Don't Panic

Don't panic... The big secret of private-equity firms... Stansberry Venture Value delivers a triple, exactly when promised...

This won't surprise you...

Extremely wealthy and successful people don't invest in regular stocks. They invest in deals, not index funds. They buy into real estate deals... buy into private financings (with warrants)... engage in arbitrage... and own private companies, which are far better-managed than public ones.

And typically, in almost the exact opposite way you've been taught to invest (if you learned how in college or through the mainstream media), they tend to heavily focus their capital into a small number of outlets for long periods of time.

They tend to exchange liquidity for value... And they tend to exchange duration for certainty.

I (Porter) have learned about this other kind of investing over the last few years...

As my newsletter grew and became more widely read and more influential, a few extremely wealthy people reached out to me. Believe me, I would have never known about any of this other kind of investing without these contacts.

Where I grew up, in the endless suburban sprawl of central Florida, the wealthiest people I knew were doctors, lawyers, and commercial real estate brokers. They invested in stocks and bonds. A few dabbled in real estate – but only at a tiny scale. Nobody in my universe could have even imagined doing a $10 million deal, never mind a $100 million deal.

But those deals happen all the time. And I'll tell you a secret I sure wish I had learned earlier in my life: Big deals aren't any harder to pull off than small ones. Both take the right economics, people, and legal due diligence. The only real difference is that one might make a few million dollars, and the other might make a few hundred million dollars.

What does any of this have to do with you?

You may never have $1 million in capital to put into a private deal. You'll probably never be "in the room" when big deals get put together. But if you know where to look, you can still find a few of these incredible opportunities in the stock market.

What I'm going to tell you about in today's Friday Digest is the single biggest secret to getting into extremely high-quality private deals, even with tiny amounts of capital.

And as you'll see, this is a strategy that you can reliably use to double, triple, or quadruple your money in reasonable periods of time. It really works. And it's one of the most lucrative strategies in the world. Plus, everything I'm going to show you in today's Digest is real. These are actual investments we've recommended... deals we've gotten subscribers into – starting with a gain of nearly 200% we made last month.

I'll tell you everything – the name of the stock, how the deal ended up in the stock market, and why the insiders are still buying shares hand over fist.

This is what you should focus on as an investor, not the "noise" coming from Washington or Wall Street.

But first, let me address the elephant in the room...

Unfortunately, the vast majority of people reading today's Digest are going to ignore everything else I write below.

Instead of learning how to succeed in the markets, most people will fixate on prices, not values. They will be manipulated into buying at the top and selling at the bottom, again and again and again.

It's a market, after all.

Any time the stock market falls – even by miniscule amounts – the fireworks begin in our mailbag. Lots of notes from people who are scared and angry, like paid-up subscriber Donny A...

"If these three months of the New Year represent a melt up then the melt down is going to be spectacularly ugly. I am a Total Portfolio subscriber and after today my returns are red all over."

There's no question that there will be hell to pay when this incredible bull market finally dies...

We've never experienced a bigger debt-fueled boom than this one. The world's major economies have never been this overleveraged before. The world's entire economy has never before been balanced on top of a global financial system backed only by paper. Financial assets have never been so highly valued relative to income in the United States.

And all of those things are just for starters.

American corporations have never carried so much debt (relative to GDP) before... and the overall quality of this credit has never been lower.

Here's an interesting fact...

The size of the BBB-rated corporate debt market (one notch above "junk") is now twice the size of the entire high-yield market. That is, most American businesses that have issued bonds are either already a "junk" credit risk, or are within one downgrade of becoming so.

Trust me when I tell you that the next default cycle we have in this country will be the most devastating financial crisis in our history, far worse than the events of 2008/2009. And... we believe last week's announcement that toy retailer Toys "R" Us will be liquidating marks the beginning of this cycle.

We don't know how any of these risks could be 'news' to our subscribers...

We've been writing and warning about them (here, here, and here, for starters)... in books, newsletters, podcasts, webinars, trading advisories, and e-letters (like the Digest) since at least 2015. We've also designed The Total Portfolio to balance against these risks, while allowing us to stay in the market for as long as possible. Nobody can know when the final top will arrive. And we'll experience multiple corrections like this one before the final manic run-up occurs.

But no matter what happens with this particular bull market, investors ought to know that risk and volatility are inevitable. Successful investing is more about managing these risks than finding winners. Unfortunately, that's something most investors will simply never understand. But you can. It's really not hard.

Let me give you a great example – our own Total Portfolio...

We've had some bad luck so far this year. (Our portfolio "started" on January 31.) Almost since inception, the market has fallen.

Worse, we picked two biotech stocks whose volatile shares have gone completely against us. They're both down big. Likewise, we have exposure to social networking and China. We've done great on those investments in the past, but so far this year, they've been disasters. Out of our roughly 40 positions, 20 are in the red. And half of those are down double digits (or almost double digits). Three positions are down around 20%.

That sounds bad, I know. Aren't we supposed to be good stock-pickers? Well, when the market goes straight down, our picks aren't all going to be immune.

But consider this... As of this morning, the S&P 500 Index is down more than 6% since we reallocated The Total Portfolio. But the value of our Total Portfolio has only declined by about 3% – roughly half the market's decline. While we aren't happy our portfolio is down, we can certainly live with a 3% decline. It won't kill us. Nor will it eliminate our opportunity to manage the portfolio back to a profit before the end of the year.

In short, if your portfolio isn't doing well, it's time to look at your asset allocation. It's time to figure out how to hedge your risks. And it's time to carefully consider your position sizing. If you haven't yet, please take a free trial subscription to TradeStops. If you do nothing else, at the very least begin to manage your position sizes with its volatility-based position-sizing algorithm. For most investors, this is the single most powerful tool you can use to improve your results.

Or you could simply write us angry e-mails and blame your poor results on our work.

What will you do? Remember: There's no such thing as teaching, there's only learning.

It doesn't happen often...

But every now and then, a high-quality private-equity deal ends up trading on the stock market.

Virtually all of these deals all have one common characteristic – they're designed to turn debt into equity. But isn't debt bad? Well, yes, it can certainly be risky. But one of the big secrets to successful, wealthy investors is that they're willing to trade duration for certainty. Private deals are typically loaded with debt, because that's what generates a lot of the return.

I know that sounds risky. But chances are, you've done the same thing with one of the biggest investments you've ever made – your house. If you're like most people, you bought your house with a small amount of money down and then spent 15 years (or longer) to slowly convert that debt on your balance sheet into equity. As long as your home appreciates in value, that ends up being a good investment for most people.

Almost all good private deals work in the same way. A wealthy investor (or a group of wealthy investors) will buy a company and immediately load it with a lot of debt. If it's a good, well-managed asset, over a period of five to seven years, it can grow enough to pay off these debts, converting billions of dollars in debt into equity... and earning a windfall for the owners.

Most people are familiar with how this structure works in real estate. If you've ever been pitched a commercial real estate deal, then you know that the cost of the debt plays a major role in determining whether the deal is feasible (and will be profitable).

That's exactly what firms like Blackstone (BX), KKR (KKR), and Cerberus do for investors...

They buy companies using a lot of debt and then work hard to quickly convert that debt to equity to produce big returns.

In either case – whether it's buying real estate or buying corporations – investors must be sure that the underlying assets are good enough and growing fast enough to both pay off the debt and continue to grow the business. When that's the case, the returns are extraordinary.

Let me give you an example. Back in 2006, Richard Kinder – the founder (and for many years, the CEO) of Kinder Morgan (KMI) – orchestrated a deal. He allowed a group of private-equity investors including Goldman Sachs (GS), Highstar Capital, and Carlyle Group (CG) to buy out his firm.

These wealthy investors paid public shareholders around $13 billion. Where did the private-equity investors get so much money? They put up $3 billion of their own funds and got $10 billion by loading the company with debt.

As you probably know, Kinder Morgan is one of the best pipeline firms in the country. Over the next five years, the company continued to prosper. Because the deal was going well, the private-equity investors were able to sell shares back to the public five years later. By that point, the company was worth $22 billion. Thanks to the debt used in the deal, the private investors did even better. Their initial $3 billion investment was now worth $16 billion.

To use our house analogy, the Kinder Morgan deal was like buying a $130,000 rental house with a $30,000 down payment (23%). Over the next five years, the value of this "house" almost doubled, to $220,000. Even better, rents in this neighborhood soared, too. The homeowner was able to pay off the entire mortgage. Imagine earning seven times your money on a rental property in five years! That's the power of combining leverage with a high-quality, reliable, growing business.

Every now and then, for one reason or another, a private deal like this will end up on the stock market...

The most common way this happens is when a private-equity firm brings one of its deals back to the stock market. (Stansberry's Investment Advisory subscribers can read about that right here.) Most of the time, the biggest gains have already been made and the private-equity firms are just cashing out.

Sometimes, private deals happen in a way that can truly benefit individual investors. The managers of a public company decide to recapitalize themselves. They adopt a private-equity-like capital structure without involving outside investors. (See, for example, our coverage of medical-equipment firm Boston Scientific (BSX) from the July 2009 issue of Stansberry's Investment Advisory.)

Sometimes – very rarely – a private-equity firm will screw up and sell shares in a valuable private deal far, far too early. That's what happened recently with the shares of BlueLinx Holdings (BXC).

Stansberry Venture Value editor Bryan Beach brought the situation to the attention of his subscribers in January. Currently, the stock is up almost 200% from our original recommended price. Shares soared last week – exactly when Bryan told our subscribers they would.

Let me tell you how it happened, and why there's probably a lot more upside from here...

BlueLinx was a private-equity deal Cerberus put together about a decade ago. It's a simple business. BlueLinx distributes building supplies to homebuilders. It owns 39 distribution centers across the U.S. The business was built in the 1950s by Georgia-Pacific, the big timber company.

By the mid-2000s, Georgia-Pacific needed to raise cash to pay down debt and sold this subsidiary to Cerberus. Cerberus, in turn, loaded the company with debt – including a 10-year mortgage that couldn't be prepaid.

The housing crisis hurt BlueLinx and caused the deal to "bust." It didn't go bankrupt, but it couldn't quickly repay the loans. Eventually, in 2010, Cerberus gave up on the deal and sold shares to the public and moved on. Meanwhile, that 10-year mortgage continued to hamstring the company. It couldn't be repaid or refinanced until 2016.

I won't bother getting into the additional details of the recommendation, but I'd urge you to read it carefully. (We've "unlocked it" for you right here.)

The key factor in these kinds of private-equity deals is how quickly the balance sheet can be transformed from mostly debt into mostly equity. Your mortgage works exactly the same way. If you could pay off your mortgage in a few months instead of 15 or more years, imagine how much better your annualized returns would be on your house. BlueLinx was a busted deal because it took far longer than Cerberus expected to pay down the acquisition debt.

But finally, in 2017, BlueLinx was poised to turn everything around. Home construction was booming. The company finally had the financial flexibility to rapidly convert its balance sheet debt into equity.

Companies can sometimes accelerate the debt to equity transition, increasing their earnings. Or they can do this by "unlocking" assets that are hidden on their balance sheet. That's how it worked with BlueLinx.

What was the critical factor to understanding what would happen this year with BlueLinx?

It was really knowing the company firsthand... Because the database information on the company was woefully wrong.

You see, accounting rules require real estate to be valued on a company's balance sheet at the price it was acquired, not at its current value. As I mentioned, BlueLinx operates a network of 39 distribution centers around the country. These valuable industrial sites were purchased over the last 60 years... and they had appreciated.

But they were carried on BlueLinx's balance sheet for their acquisition costs.

By selling these assets to investors (and then leasing them back), BlueLinx will be able to generate more than $200 million in cash, allowing it to pay down its private-equity acquisition loans. It will transform itself from a business carrying six years' worth of earnings in debt to a company with debt equal to only two times its earnings. This will have a profound effect on its equity value, as reflected in its share price.

When would investors realize this incredible and dramatic change to the capital structure of this company? Bryan predicted it would happen in early March. As he wrote in the January issue...

When you factor in the brand new, lower debt balance, [BlueLinx has a fair value] nearly double today's price... The recent price jump is a precursor for what we'll likely see in early March, when the company files its official U.S. Securities and Exchange Commission ("SEC") financial statements. For years, financial screens have "screened out" BlueLinx because of the optics problems we discussed earlier. This will start to change once it files its official 2017 numbers in March.

I'm willing to bet that few of you have ever seen investment research this detailed or valuable...

That's why when I tell you that we charge $5,000 per year for Stansberry Venture Value, you probably think we're nuts.

The truth is, Venture Value is the best value we offer in our entire lineup of publications. Research like this isn't available anywhere else, at any price.

This product is designed to ferret out values that other investors miss (like BlueLinx). It's also designed to find investments that are small, where the opportunity for huge gains is realistic.

These investments are safe and reliable, and produce excellent results. What else are you looking for? I urge you to subscribe. Get the details here.

New 52-week highs (as of 3/22/18): short position in Sprint (S).

So what will you do? Will you finally take a look at your asset allocation and position sizing? Will you finally consider hedging? Will you finally put our best advice to work for yourself? Let us know at feedback@stansberryresearch.com.

"Porter: Kudos for your achievements and generally stellar analysis, but a question about American Express. The Wall St. Journal recently reported the company's loan loss reserve increased in excess of 35% in 2017 and is expected to have a similar increase in 2018. If the reporting is correct, doesn't this raise a red flag about the quality of the loan portfolio and undermine the common view of American Express as a sharp-eyed protector of credit standards imposed on the customer base?" – Paid-up subscriber David

Porter comment: Did you read our analysis? I doubt it. And if you did, you need to work on your reading comprehension.

Regards,

Porter Stansberry
Baltimore, Maryland
March 23, 2018