Don't be scared of volatility...

Editor's note: The Digest team is at Porter's mountain house this week for a strategy meeting. We're publishing regular (albeit shorter) Digests this week.

 

 

 Don't let the volatility scare you.

 

Last Thursday, we shared a study from Steve Sjuggerud's True Wealth Systems. Steve studied the past 35 years of markets and concluded, "When a bull market runs for extended periods like this, history shows buying when the 200-day moving average is breached actually leads to outsized returns."

 

You can read the full piece here.

 

 In yesterday's Growth Stock Wire, Dr. David "Doc" Eifrig expressed a similar sentiment...

 

 Doc noted that market selloffs generally coincide with increased volatility... And that's often a great time to capture large option premiums selling puts and calls.

 

 Following a month-long rout that sent the S&P 500 down 7.5%, stocks have bounced back a bit over the past three days... But several blue-chip companies are getting crushed. Today, we'll review the recent earnings and performance of Big Cheap Tech firm IBM (IBM) and pharmacy chain Walgreens (WAG).

 

 We begin with IBM. Shares are down more than 10% in the past two days. Is this dominant business really worth 10% less than it was last week... or is the market overreacting?

 

Certain high-profile investors – namely, billionaire hedge-fund manager Stanley Druckenmiller – believe IBM is finished.

 

But Extreme Value editor Dan Ferris countered Druckenmiller's pessimistic view in the December 3, 2013 Digest Premium...

 

Druckenmiller – known in the industry as "Stan" – said IT World Dominator IBM is "one of the more higher-probability shorts I have seen in years." Bad grammar aside, Stan makes a common error.   Stan's error is easy to find... He went on to say, "IBM is old technology being replaced by cloud technology." Like most investors, Stan perceives IBM as a static collection of technologies... as a company permanently locked into whatever it was doing five years ago. I completely disagree with this viewpoint. I have to wonder if Stan and I are thinking about the same company.   IBM is not set in its ways, like fellow technology companies Dell or HP. Both of those companies are struggling because large parts of their business are dependent on a rapidly changing technology (the PC). IBM is in the business of understanding what customers want and giving it to them, whatever that might be. IBM is always looking for the high-value, high-margin product or service its customer needs. That hasn't changed over time...

 

 And though its recent earnings scared some investors, we maintain our thesis... IBM is continuing its transition from hardware to specialized software.  As Dan described when he recommended IBM shares in the August 2012 issue of Extreme Value...

 

A little over a decade ago, IBM had a foot in the consumer and business computing worlds. It was selling PCs to consumers and big computers and software applications to large corporations (so-called "enterprise" clients). It soon recognized the PC was becoming a low-margin commodity business, and that creating large software applications for big companies was a much higher-margin business.

 

 Today, IBM is the world's largest technology-services company and the second-largest software company (by revenue) after Microsoft.

 

IBM focuses on custom-designed software and computer systems for its clients, who are mainly large companies and government entities. IBM determines what its customers need and designs the software.

 

Software and services made up 65% of IBM's profit in 2000. Today, they account for more than 84%.

 

 On Monday, IBM shares fell after the company announced that it plans to divest its semiconductor operations. But we believe that's a step in the right direction... and continuing the company's transition from hardware to software.

 

The competition from companies like Intel (INTC) became so intense that IBM could no longer produce enough computer chips to make them at a profit.

 

IBM made a deal to pay $1.5 billion for Globalfoundries, a semi-conductor manufacturer, to take over chip manufacturing operations. Globalfoundries will continue to manufacture the chips IBM needs for its systems.

 

 The deal guarantees IBM supply for its server customers and simultaneously moves the unprofitable business off its books. IBM took a $4.7 billion charge to earnings for the divestiture.

 

IBM faced a choice... It could continue to make chips at a loss indefinitely, devoting tens of billions of dollars to remain in a low-margin, ultra-competitive industry... or it could focus on its core software business.

 

 IBM chose to concentrate on its customer-specific software.

 

IBM executive Virginia Rometty said IBM divested in "empty calories" – businesses that generated $7 billion in revenue and $500 million in losses.

 

 Dan commented on the company's recent price action...

 

I don't worry about IBM. Its share price is mostly a victim of the current malaise in all financial markets (which I consider an absolutely wonderful development, as I consider it unlikely that every business and every commodity in the world has suddenly lost 8% or more of its value in just the last few weeks). IBM has ample financial resources to make it through and well beyond any downturn.   I consider the many stories of IBM's demise – especially from short-sellers – to be more than a tad premature, if not apocryphal. For example, former mid-level employees paid to focus on a single task or department claim to know the mind of upper management. That strains credibility, as do short-sellers whose self-interest is crystal-clear.

 

 Extreme Value research analyst Michael Barrett also commented on the recent action...

 

Major business transformations are rarely pretty, and the one currently underway at IBM is no exception. But it's during difficult periods like these that World Dominators really shine.   Most investors are worried that revenue hasn't grown year-over-year the past 10 quarters. But over that same period, IBM has generated more than $30 billion in free cash flow, increased its quarterly dividend rate 47% (from $0.75 to the current $1.10), and reduced the share count 13%.

 

 Don't get caught up in the quarter-to-quarter action with "World Dominators" like IBM. IBM's management is focused on making decisions that add value for shareholders over the long term.

 

And their track record is fantastic. Over the past 10 years, annual revenues have come in between $91 billion and $107 billion. But gross margins have steadily improved from 37.4% in 2004 to 48.6% in 2013. And net income has nearly doubled over that time frame, rising from $8.4 billion in 2004 to $16.5 billion in 2013.

 

Better margins mean IBM's management had more money to distribute to shareholders. Over the past 10 years, annual dividends increased more than 500%, from $0.70 to $4.40. At the same time, IBM also reduced its share count more than 40%... from 1.7 billion shares to less than 1 billion today. When IBM buys back shares, it's like giving each shareholder a bigger piece of the pie.

 

As we've said before, the best way to make money in the market is to buy and hold these high-quality companies that gush cash and pay large, growing dividends... especially when they go on sale.

 

 We saw another short-term selloff in Retirement Millionaire recommendation Walgreens (WAG).

 

Shares of the drugstore chain have fallen nearly 20% from their June highs after the company announced it won't use a new acquisition for a "tax inversion" to avoid U.S. taxes. Walgreens is purchasing Swiss health-and-beauty retailer Alliance Boots, which would allow the company to move its tax domicile to Switzerland and avoid billions of dollars in taxes.

 

 As with IBM, we see this selloff as an opportunity. As Doc wrote in the August 8 Retirement Millionaire update...

 

Walgreens stated that staying in the U.S. was the company's best option due to "potential consumer backlash and political ramifications." The markets overreacted, sending shares plummeting.   Walgreens is still a great company. Despite our tough economic environment, Walgreens has continued to increase revenues. And it consistently rewards shareholders – raising its dividend for 38 consecutive years. So we're not going to follow the herd and sell our shares based on fear.

 

 Hedge fund JANA Partners agrees with Doc. The firm added 1.3 million shares to its Walgreens position between October 10 and October 14. The fund now owns 13.8 million shares. And JANA founder Barry Rosenstein sits on Walgreens' board of directors.

 

 We know it's difficult to ignore these selloffs... Emotions get the best of most investors. But when you own high-quality stocks like Walgreens and IBM, you can rest assured. These companies produce billions of dollars of free cash flow. And they raise their dividends almost every year, through feast and famine.

 

Don't let the fear-mongering media scare you out of positions. Mind your stop losses, of course... but stay the course.

 

As Doc's chart from earlier in today's Digest suggests, the current selloff will be just another blip in a longer upward trend.

 

 Doc currently has 11 high-quality stocks rated a "Strong Buy" in his Retirement Millionaire portfolio. If you've been waiting on the sidelines for a selloff, now is your opportunity... Shares of some of the world's greatest companies have gotten hammered... But it's only temporary. You don't want to miss out on this opportunity.

 

Take advantage of these lower prices to buy shares in some of the world's best companies that pay large, growing dividends. Doc's latest recommendation is one of the most dominant companies in the world – a household name – that pays a 5%-plus dividend today.

 

You can sign up for a no-risk trial to Retirement Millionaire (without watching a long promotional video) by clicking here. If you decide his research isn't right for you, we'll issue you a 100% money-back refund.

 

 

 New 52-week high (as of 10/20/14): National Beverage (FIZZ).

 

 In today's mailbag, another interesting perspective on Ebola, a subscriber shares how the recent market pullback is affecting him, and finally another subscriber describes his experience at the Nashville conference. Send your e-mail to feedback@stansberryresearch.com.

 

 "The fear of Ebola in the US is silly, for now. The real thing to fear is something it seems the so called 'experts' are missing or hiding from us to prevent panic. I was in Special Ops for almost nine years before I went to medical school to become a Physician Associate. I have actually lived in third world countries were the true face of poverty is endemic. The real fear is what the reaction will be when the infection of Ebola is discovered in Bangladesh, the slums of Mexico City or India or XXX. Worldwide panic. Economic destabilization, world trade of goods, civil war, massive migrations as was seen in the middle-ages. This is a wildcard that no paradigm or algorithm can anticipate.

 

"The end of America. Oh, yes, but much, much worse than that. You encourage folks to prepare for tough economic times but you do not understand the simple reality that the 'survivalists' fail to apprehend. It takes a community of several hundred people to work together to do more than just survive. The forts of Europe were a 'fortnight' apart to allow enough area for crops, wildlife, a quarry and other land wealth for sustenance. You must have crops, hunting, herds, work parties, security forces and other communities to trade with. And above all, the people must be tough. Mentally, physically, and spiritually to get through the hard times. And you must have a leader the people are willing to follow and support. I am not optimistic." – Paid-up subscriber Jim Nash

 

 "Been doing this as well for quite some time now. Thank You Porter and the Stansberry team, saving at least half income, investing wisely on capital efficient businesses, gushing free cash flow companies, consistent dividend and growing dividend paying companies, land, business venture etc. Sharing my success to charities and less fortunate. Practicality and smart on purchases and spending, i.e. will never buy new car again bought a luxury car 6 years ago – used , saved maybe 40-50% vs. true cost over 156k miles and it runs like it just came off the lot. The peace of mind and the feeling of a fatherly like advice is absolutely value added and immeasurable from The Stansberry family. Many, many thanks. Subscriber for life." – Paid-up subscriber Eddie Espinoza

 

 "Dear Porter, I just wanted to let you know what a great pleasure it was to attend the Nashville Conference and experience your opening remarks along with those of Bill Bonner. To sum it up for those who were unable to attend, we are all a bunch of lazy, sniveling cowards who don't deserve the blessing of freedom which we have inherited and the newsletter business and the stock market are garbage and we should run from them as far and as fast as we can. I found it to be an excellent opening to a superb event.

 

"The presentations were all exceptional and the breakout breakfast session with ECI was perfect timing as the Panamanian Teak program is something I had already been considering. I had the opportunity to engage in a 10 or 15 minute uninterrupted conversation with resource investing legend, Rick Rule, in the lobby during one of the breaks. What an entertaining gentleman and how much more of a contrarian indicator does one need to be bullish on the resource sector than to find a man of Rick Rule's reputation standing alone in the lobby of an investment conference during a break with a few hundred people milling around? Great day of exceptional information delivered in an energetic and entertaining fashion, surrounded by interesting and sociable people. Thanks to you and the entire Stansberry team. Best regards and better profits." – Paid-up subscriber Ken McGaha

 

Regards,

 

Sean Goldsmith

October 21, 2014

 

This is the most important thing you need before purchasing art...

 

In today's installment of our "art week" series, we hear from The Art Fund Association founding member and art lawyer Enrique Liberman. Enrique specializes in art law and investments and advises collectors, art fund managers and investors, dealers, galleries, museums, appraisers, and artists in connection with commercial art transactions.

 

In today's Digest Premium, he shares what you must do before purchasing art... and explains why an art investment fund could be right for you...

 

 

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Editor's note: In today's installment of our "art week" series, we hear from The Art Fund Association founding member and art lawyer Enrique Liberman. Enrique specializes in art law and investments and advises collectors, art fund managers and investors, dealers, galleries, museums, appraisers, and artists in connection with commercial art transactions.

 

 

 The most important thing that someone needs before investing in the art market is information. Information is the most valuable commodity in the art market.

 

Information is acquired in two ways...

 

One, you can utilize an experienced art advisor. I (Enrique Liberman) always tell people that they don't want a 24-year-old newcomer whose experience consists of a degree in art history and a one-year internship at an auction house.

 

You want an established name... someone who has been in the market for decades, who really understands art history. Those are the people who are going to be able to identify the artists who are writing themselves into the narrative of art history and will be relevant 10, 20, 30, or 50 years down the line.

 

The other way to acquire information is to do it yourself.

 

Go to all the major art fairs like Art Basel in Miami Beach (December 4-7), the Armory Show in New York City (March 5-8, 2015), and the Frieze Art Fair in New York City (May 14-17, 2015). Those are invaluable places to go to different booths, talk to various art dealers and exhibitors, and see different kinds of art.

 

If you live in New York, auction houses like Sotheby's, Christie's, and Phillips always have great previews before their auctions in November and in May. It's a great opportunity to see what's being offered, ask questions, and read their catalogs.

 

 In deciding whether to buy pieces of art directly or to invest in an art fund, the key question to ask yourself is whether you're interested in purchasing art strictly as an investment or also for its aesthetic value. If it's strictly for investment purposes and you have no interest in exhibiting the artwork in your home, then an art investment fund would be what I recommend. The advantage of an art investment fund is that you're finding someone who is a genuine expert with access to information and relationships. They have access to hard-to-get artwork at preferred pricing.

 

People always assume that if you go into a major gallery and see a beautiful work on the wall, you can just buy it. That's often not true. Galleries reserve the best works for the most important collectors, art dealers, fund managers, and individuals they have done a lot of business with. By investing in an art fund, you are essentially piggybacking off fund managers' access.

 

 Art fund managers also have their ears to the ground. They get an early heads-up on market trends and upcoming information and announcements.

 

For example, it is not unheard of for fund managers and major collectors to receive advance word of upcoming artist retrospectives – or exhibitions of works – before they are announced to the general public. That's a valuable piece of information because acquiring the artist's work in advance of a major museum show could increase the value of that artist's work.

 

Fund managers also often have the inside track on unadvertised private sales. They can see recent sales transactions and price trends for an artist before the next regularly scheduled public auction.

 

There are some collectors and curators renowned for their taste and connoisseurship when it comes to acquiring artworks. If you have a relationship with those collectors or curators and can see what they're buying or recommending before everyone else does, you have a chance of getting in on the ground floor before the artist's market increases in value. The advantage of investing in an art fund is that you can really benefit from the manager's expertise and access to information and relationships.

 

 Another reason to put your money with an art fund is its diversification of investment capital across many artworks created by many different artists. Let's say you have $10 million and you decide to put 5% of your total net worth into works of fine art. That's not a whole lot of money to play with in the fine art market, especially if you want to acquire a diversified investment portfolio.

 

If you're lucky, you can buy one or two decent works or small gems. But you should diversify your collection and make sure you aren't relying on one or two artists or paintings. That's why it might be better to invest your money in a pool of capital that's being used to acquire a diversified portfolio of artwork.

 

– Enrique Liberman

 

 

Editor's note: You can learn more about Enrique and his art-focused law firm by clicking here.