Once is luck. Twice is skill. This is the second time this year one of Dan's 2009 recommendations is being taken over by a rival company at a huge premium. On Friday, mining royalty giant Franco-Nevada announced a $600 million all-cash takeover bid for International Royalty (ROY) – one of Dan's top recommendations. The offer is a 43% premium to International Royalty's December 4 closing price. Assuming International Royalty gets taken out at Franco's current bid, Extreme Value readers are sitting on a 241% gain in nine months.
Dan, I think I can speak for everyone who took your advice to buy ROY... Thank you. Nothing says "Merry Christmas" quite like nearly tripling an investment in less than one year. Says Dan regarding his two big deals this year (his pick IMS Health was bought out, too):
My solution to the falling valuations that characterize a sideways market has been to raise the bar on quality, and buy only at low single-digit multiples of high quality earnings. Both IMS and ROY have high quality earnings, the basic measure of which is operating cash flows in excess of net income. I highly recommend the same overall strategy to every stock picker, newsletter editor, or investor on the planet. Sideways markets are when the value-oriented stock picker ought to shine.
Royalty companies, like International Royalty, are the best way to gain leverage to a commodity. If you've never seriously looked at owning these kinds of stocks, I'd urge you to take the time to sit down and figure out how they work. For example, take a look at one of S&A Resource Report editor Matt Badiali's favorite recommendations. It holds royalties on 17 different mines. And it's buying production at a 38% discount to market value. This company's performance is highly leveraged to the price of gold – so when gold prices increase, these shares will soar. Click here to subscribe.
Last week, the Treasury Department admitted its Home Affordable Modification Program, its plan to help mortgage borrowers by reducing payments, was a flop. Around 70% of modifications, which use only interest-rate cuts and not principal reductions, default within 12 months. New York Times writer Gretchen Morgenson produced a great article explaining why (thanks to Whitney Tilson for sending this)...
First off, when calculating what it considers an affordable mortgage payment, the government doesn't account for the borrower's total debts – the first mortgage, second lien, credit-card debt, and auto debt. It only uses the first mortgage payment, insurance, and property taxes. So what looks like an affordable payment is still out of reach for most struggling borrowers. The article, quoting Lanie Goodman of Amherst Securities, says the government also fails to consider the borrower's equity – or negative equity in many cases – on the property. Goodman says negative equity, not unemployment, is the best predictor for defaults...
Ms. Goodman recently compared the experiences of prime mortgage borrowers living in areas with an 8 percent unemployment rate. Those with at least 20 percent equity in their properties were falling two payments behind for the first time at a rate of only 0.22 percent a month. But the same 60-day delinquency rate for those who owed at least 120 percent of the value of their homes was 1.46 percent a month.
Goodman says the government needs to address second liens and focus on principal reductions. But there's a huge reason second liens will likely still be ignored... The same banks the Treasury is urging to modify loans – Bank of America, Wells Fargo, JPMorgan, and Citigroup – hold $442 billion of second liens on their balance sheets. Writing those down would hurt the banks even more.
Finance blog Zero Hedge released a list of the top 10 U.S. commercial properties in risk of default. The Mandarin Oriental hotel in the Time Warner Center in Manhattan tops the list. And it has a $135 million loan balance maturing in 2012, even though the Mandarin's estimated value is only $123 million. Annual cash flows plunged to $3.6 million from $21.6 million in 2007. The building's debt coverage is a weak 0.42x. Occupancy is 64%.
And who owns this building? Istithmar World Capital, the private-equity arm of Dubai World. The firm also owns high-end retailer Barneys New York, Fontainebleau Hotel in Miami (another building near default), investment bank Perella Weinberg Partners, and Cirque du Soleil... A portfolio of high-end names bought for exorbitant prices at the peak of the market. In total, Istithmar owns around $20 billion in assets and only has around $3 billion in equity.
New highs: Fairholme Fund (FAIRX), Verizon (VZ), Johnson & Johnson (JNJ), Burlington Northern Santa Fe (BNI), iShares High Yield Bond Fund (HYG), WD-40 (WDFC), Akamai (AKAM), Providence Service Corporation (PRSC), Ormat (ORA), Encore Acquisition (EAC).
In today's mailbag... questions about our portfolios, the best place for a new subscriber, and when I'd sell my gold. Send us a note here: feedback@stansberryresearch.com.
"As you guys are having a great year picking winners I believe you are starting to influence prices with your recommendations, i.e. BRNC and S. I believe this linkage makes your practice of selecting your tracking purchase price of the pre-pick close inflate your results. I think it would be more accurate to use the closing price of your selection at the close of the session following pick publication as your starting price. Why not?" – Paid-up subscriber Mark Sullivan
Porter comment: Our portfolio pages are designed to reflect the value of our research – not the results of any particular subscriber. When it comes to stocks, our policy is to show the price of the security immediately prior to our recommendation. This reflects the price we might have paid if we were simply buying the security ourselves. Our exit price is based on the closing price of the security following our recommendation to sell. We use the closing price simply to provide a standard, rather than pretending we would have gotten the highest, the lowest, or the average price that day.
This method is clearly the most accurate way of representing the value of our work, as it shows the results we might have achieved with our money. For every example you show me of a situation where the price rose substantially following our recommendation, I can show you another example where the price fell steadily, offering subscribers a more attractive entry price. And trust me, if we decided to use those lower entry prices, we'd get thousands of letters accusing us of fraud. So we don't cherry-pick our entry prices. We use the previous closing price prior to our recommendation. And we use the closing price following our recommendation to sell. We do it the same way, every time.
"Have become a True Wealth subscriber in last 3 months – being in the midst of a huge learning curve – have several beginner questions. First some history – am in late 50s, had $120k in my 401k, lost 60k. Have regained 20k this year. Would like to retire sooner than later – however, need more income! Tend to be conservative and cautious, and need adivice on making sound investments with a strong retun. I read the daily S&A Digest – recently read the notification of subscription changes e-mail, recieved Off the Record e-mail – is the only way to listen to the conversation, by signing up? I do not have $10,000 laying around to join the Alliance – Should I consider subscribing to several of your lower-end services to get started? Would it be better to invest other than Off the Record getting started. To become an investor is E-trade or Ameritrade recommended? Any guidance on slowing down the spinning with the wealth of information would be very much appreciated – Thanks for helping me get pointed in the right direction." – Paid-up subscriber Tim H.
Porter comment: That's a difficult question to answer. Obviously, you want to use the products that will produce the best results for you... but I can't know which of our analysts will have the best results next year. Here's my best suggestion: Try the products you think will be best suited to your needs. Just about everything we offer has a refund guarantee. This should allow you a "risk free" look at the newsletters, their track records, and their current strategies. If nothing else, you could get a great education just trying our different products. And hopefully, you'll find one or two that fit your needs.
Besides this, I'd offer you two other general tips: 1) Focus on risk, not return. Make sure you learn how to manage risk and how to minimize it. Pay attention to the analysts' advice about position sizing and risk management. These strategies will be your keys to success. 2) Don't try to do everything. Figure out what kind of investing meets your needs and is best suited to your personality. Some folks are traders. Some folks just want to sit back and not touch anything for three years. Some folks can handle lots of volatility. Some can't handle any. Find two or three analysts whose work you respect and whose style matches your needs. Then, stick with what works for you.
"You have been recommending gold as insurance against 1) inflation and the possibility of a U.S. bankruptcy. Let's guess that gold gets to $4,000 per ounce. Do you sell your gold or gold stocks?? $5,000 per ounce? $6,000 per ounce? $15,000? And what do you do with the money that you receive from the sale?? I think your readers would like to hear what the exit strategy is!!" – Paid-up subscriber David B
Porter comment: In truth, I will never sell my gold coins. They are how I measure my own wealth. Asking when I will sell them is like asking me when I would decide to become poor. That's never going to happen. In regard to the speculative positions I hold that are designed to hedge my exposure to the U.S. dollar, I would close out my hedges when the U.S. central bank decides to run a sound currency.
How could you fix the dollar? Simple, really. You have to do two things. First, you'd return the dollar to a defacto gold standard by using monetary policy to target money supply. You'd limit the supply of new dollars to real increases in productivity. Second, you'd begin to pay a market rate of interest on U.S. Treasury securities. Without the power to print more money, the U.S. would be, at best, a junk credit. Therefore, you'd expect to see 12% coupons or better on long-dated U.S. Treasury securities. Ha, ha, ha... Right? It'll "never happen," right? Oh yes it will. Sooner than anyone expects, too.
"I have to admit, I am constantly amused at the subscribers who call you 'millionaire' plus some other ignorant descriptive name. I like to see the 'fruit on the tree' of my source of knowledge and to see your success proves to me that you are not some ideological windbag, but actually write, and invest based on your experiences and successes. Why would I want to hear investment research findings from a junior Edward Jones broker who is in debt up to his hears, rides the bus to work every day, and produces loser after loser for his clients? Why would anyone subscribe to your newsletters and not want to hear of your successes? I don't advocate flaunting wealth, but to use examples from your real life like Porter's Miami boat troubles, shows his ability to enjoy the fruits of his labor while telling a story. I personally have made a lot of money off of your research. While I may not always agree with your political or social views, rant on. You are making me money." – Paid-up subscriber Bobby Casey
Porter comment: We're happy for your success Bobby. We've never been the jealous type...
"Talked to a friend working at BlackRock (btw, the largest money management firm, not PIMCO) yesterday. She told me she was bearish on the dollar, just as all the other economists. Hummm, now, I think that in the next 12 months, I'm with Tom on this one... USD up!" – Paid-up subscriber David
Porter comment: Good luck with that trade... Before you lever up, you might ask yourself what the Fed is going to do when another $1 trillion worth of home mortgages blow up this year... when $1 trillion worth of commercial mortgages come due in 2011... when China decides to stop buying Treasuries... and when GE can't refinance in 2012. The U.S. dollar is a one-way bet, my friends.
In my latest issue of PSIA, I tell readers the absolute best way to prepare for the collapse of the U.S. dollar. My latest prediction will be even bigger than my calls on GM, Fannie, and Freddie. I think this is the best newsletter I've written in my entire career. To access my latest issue, click here...
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
December 7, 2009