Drop Everything and Read This

Drop everything and read this... 'One of the very best issues we've ever published'... A new buyout offer for this Investment Advisory holding... Apple returns to growth... A surprising fact about gold and interest rates...

Porter and the Stansberry's Investment Advisory team published their latest issue on Friday...

And if you haven't had a chance to read it yet, we suggest you do so immediately.

In fact, Porter himself believes it's one of the best issues he and his team have ever published... If you've been with us for long, you know that's saying something.

In the February issue, they unveiled brand-new research on a Wall Street darling. Its stock has soared in recent months, but the firm is hiding a critical problem: Its business is broken beyond repair.

It has little hope of ever paying off its mounting debts... And its troubles are only going to grow in the months to come. Yet most investors still have no idea just how bad things are.

Porter and his team also recommended shares of a surprising growth stock. They believe buying shares today is like getting a second chance to buy one of the world's most dominant brands at a tiny fraction of today's prices.

Stansberry's Investment Advisory subscribers can access the issue here. And if you're not yet an Investment Advisory subscriber, you can get immediate access with a risk-free subscription right here.

In related news, Investment Advisory portfolio holding Mead Johnson Nutrition (MJN) is back in the headlines...

Porter and his team originally recommended the baby-formula maker in November 2015, calling it a "quintessential example" of what they call a "global elite" company. From that issue...

Mead Johnson has a large, sustainable moat. It has the world's most valuable formula brand. Its customers are loyal. Its reach is global.

We truly consider Mead Johnson one of the best consumer products businesses in the world. As you might expect, a company with these characteristics throws off some pretty incredible operational numbers:

• Return on invested capital of more than 70%.
• Return on equity of 120%.
• Gross margins of 65%.
• Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 25%.
• For every dollar that comes in the door, 16% flows straight to free cash flows – this is the cash left over for owners after paying all the bills and making all necessary capital investments.

They also noted that recent developments in China – Mead Johnson's most important market – could create a strong long-term tailwind for the company's business. More from the issue...

Many of us know China's government has maintained an official policy "encouraging" families to have just one child. We knew it kind of like we know China has a really big wall and lots of air pollution. But from our privileged vantage point, we were never confronted with the appalling moral ramifications of enforcing that kind of policy... or the disgusting lengths people will go to coerce compliance.

Just last week, China finally repealed its one-child policy, ending the largest birth control program in human history...

The reversal of the one-child rule will benefit most companies selling formula in China. But not only is Mead Johnson China's market share leader, it is also the only pure-play on Chinese babies. Every other formula maker is buried within large multinational conglomerates like Danone, Nestlé, Heinz, or Abbott Labs.

The repeal has already had an effect on China's birth rate... The Chinese government recently reported more than 18 million children were born last year following the policy's reversal. That's an 8% increase over 2015.

But the growing market hasn't yet flowed to Mead Johnson's business. The company's China revenues actually fell last year for the second consecutive year. And shares are still down significantly from their 2015 high.

Porter and his team aren't concerned... The company has been investing heavily in China, and they believe these investments are likely pay off soon... meaning shares are likely far too cheap today.

Apparently, they aren't alone...

News emerged last month that a competitor was interested in acquiring the company. Last week, a second firm made an official offer. As Porter's team explained in February's portfolio update...

The first is one of Mead Johnson's largest foreign competitors – $226 billion Switzerland-based packaged-foods giant Nestle (NESN.VX). Nestle hasn't made its offer price public.

Nestle sells more baby formula than any other company in the world. Mead Johnson is No. 3 in global market share, but its $16 billion market cap is more than three times smaller than the second-largest baby-formula maker, France-based Danone.

And on Thursday, a surprise new suitor emerged – U.K.-based Reckitt Benckiser (RB.L), maker of consumer products ranging from French's mustard to Lysol air fresheners and cleaners. Reckitt Benckiser doesn't sell baby formula. An acquisition would allow it to expand its health-products line and grow in Asia, where Mead Johnson generates more than half of its operating income.

Reckitt Benckiser's initial offer of $90 per share – which was made public Thursday – is a premium of almost 30% on Mead Johnson's stock price before the proposal was announced.

Shares closed Friday around $84. Stansberry's Investment Advisory subscribers are officially up 4% and holding for further gains, though subscribers who picked up shares during last year's correction are doing even better.

Mead Johnson wasn't the only Stansberry Research recommendation making news last week...

On Tuesday, consumer-electronics giant Apple (AAPL) reported iPhone sales grew to a new all-time record last quarter. Apple said it sold a better-than-expected 78.3 million iPhones in the fiscal first quarter for $54.4 billion in revenue, compared with 74.8 million for $51.6 billion in the first quarter last year.

The new quarterly record pushed Apple back to revenue and earnings growth for the first time in a year. The company also set new all-time revenue records in other areas of its business, including Mac, Apple Watch, and services – which includes the App Store, iTunes, Apple Music, Apple Pay, and iCloud.

"It was a dynamite quarter," Apple CEO Tim Cook explained on a call with financial-news network CNBC. "We are very excited about our pipeline."

Our colleague Ben Morris recommended Apple shares to his DailyWealth Trader subscribers last February...

At the time, Apple shares had sold off on fears the company couldn't keep up its astronomical growth. Of course, we know now these fears were well-founded... Apple proceeded to report lower revenue and earnings for the next three quarters.

But as Ben explained at the time, none of this mattered. Apple shares were already incredibly cheap. As he wrote in the February 25, 2016 issue of DailyWealth Trader...

Two of my favorite ways to measure whether a company is cheap or expensive are the EV/EBITDA ratio and the EV/FCF ratio. The EV/EBITDA ratio looks at a company's market value compared with its earnings... And the EV/FCF ratio looks at its market value compared with its free cash flow.

The chart below shows Apple's share price (top) along with the two valuation ratios (bottom). Right now, Apple trades with an EV/EBITDA ratio of 4.6 and an EV/FCF ratio of 6. Since the iPod was released in 2001, Apple has been this cheap only three other times...

The first time (not shown) was at the bottom after the tech bubble burst, in early 2003. The next time was at the bottom after the financial crisis, in late 2008 to early 2009. And the last time, in the first half of 2013, was at the bottom of a sharp correction after the stock overheated from a 750% run.

In other words, Ben said the market had already "priced in" the risk of slower growth... meaning Apple was a great investment even if sales slowed as feared...

The Apple naysayers have two main concerns. One is growth. Such a big company can't possibly grow as fast as Apple has been growing (sales have more than doubled in four years) for much longer. The other is that the iPhone represents 66% of Apple's sales. This concentration on just one product makes the company more susceptible to competition.

The naysayers are right. Both of these problems are likely to hurt Apple's future results. The thing is, investors are valuing Apple today as if the worst has already happened... But the last 12 months were the best in Apple's history...

There's a good chance Apple will perform better than expected. But even if it doesn't, the downside from here is low. Apple is trading at crisis levels. [And] any good news or change in sentiment could send shares back up to their old highs and beyond.

As you can see in the chart below, Ben was exactly right... Apple shares hit a fresh all-time high today...

Ben's DailyWealth Trader subscribers are up more than 35% in less than a year... a powerful real-life example of what can happen when you simply buy a great business at a dirt-cheap price.

Finally, regular Digest readers know we expect much higher interest rates in the coming months and years...

Long-term rates could soar higher as inflation begins to stir for the first time in years and the long bond bull market rolls over.

Even Jeffrey Gundlach – the so-called "Bond God" – expects benchmark 10-year rates to rise to 6% or more over the next few years... more than doubling today's 2.40% levels.

Given this stance, some folks have asked how we "square" this belief with a bullish outlook on precious metals.

After all, the conventional wisdom says gold and interest rates trade inversely... meaning higher rates are bearish for gold and silver and other precious metals investments. And this argument makes sense. After all, gold pays no interest. So higher rates should make holding gold less attractive.

So what gives? Are we simply talking out both sides of our mouths?

No. You see, like many relationships in the market, the reality isn't so simple...

Gold and interest rates sometimes move in opposite directions as expected... But they sometimes trade together, too. In fact, since 1969, the data show gold and interest rates have moved together nearly as often as they traded inversely.

For example, many investors know that gold soared in the 1970s. From the time President Richard Nixon closed the "gold window" in 1971 through the peak in 1980, gold rallied from less than $50 per ounce to $850 per ounce... a gain of more than 1,600%.

But what you may not realize is 10-year rates more than doubled over that same time, from less than 6% to more than 13.5%.

The same thing happened in the recent bull market. Ten-year rates rose from around 3.2% in 2003 – just over today's levels – to more than 5% in 2006. Yet as you can see from the chart below, gold doubled from $350 per ounce to more than $700 per ounce over the same time period...

In short, folks who argue that rising rates must be bearish for gold simply don't know history.

New highs (as of 2/3/17): Apple (AAPL), American Express (AXP), First Trust Nasdaq Cybersecurity Fund (CIBR), CommScope (COMM), Corsa Coal (CSO.V), First Trust Emerging Markets Small Cap AlphaDex Fund (FEMS), Huntington Ingalls Industries (HII), Altria (MO), PowerShares S&P 500 BuyWrite Portfolio Fund (PBP), and PNC Financial Warrants (PNC-WT).

In today's mailbag, several subscribers respond to Porter's request for feedback on Stansberry Portfolio Solutions. Send your notes to feedback@stansberryresearch.com.

"I almost fell on the floor laughing as I read your responses to all the Portfolio questions. For a month leading up to the big day, you made it clear what you were offering. Your answers were on point and your sarcasm not missed here. Oy vey." – Paid-up subscriber F.M.

"Great job on The Total Portfolio. I felt it was perfectly clear, this was what we were to buy at current prices. I was concerned that with so many subscribers prices might surge, but that has not happened. I could not be happier with the information you provide. Thank you." – Paid-up subscriber Dan D.

"Hi Porter, no, it was not at all explicit enough since your other newsletters say something like 'BUY', 'NEW'. I'm sure you said it somewhere, but the reason I am buying this product is because reading time is very limited. Like Pavlov, you've trained us to salivate when you ring the bell, so now you just have to ring the bell... Overall, you guys are, of course, great, and I appreciate the new service!" – Paid-up subscriber Chris

"Porter, Dr. Steve, Doc, et. al., thank you so much for all of the thoughtful work that went into Portfolio Solutions! I can't imagine how much time and effort it took to get where it is, but it really shows. The format for the one page position overviews should be the new industry standard. And having the link to the original write-up is superb design. Everything you need in one page, with all of the background information you could want in a single click. The portfolio view and the position-size calculator are also concise and easy to use. Add the Newswire and decades of in-depth market talent... I think you got it! Thank you!" – Paid-up subscriber B.T.

"No, you didn't disappoint, in fact you exceeded my expectations. I too had a question about the fixed income positions in The Income Portfolio given the difference in the portfolio price and the buy up to price in Credit Opportunities, but I assumed that the objective of The Income Portfolio was income, and these bonds provided good income streams, so I bought them.

"Regarding the questions on price differences, I duplicated your spreadsheet and plugged in the number of shares purchased and the price I paid, and as you said, the price was immaterial in terms of the overall portfolio. I also plugged in positions I already had and adjusted my trailing stops so that the position risk was in line with that of The Income Portfolio. So thanks, I feel better about my purchase of the new service and the safety of my portfolio. I like to think I am learning." – Paid-up subscriber Christopher M.

"Porter, after reading the FAQ email sent out concerning the new portfolio solutions, I am completely trusting in this new approach. I understand the concerns of your subscribers (including myself), but I also love your 'attitude,' and 'snarky'-ness! 'If we say buy XYZ, it means to buy XYZ.' I love it. I am new to the investment game (I know, pathetic at 51. Years old), and I have learned and forgotten more in the past 2 months than I have learned in my previous 50 years about investing. I think your services ROCK!! I look forward to continue learning and am so grateful for stumbling onto your service last November. Thanks for all your views, and your time in answering our crazy questions. I am a neophyte with this stuff, but I feel like I have great guidance here. I have invested $100,000 in The Income Portfolio, and feel completely comfortable that this will grow, as safely as possible. Happy Investing from Colorado." – Paid-up subscriber Mark U.

"I totally agree with your opinion that you gave us what we needed and that the questions about whether the recos are buys is bordering on ridiculous. I really appreciate this new newsletter since for some reason I seem to pick investments poorly from the various newsletters; also, I'm apparently not smart enough to fully understand some of the underlying logic regarding the bond market and bond recommendations – plus don't have the time to become better versed and to watch things constantly. So the fact that you are now managing the portfolio takes a big burden off me – THANKS VERY MUCH. I'm 100% sure you will do a better job than I have been doing and so I won't have to worry so much about running out of money before I run out of breath (I'm one of those people). Alliance member from very near the beginning (best money I ever spent)." – Paid-up Stansberry Alliance member Buddy S.

"Hello Porter et al, your webinar could not have been more clear regarding how to implement the various portfolios you unveiled on February 1st... buy the specified number of shares for each $100K in capital invested! Perhaps the confusion centers around change management issues with long-time subscribers who are having to adjust to a new approach. I do have one question regarding the trailing stops though... do you recommend scheduling those trades now within our online brokerage accounts to ensure they occur automatically, hence ensuring we don't delay implementation of a critical transaction?" – Paid-up subscriber Julie

Porter comment: We never recommend telling your broker about your stop levels or entering this as good-til-canceled orders in the market. If our readers all enter stop orders at the same level, it's far too easy for something like the "flash crash" to take everyone out at the worst possible time.

Instead, we recommend using a spreadsheet or a system like TradeStops to monitor your portfolio "off market." Also, ONLY use closing prices as a basis for your investment decisions.

Regards,

Justin Brill
Baltimore, Maryland
February 6, 2017