Guess Who's Diving Into Subprime Lending Again

This surprising turnaround is already going mainstream… Why Wall Street is getting bullish on one of our favorite 'left for dead' retailers… Guess who's diving into subprime lending again…

We wrote it, did you buy it?

From the May issue of Stansberry's Investment Advisory, published exactly one month ago today...

Years from now, investors will look back and realize that right now is a key turning point in the company's history...

Under Armour has a plan. It knows its high-growth days are over. [CEO Kevin] Plank is pivoting the company in a new direction. He is turning the page to a new chapter in its history. The company is transforming itself from a high-growth business to a high-profit company. Until now, revenue growth was all that mattered. Now, profits matter.

Plank announced a restructuring plan last August to begin scaling back the business and improve profits. How quickly Plank can accomplish this is the key to this investment. Last July, he hired a new chief operating officer, Patrik Frisk, who has nearly 30 years of experience in the retail apparel and footwear industry. He has a proven record of improving efficiency and profitability...

And if we wait until after the improvement is clear to the rest of the world, the stock price will already reflect the turnaround.

Shares of Under Armour surged 6% today to a fresh 10-month high...

The rally followed a bullish note from Wall Street analysts that should sound familiar to Investment Advisory subscribers. As financial newspaper Barron's reported this morning...

Under Armour's management has started down the path to improved profitability – and investors should benefit as a result...

While that's not yet seen in the numbers – Under Armour recently turned in Q1 results that beat Wall Street revenue estimates but raised questions about gross margins – that should change, according to [analysts at Stifel]. The analysts today set a $27 price target, 23% above current levels...

"With the recent market evidence that performance athletic demand and channel inventories are healthy, we have increased confidence that inventories will be appropriately matched to demand before year-end and margins will inflect and margin improvement can continue in 2019 and beyond," they wrote.

Kudos to Porter and the Stansberry's Investment Advisory team for beating Wall Street to the punch on another great call...

Folks who took their advice are already up nearly 30% in just 30 days so far. And while the stock is likely to hit some "hiccups" along the way, Porter and his team believe it still has tremendous upside ahead as this turnaround plays out.

Don't be surprised to see similar headlines in the weeks and months ahead as this story goes "mainstream."

Today's new highs are also a good reminder why – despite our cautious outlook on the broad market – we continue to recommend owning stocks...

As Porter and his team explained in that same issue last month...

[If you've been reading the Stansberry Digest], you know we're worried about the stock market. American companies have never owed more debt, relative to the size of the economy. Three times as many of the largest public companies in the U.S. can't afford the interest payments on their debt as before the last financial crisis. Several hundred of these "zombie companies" are destined for bankruptcy.

But that doesn't mean you shouldn't continue to invest in the stock market... No one can predict precisely when the bull market will end... And the best businesses will survive.

That's why we've been investing in elite businesses with world-class brands when they go on sale, like Under Armour today.

Speaking of companies with unsustainable debt loads...

Regular Digest readers know automaker General Motors (GM) is near the top of the list. As Porter explained in a Friday Digest last month, the company is repeating virtually all the same mistakes that lead to its bankruptcy nearly 10 years ago. From the May 25 Digest...

What has changed at GM today? Nothing. Over the past four years, GM has burned through more than $40 billion in cash when accounting for capital expenditures and the net cost of repurchasing leased vehicles. That means it's not producing enough cash from operations to fund its capital investments (which are necessary to operate the business). As a result, GM's debt load has exploded. It has jumped from virtually zero long-term debt post-bankruptcy to more than $60 billion today, including the addition of almost $40 billion in new long-term debt over the last four years.

Even more ominous, the company is again relying on huge amounts of short-term funding to pay for its inventories. Short-term debts (loans due in 12 months or less) have almost doubled over the past four years, from $15 billion to $27 billion. Putting all of these obligations together with its unfunded pension liabilities gets you to a total debt for GM worth more than $100 billion. More than half of these debts mature before the end of 2020...

Worse, as Porter explained, we're already seeing the familiar signs of a slowdown in GM's business that will eventually trigger a crisis...

Over the past four years, GM has seen its revenues decline... Demand for cars is highly correlated to the availability of consumer credit. As credit has become less available for subprime car buyers, GM's sales have gotten weaker. Likewise, all of GM's most important business metrics have declined. The company's return on assets, which has always been weak, has fallen from 2% to negative. The same trend is apparent in all of the other, similar metrics like return on equity (now negative), return on invested capital, etc.

Its largest American competitor, Ford (F), is leaving the passenger-car business because it can't make a profit selling cars. Maybe that's a sign that GM's business prospects aren't nearly as rosy as Wall Street seems to believe. Surely, the guys at Ford know more about the car business than Wall Street's bond salesmen, right?

GM is doing a "Groundhog Day" – making all of the same mistakes, just like it did before.

Not to worry though...

GM's management has a plan to counter the inevitable slowdown in auto sales. As the Wall Street Journal reported over the weekend...

General Motors is counting on a profit boost from an unlikely source: its in-house lending arm.

The nation's largest auto maker by sales used to run one of the nation's largest banks, General Motors Acceptance [GMAC]. GMAC once contributed the bulk of the auto maker's profits, leading critics to label General Motors a bank that happened to sell cars.

GM was forced to give up control of GMAC over the past decade, as both car company and lender careened toward federal bailouts in 2008 and 2009. But now, the rebuilt vehicle-finance unit, called GM Financial, has emerged as a budding profit driver, just as other parts of GM's business have come under pressure...

GM sees GM Financial as a core part of its plan to sustain profitability when auto sales stall or the economy dips, helping to support sales and finance inventory if other lenders pull back, GM President Dan Ammann said.

"At some point [a downturn] will happen," Mr. Ammann said. "That's when the real benefit will come to the fore."

Now you may be thinking...

Wasn't it GMAC's foray into risky subprime mortgage lending that exponentially multiplied GM's problems during the last crisis?

Well, yes... But again, not to worry.

GM Financial isn't getting involved in risky subprime mortgage lending this time. It's sticking solely to auto lending – including risky subprime auto lending, which it considers its "specialty," according to the Journal – this time around.

In other words, just as GM's finance arm loaded up on exposure to the most toxic debt (subprime mortgages) prior to the last crisis, it is now loading up on what is likely to be the most toxic debt (subprime auto loans) in the next crisis.

"Groundhog Day" indeed.

New 52-week highs (as of 6/1/18): Apple (AAPL), AllianceBernstein (AB), Automatic Data Processing (ADP), Amazon (AMZN), Facebook (FB), Fidelity Medical Equipment Fund (FSMEX), Intel (INTC), Monsanto (MON), Microsoft (MSFT), Okta (OKTA), Ralph Lauren (RL), ALPS Medical Breakthroughs Fund (SBIO), and Verisign (VRSN).

The mailbag is overflowing with feedback on Porter's latest Friday Digest missive. What did you think? Let us know at feedback@stansberryresearch.com.

"Porter – The '97% mortgage' sent my head spinning. When are these slapnuts going to offer non-doc (liar) loans and put them into CDO Squared? (CDOs made up of CDOs). Better yet, make sure the underlying collateral are 97% MBS. The bankers need to pay this time around!

"Thoroughly enjoying the wealth being created by my Alliance membership (paid up of course!) and the good work of your solid team." – Paid-up Stansberry Alliance member Mike O.

"Thanks for the post today. Sage wisdom as always. I'm near the end of a long career in mortgages so I can say this from experience, we are not remembering the lessons from the past. I watched the Savings and Loan industry bust, the mortgage industry rebuild into selling stupid loan products to people who probably couldn't repay them, the bust of 2008-9, and now the return of very low down payment products, and the return of "non-QM loans (those that don't follow all the safeguards that were put in place after the last crash). Everyone thinks it will, but this time will not be different. Simply calling a bad loan product by a different name doesn't make it any different, it's just a different color of lipstick on the same old greedy pig. I truly hope I'm retired and done before this most recent pig gets shoved into the slaughter house. I've seen this movie before and it didn't end well. Thanks for writing truth and common sense!" – Paid-up subscriber Scott P.

"The education I absorb from your missives is far more valuable than any one stock or bond trade. The fact that you care and respect your audience enough to give the why and how, the micro- and macroeconomics, and U.S. as well as global perspectives is enough to have induced a Pavlovian urge in me to dutifully check my e-mail daily just after 6 p.m. EST for my steady Stansberry diet of knowledge kibble.

"BTW, I too have a black lab puppy and have been using an anti-gulp bowl, which features convoluted channels through which Fletcher must work his tongue and slow down his kibble ingestion rate. Occurs to me an anti-gulp capital restriction bowl/mechanism should be invented to slow the dangerous rate of bloat occurring in the dogs of the market. Oh, wait, it already does exist. It's called interest rates and sound monetary policy. Wait again... where did I learn that?! Thank you 'Lead Dog' Porter and your intelligent pack of investment guides and guards. Truly the best in the business." – Paid-up subscriber Kevin B.

"Porter, you are obviously a smart, smart guy. And you seem to sincerely care about us, your readers. For that I am truly grateful.

"But your every week statement that there is no such thing as teaching only learning is, to me (maybe no one else), ridiculous and absurd. Have you researched it? I haven't, but when I get time and care enough (or get bugged enough, fed up enough) about you continually saying it I will. I'm thinking you should research it before I do since you are the one saying it, but what the heck do I know? I don't have 100,000 or more people around the world listening to anything I have to say.

"Which brings me to my basic thought. Basic question. Basic, gut level, off the top of my head point of refute. If there is no such thing (no such thing?!) as teaching (no such thing?! Really?!) then what is the primary purpose of all the Stansberry publications? Your statement simply makes no sense in light of what your business is all about; no, actually, it makes no sense in light of What Your LIFE Is All About." – Paid-up "satisfied and thankful" Stansberry Alliance member Jeff M.

Porter comment: Jeff, English is a wonderful language. It has the most words of any major language and the most nuanced meanings. It also has a wide range of expressions and metaphors.

Nobody goes to the dictionary when they meet a 300-pound football player whose nickname is "Tiny."

It should be obvious, from the context you cite, that I don't mean those words literally. What I mean, of course, is that unless you are prepared to read carefully and think about what I'm writing about, the Friday Digest will be worthless to you. By reminding you that there's no such thing as teaching without a dedicated, willing student, all I'm saying is that it's up to you. Same as when I write "Horse, meet water."

For 99.9% of the 500,000-plus people who read my essays each week, this explanation is intuitive and therefore unnecessary.

But... it's a bell curve. And there are outliers.

Regards,

Justin Brill Baltimore, Maryland June 4, 2018