Fiduciary Trust – which manages $9.5 billion in assets – said, "We see gold as a hedge against the follies of politicians. It's a good time to garner some protection in portfolios by having some real assets like gold."
And Alan Gayle, a senior strategist at Ridgeworth Capital Management in Virginia – which has $47 billion in assets under management – said, "It looks as though global monetary stimulus is likely to continue, particularly in the wake of growing fiscal austerity. That puts pressure on the monetary authorities to stimulate the economy and that will debase the currencies and put a bid under gold."
Gold trades for around $1,733 an ounce today. It's up 11% so far this year. If it stays above the year's opening price of $1,564 by year-end, it will have put in its 12th consecutive year of gains. Bloomberg also reports that exchange-traded vehicles (like GLD) now hold more than 2,604.2 tons of gold... an all-time high. That's more than every nation except the U.S. and Germany, according to World Gold Council data.
If you want exposure to the gold market, we'd recommend a subscription to our friend John Doody's Gold Stock Analyst... John has made millions of dollars using a proprietary method to invest in gold stocks. And today, he's "going all in." He believes gold stocks could return more than 1,000% over the next few years. To learn more about subscribing to Gold Stock Analyst – at a big discount – click here...
Finally... if you viewed our website today... you probably noticed our new look.
We launched a new website for Stansberry & Associates. You can check out the changes here.
Currently, we've only updated the pages in the site that can be accessed without a login. Once you log in, you will see the same S&A site with the normal archives for our newsletters. We're working on a new subscriber area... We'll launch it in the coming months.
In addition to redesigning our homepage, you'll notice we've added lots of new content... You can now access our latest e-letter content from the home page.
And at the top of the page, you can easily navigate to our other websites (DailyWealth, Growth Stock Wire, and Stansberry Radio).
We've also added extensive editors pages with headshots and bios. And we've included descriptions of every product we publish. Plus, we've posted lots of testimonials from you, our subscribers.
At the bottom of the page, you'll notice the "News & Events" section... Here, we update you on the latest happenings with our business.
New 52-week highs (as of 11/19/12): None.
Please take a look at the new site and let us know what you think. Like any big business endeavor, it's a work in progress. We value your feedback, and we'll use it to make the website as useful as possible. Please send your thoughts and suggestions to feedback@stansberryresearch.com.
"How do I navigate around your site? I can't seem to find any info on what is hot and what is not. BUT I find that there are numerous places to send you more money. Is this site just an infomercial or what? I would like to see some real advice somewhere that doesn't cost me a higher premium." – Paid-up subscriber Paul
Ferris comment: We provided some details above on how to navigate our new website. But be careful... Perhaps I'm reading too much into your e-mail, but...
If you want to make money in the stock market, you'll forget all about what's hot and what's not. And you'll focus more on what's going to help you compound your money over a long period of time, while keeping risk to a minimum. (As I wrote at the outset of today's Digest.)
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
November 20, 2012