Coca-Cola sales down; stock goes up...

 Great news for several of our portfolio companies...

 

Coca-Cola's (KO) global sales volume for soda fell for the first time in a decade for the most recent quarter... But the world's largest beverage maker's stock still rose more than 4% today.

 

The decline in soda sales was offset by an 8% rise in sales of noncarbonated beverages... Overall sales volume rose 2% on strength from emerging markets. Sales volumes in China rose 12%, up from 5% in the fourth quarter. Volumes in Russia and India both rose 6%. Brazil rose 4%.

 

First-quarter revenue fell 4% to $10.6 billion... Earnings dropped to $1.62 from $1.75 a year ago. The company faced headwinds from a strong dollar. Adjusting for currency fluctuations, revenue increased 2%... And earnings were in line with analyst expectations.

 

 Coke, like another company we'll discuss in a moment, gushes free cash flow and consistently raises its annual dividend. Holding stocks like this over a long period of time can generate tremendous wealth. Consider this tale Porter wrote in the February Investment Advisory about Warren Buffett's position in Coke:

 

Buffett bought his Coke stake between 1987 and 1989. It was a huge investment for him at the time, taking up about 60% of his portfolio. How could Buffett have known Coke would be a safe stock... and that it would turn into a great investment?   Well, like Einstein said famously about God, Buffett doesn't roll dice. He only buys sure things. He knew Coke's business model told him it was incredibly capital-efficient. And judging by its previous marketing results and its expansion into new markets, its sales would also continue growing. As Buffett would tell you, it wasn't that hard to figure out.   Later, other investors would bid up the shares to stupid levels. Coke was trading for more than 50 times earnings by 1998, for example. But Buffett never sold. It didn't matter to him how overvalued the shares were, as long as the company kept raising the dividend. In 2011, Coke paid out $1.88 in dividends per share. Adjusted for splits and dividends already paid, Buffett paid $3.75 per share for his stock in 1988.   Thus, Coke's annual dividend, 24 years later, now equals 50% of his total purchase price. Each year, he's earning 50% of that investment – whether the stock goes up or down.

 

 Dr. David "Doc" Eifrig holds Coca-Cola in his Retirement Millionaire model portfolio, and subscribers are up 56% since he recommended it in August 2010.

 

 Pharmaceutical giant Johnson & Johnson (JNJ) also reported solid earnings...

 

The company earned $4.4 billion in the quarter, a 7.8% increase from a year ago. Revenue increased to $18.1 billion from $17.5 billion a year ago and beat analyst estimates of $17.9 billion.

 

JNJ's performance was bolstered by strong global pharmaceutical sales, which were up 10.8% to $7.5 billion (estimates were for $7.1 billion). The biggest contributors to the gain were Stelara for psoriasis, Invega Sustenna for schizophrenia, HIV drug Prezista, and cancer drug Velcade.

 

The company also improved its forward guidance, saying it expects full-year earnings between $5.80 and $5.90 a share, up from a previous estimate between $5.75 and $5.85 a share.

 

The stock rose around 1.5% on the announcement.

 

 Johnson & Johnson is a mainstay in several S&A model portfolios... including Dan Ferris' Extreme Value, Stansberry's Investment Advisory, and Retirement Millionaire. The stock gushes free cash flow, is the dominant player in the industry, and pays a large (2.7%) and growing dividend. JNJ has raised its dividend for 49 consecutive years.

 

"Doc" Eifrig calls Johnson & Johnson the "greatest health care company in the world."

 

And he says the company is benefiting from an important trend in the market today... aging baby boomers and their growing need for prescription medication. Note the rise in JNJ's pharmaceutical sales above.

 

From the June 2011 Retirement Millionaire:
 

Older people use three to four times the amount of prescription drugs as folks under 50. And more than 30 million people will gain Medicare coverage by 2014. This means an increasing number of written prescriptions.   Right now, only 10% of Medicare dollars are spent on pharmaceuticals. If Washington starts looking for cost-effective ways to manage health, prescription drugs will be a quick and easy way to test its hypothesis. In many cases, the use of drugs can ward off diseases for many years. For example, doctors already know blood-pressure pills and diabetes medications prolong lives cheaply.   This demographic shift means big opportunities for companies delivering drugs. Pharmaceuticals could easily grow to 15%-16% of the Medicare pie this decade. And the over-the-counter (OTC) markets will grow along with it.

 

Retirement Millionaire readers are up more than 80% since Doc recommended JNJ in August 2010.

 

 Another Investment Advisory model portfolio holding, discount retailer Dollar General (DG), scored a coup last week...

 

Porter and his team of analysts recommended Dollar General to take advantage of the growing wealth disparity in the U.S... The money the Federal Reserve is printing will cause prices to rise across the board. Meanwhile, wages for most of America will be stagnant or falling. This will result in hordes of people fighting to maintain their quality of life.

 

The Investment Advisory team recommended Dollar General to benefit from this trend. The company makes the bulk of its profits selling household supplies, frozen food, and other basics. It also recently introduced tobacco products to increase traffic.

 

 Plus, Dollar General is taking advantage of another consumer trend... From the December 2013 Investment Advisory:
 

Mike Duke, Wal-Mart's CEO, has noticed a change in his customer base. They still eat the same amount of food... They still buy the same amount of cleaning supplies and have remained loyal to most of their favorite brands. What has changed is where they go to buy these basic necessities.   Many customers have moved back into town. Some became renters or moved in with family. People are shopping closer to home. Instead of getting a cab or loading the family minivan for a trip to Wal-Mart, mom may push the stroller to a neighborhood store.   People are migrating away from supercenter shopping, toward a new breed of smaller discount retailers.

 

Dollar General has 11,000 retail outlets around the country... And it plans to open another 700 stores this year.

 

 Meanwhile, fellow discount retailer Family Dollar announced it would shutter 370 stores and slow its expansion. It's also cutting prices on around 1,000 products as it explores ways to improve its business.

 

 

Dollar General is a much better-run organization. As Investment Advisory analyst E.B. Tucker explained to us in an e-mail, "FDO is the runner up, and it's been like that through every decision the two companies make."

 

 Gold fell as much as 3% today to less than $1,300 an ounce, its worst day since Bernanke announced the Fed would taper its bond purchases last December.

 

The precious metal declined on news that demand from China, the world's largest gold consumer, would wane this year. Gold demand in China has risen every year since 2002. But the World Gold Council, a gold trade group, estimated demand would be flat for 2014... then climb 19% over the next three years.

 

 One reason for the slowdown is the slowing growth of China's money supply...

 

China's money supply grew 12% in March from the year before – the slowest pace since 2001. If there's less money in the Chinese economy, there's less money to buy gold, the thinking goes.

 

 Still, it appears China's appetite for commodities is healthy in other areas... This week, a consortium of Chinese buyers acquired the Las Bambas copper mine in Peru, one of the world's largest, from commodities firm Glencore Xstrata for $5.9 billion. It was a big price tag, and one of China's biggest commodities purchases to date... The price was especially high considering the weakness in copper prices, which dropped to less than $3 a pound today.

 

"It's strong confirmation that China's appetite for metals has further to run," Bernstein Research analyst Paul Gait told the Wall Street Journal.

 

 

 New 52-week highs (as of 4/14/14): Brookfield Asset Management (BAM), Anheuser-Busch InBev (BUD), Callon Petroleum (CPE), Comstock Resources (CRK), Dorchester Minerals (DMLP), Eni (E), Targa Resources (TRGP), and US Commodity Index Fund (USCI).

 

 In today's mailbag, a Tesla owner who's upset with our coverage of the company. What do you think of the electric-car manufacturer? Let us know here... feedback@stansberryresearch.com.

 

 "Your recurring degrading remarks about Tesla are inaccurate (not the current valuation) 1. It is a great car to drive 2. it has a range approaching 250 miles. 3. it recharges in my garage overnite 4. It is a very comfortable vehicle 5. the service is first class 6. the fire issue is grossly overstated (2 episodes). 6. the company just installed body armor to the underbody to minimize this risk (all cars, no cost). 7. the company is grandiose in its image but have achieved some success in their ongoing projects (Like supplying the space station). 8. I regret not buying more stock when I got my car (14 months ago)." – Paid-up subscriber Harris Silverman

 

Goldsmith comment: While those points are valid... There are plenty of companies whose products we like (or even admire) that we wouldn't own. Just because a company has a great product... it can still be a terrible business. The fact remains, Tesla loses money every quarter and sports an outrageous valuation. We maintain our stance on Tesla, which is down about 2% today...

 

Regards,

 

Sean Goldsmith

Baltimore, Maryland

April 15, 2014