Going into 2012, you need to hedge your positions. In stocks, that means holding high-quality dividend-payers, like Coke and Altria, while shorting bloated growth stocks (look to Dan's Extreme Value World Dominator portfolio for ideas). Many of the high-yielding blue chips are frothy after huge gains last year. (McDonald's and Altria were up 13% and 35%, respectively, in 2011.) If you already own a portfolio of World Dominators, you can sell covered calls to boost your income.
Our favorite example of a bloated growth stock is Salesforce, which Dan shorted last April in Extreme Value. He wrote at the time...
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Salesforce is so overvalued, no reasonable set of expectations could justify its current share price. At around 250 times earnings, Salesforce is priced to grow at exorbitant rates forever with zero risk of competition. Once upon a time, Salesforce was growing rapidly. The year it went public, 2004, sales grew 88%. Had it kept that up until the present, it would now be making $4.5 billion in sales. (Instead, it's making $1.55 billion a year.) It would almost justify its market cap of $18 billion, and would trade around 62 times earnings... |
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But 2005 was the last year Salesforce's revenue growth topped 80%. Though investor belief in it continues unabated, Salesforce's hypergrowth phase is a thing of the past. It's gone and it's never coming back. In fact, Salesforce's revenue growth has fallen every year since the stock went public in June 2004. |
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So the No. 1 reason to pay 250 times earnings for this stock is long gone. In order to justify Salesforce's price tag based solely on sales growth, it would have to return to its 2004 growth levels – and stay there for a few years without the stock price budging. I have to place the odds of such an occurrence near zero. |
Many of Dan's World Dominators are hitting new highs. Today, Wal-Mart made the list. But his No. 1 short victim hit a 52-week low. Shares of Salesforce fell 4% today after Sanford Bernstein's Mark Moerdler reiterated his "underperform" rating on the shares, noting the company's growth is slowing. Moerdler said Salesforce's core business of "customer relationship management," or CRM, fell from 40% growth in the first half of 2010 to 22% in the first half of 2011.
"To meet the Street's expectations regarding revenue growth, Salesforce is relying on acquisitions," Moerdler wrote. At today's share price of $97, Extreme Value readers are up nearly 30% on the short.
Another one of our favorite short targets – though far from a growth stock – Italy's largest bank, UniCredit, plunged nearly 15% today. In the November 2011 issue of Stansberry's Investment Advisory, Porter wrote...
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I believe UniCredit has clearly reached this point [whereby creditors are refusing to lend to it at any reasonable price]. Its bonds are now trading at prices that indicate an eight-notch reduction in credit rating – prices at which the bank cannot hope to operate profitably. To raise desperately needed capital, it has organized a huge equity offering. |
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The problem is, it has little equity left to offer. On the company's balance sheet, you'll find $13.5 billion euros of "tax-deferred assets" – these are literally the value of the future tax savings UniCredit has earned by taking horrendous losses. They are worth nothing if the bank doesn't return to profitability. Likewise, the bank lists $11.5 billion euros of goodwill – an intangible asset that's worth nothing if the bank doesn't survive. That's $24.5 billion worth of assets that can't be traded or sold. Are they really assets? Only to an accountant. |
The "huge equity offering" Porter wrote about happened today... UniCredit launched a $9.7 billion rights offering (an offer made to existing shareholders, who are entitled to buy a set number of new shares at a set price over a specified time frame). This is a huge offering – over half of UniCredit's market capitalization. But here's the thing... The offering was priced at 1.943 euros, a 43% discount to Tuesday's close. If you account for the value of the option to buy more shares in the offering, the offer is nearly 70% less than the shares' quoted price. Still, shareholders only took up 24% of the offering.
So Italy's largest bank can't obtain credit. And it can only sell 24% of the shares it's offering (to existing shareholders, nonetheless) at a near-70% discount. What do you think these shares are actually worth?
For proof of creditors' distrust of European banks, look at commercial banks' overnight deposits at the European Central Bank (ECB)...
Banks are constantly lending money to each other for short, set periods of time (most often, overnight). Banks are required to hold a certain amount of liquid assets at all times to insure against losses. At the end of the day, if a bank is short of funds, it will borrow that money overnight from another bank. On the flip side, some banks have excess liquidity (which is the case with some European banks following the ECB bailout), so they will lend that money overnight to the banks in need.
Deposits hit a record high of 453 billion euros ($591 billion) today. This means banks are choosing the security of overnight deposits at the ECB (which pays 0.25% interest) over lending their cash on interbank markets (which pays 0.396%). So much for the ECB's $637 billion bailout last month...
Today, Jeff Clark told S&A Short Report readers he sees the best opportunity to trade gold stocks of the past three years. After the end-of-the-year rout in the sector, one of Jeff's favorite indicators dropped to its lowest level since October 2008 – one of the most pessimistic times in history for gold stocks. But after the indicator flashed "buy" (as it is doing today), the average gold stock doubled over the next 10 weeks.
Take a look at this chart of the gold sector bullish percent index, which shows the past two times Jeff's indicator flashed buy (in June and October of last year)... Gold stocks rallied 20% over the following month in both instances...
To play on this trend, Jeff is recommending one gold stock in particular. It's super-cheap – the stock's market cap is around $6 billion, but it has more than $21 billion of proven and probable gold reserves. And the stock has been crushed recently. He expects this trade to make up to 250%. To start your new trading year with a potential triple-digit winner, click here...
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New 52-week highs (as of 12/3/12): Fairfax Financial Holdings (FFH.TO), Keyera Corp (KEY.TO), Abbott Laboratories (ABT), Eli Lilly (LLY), Enterprise Products (EPD), Chevron (CVX), Wal-Mart (WMT).
Check out the "boots-on-the-ground" report from Detroit below. And as always, send your e-mail to feedback@stansberryresearch.com.
"I have been reading the comments about Detroit, and maybe i should share mine. I am one of the owners of a land company that was about to go bust in 2008. We decided to start buying non-performing 1st mortgages at steep discounts. We bought over $120,000,000 face-value notes in Detroit and surrounding areas, only to find out that the taxes owed exceeded the values of many of the properties. We bought many $60,000 notes that secured houses worth less than $6,000 each. We tried to reason with the tax collectors, and we got nowhere.
"We finally put together the scheme that the previous lender had with the city of Detroit. The lender would finance the houses for $60,000 (knowing they were really worth far less) with no down payment, and the barrower didn't even have to pay the closing costs. These artificially high sales allowed the tax office to raise taxes tremendously, and when the owners could not pay the taxes, they would take the property back and offer to new residents of Detroit as an incentive to come live there. Crazy, but true. Detroit is a communist enclave. I challenge anyone to deny that." – Paid-up subscriber J
"The bottom line is that the U.S. government loves the obscenely poor and the obscenely rich. The poor because the government can buy their votes and the rich can finance their political campaigns. There is indeed a perpetual motion machine but the politicos do not realize that the inner workings are wearing out. Those of us not obscenely poor or rich are merely slaves on the plantation. Capital controls ensure we will stay on the plantation. 'We're on our own!'" – Paid-up subscriber Wayne H.
"Great call (again) on Unicredit. Down 14% as of 10:30CT. They raised $7.5B in rights offerings but they priced at 70% discount. I believe you mentioned this would happen!" – Paid-up subscriber Luke
Regards,
Sean Goldsmith
New York, New York
January 4, 2012
How to hedge your bets... Salesforce plunges... UniCredit's disastrous offering... ECB deposits at all-time high... Making 250% trading gold... U.S. debt hits all-time record, again... 'Detroit: a communist enclave'...