How to Trounce the Stock Market With Far Less Risk
A 37% annualized return in a 'boring' bond... How to trounce the stock market with far less risk... The best is yet to come for Stansberry's Credit Opportunities subscribers... It's time to prepare for the next crisis...
We wrote it... Did you buy it?
About a year ago, Stansberry's Credit Opportunities editor Mike DiBiase wrote about an overlooked opportunity in the corporate bond market. It was in the debt of CEC Entertainment, the privately held parent company of Chuck E. Cheese's – the pizza chain known mostly for kids' birthday parties, arcade games, and its costumed mouse mascot.
Private-equity firm Apollo Global Management (APO) had bought CEC Entertainment in 2014 in a deal worth $1.3 billion.
Apollo was attracted to Chuck E. Cheese's entrenched brand in the kid-entertainment industry. (Many people born as early as the 1970s and '80s likely have memories of the place.) And the company was generating strong cash profits... even though its sales and growth had started to flatten in 2006.
Chuck E. Cheese's boomed in the first two years under Apollo's ownership...
The firm made several changes immediately that sparked a recovery. Apollo did things like add free Wi-Fi for Chuck E. Cheese's guests, revitalize existing locations, and retrain workers. In short, it put money into the business with an eye on selling it at a premium.
However, the good times didn't last long. As Mike and Stansberry's Credit Opportunities co-editor Bill McGilton explained in the May 2018 issue...
At the beginning of [2017], CEC's quarterly revenue and same-store sales started to slide. They both continued to fall throughout 2017... and into the first quarter of [2018]. As a result, the company's only outstanding bond began trading at a distressed level.
And that's where they saw a 'credit opportunity'...
As Mike and Bill pointed out, despite its sliding sales, CEC Entertainment was in no danger of bankruptcy or of defaulting on its bond. Plus, the business still had highly motivated owners in charge...
Apollo has millions of dollars riding on its turnaround. A little more than a year ago, it prepared to sell the company for a large profit. Now, Apollo is stuck in a holding pattern until it proves that CEC's sales won't continue in a downward trend.
We believe CEC's management team will once again turn the company around in 2018...
Apollo didn't buy this company just to let it fail. Like any private-equity firm, Apollo expects to sell the company and make a large profit. And we can, too...
They recommended subscribers buy CEC Entertainment's 8% bond due February 15, 2022. At the time, it was selling for just $810, well below "par value" of $1,000 per bond. Including interest owed to the seller at the time of the purchase, their official reference price came in at about $830 per bond.
This meant in addition to a safe 8% annual yield, subscribers also had the opportunity to earn substantial capital gains. More from the issue...
The bond could easily return to par or higher within two years... If you sell the bond at par value two years from now, your annual [yield to maturity ("YTM")] would increase to 20%. If you sell the bond at par value one year from now, your YTM would jump to an impressive 30%.
That's exactly what happened...
CEC's fortunes reversed again in the first quarter of 2019. The firm reported preliminary same-store sales growth of 7.7%.
Then, on April 8, CEC Entertainment's owners announced that they were taking the company public again... They agreed to merge CEC Entertainment with Leo Holdings (LHC), a so-called "blank check" company that went public last year with the sole purpose of acquiring another company. And that company turned out to be CEC Entertainment.
When the deal closes, likely in the second quarter of this year, it will mark the first restaurant company to enter the public market in four years.
The new company will be renamed Chuck E. Cheese Brands and will trade under the ticker symbol "CEC" on the New York Stock Exchange. CEC will use around $200 million of Leo Holdings' cash plus another $100 million to be raised by issuing new stock to reduce its outstanding debt.
This was fantastic news for CEC bondholders...
Mike and Bill's thesis came to fruition – and then some. The recommended bond's price soared nearly 10% on the news to trade above par value, at around $1,010.
They sent a special update on April 10, recommending that Stansberry's Credit Opportunities subscribers lock in profits three years ahead of schedule. By doing so, they realized an annualized YTM of about 37% – more than double what they initially expected.
It was a huge win...
But it's exactly the type of corporate bond expertise Mike and Bill regularly deliver to their Stansberry's Credit Opportunities subscribers.
Since launching the publication in November 2015, Mike and Bill have closed 19 bond positions with an average gain of 18% – and 16 (84%) have been winners. However, subscribers have held these positions for an average of just less than 300 days, so the portfolio's annualized gain is even better at 22%.
That's two-and-a-half times higher than the return of the benchmark high-yield bond index over the same period. It even beat the 18% annualized return of the S&P 500 during that time.
These are fantastic returns in any market environment...
But it's particularly impressive considering the past few years have been a terrible time for distressed-debt investors.
As both stocks and bonds have soared higher, it's become next to impossible to find safe corporate bonds trading at a significant discount to par.
However, the best opportunities will come after this long bull market ends...
As Mike reminded Digest readers yesterday, we're on the verge of one of the biggest credit-default cycles in history. And this is when Stansberry's Credit Opportunities will truly shine.
When the panic arrives, investors won't pay attention to what they're selling. The bonds of great companies will be sold off indiscriminately along with the bad ones.
It will be the type of opportunity that only comes along once or twice in a generation. You'll have the chance to buy extremely safe bonds for pennies on the dollar... allowing you to earn huge stock-like returns, but with far less risk.
This is why we've called the looming debt crisis the "greatest legal transfer of wealth in U.S. history." You'll literally have the opportunity to make a fortune by buying these safe bonds.
There's just one 'catch'...
You'll only be able to take advantage of these opportunities if you have the capital to do so.
Unfortunately, most folks won't...
They're likely to be sitting on huge losses just as the best opportunities arise. And even those who still have the means are likely to be too "shell shocked" to buy.
If you intend to avoid this fate, you must prepare in advance. If you wait to act until after the crisis begins, it will already be too late.
This is why we're inviting you to join Porter and legendary investor Jim Rogers for a special "Bear Market Survival Event" later this month...
On Wednesday, May 15, at 8 p.m. Eastern time, Porter and Jim will show you why the coming crisis could be worse than any bear market we've seen before. And more important, they'll share the simple steps you can begin to take right now to prepare.
As usual, this online event is absolutely free for all interested Stansberry Research readers. And you'll even get the name and ticker symbol of Porter's favorite bear-market stock just for showing up. Click here to learn more and reserve your spot.
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In today's mailbag: A longtime subscriber shares his experience with Stansberry Research. What's on your mind? Let us know at feedback@stansberryresearch.com.
"Hi, Porter, I first subscribed to your newsletter when it was Pirate Investor. Then I signed on for True Wealth. Eventually I became a Flex Alliance member and finally, took the plunge and paid for the full Alliance membership. Of course I wish that I had done that when the Alliance cost more like $5000 than the figure I eventually paid.
"Over the years, I also subscribed to other letters – John Dessauer, a Canadian letter focused on high yield REITs, Mark Skousen, Oxford Club, Martin Weiss, Utility Forecaster, the Palm Beach Letter – maybe a couple of others. All of them have fallen by the wayside as I have gravitated toward Stansberry's publications.
"Frankly, if it hadn't been for you, there are several things I would never have accomplished. I would never have understood capital efficiency. One of my biggest investing regrets is that I didn't 'get it' the first time you recommended Hershey. I recently corrected that and also bought Disney. I wouldn't understand that (some) insurance is the greatest business in the world. I would never have bought a bond, but some of the largest percentage gains I've had have come from distressed bonds in SCO. Understanding these three things alone is probably worth whatever I've paid you over the years.
"So what has helped me, other than your work and that of your colleagues? Well, TradeStops. I realized the value of trailing stops based on reading True Wealth, and TradeStops seemed a reasonable way to manage stops without having to do a lot of work myself. In addition, TradeStops has been a big help in risk adjusted position sizing. So when Richard offered a lifetime subscription for something like $1500, I signed up as soon as I read the offer. Of course, Richard has evolved his business into some much more sophisticated avenues lately.
"Outside of the Agora family and Stansberry in particular, the thing that has most influenced me has been my recent reading of Nassim Taleb's book, Anti-Fragile. I had no idea that he would mention Fannie and Freddie, but what he has to say about them is completely consistent with your work while putting a risk management spin on it. What really caught my attention, however, is that Taleb's notion of asymmetric bets is the theoretical model for what Steve has been doing for decades with his 'cheap, hated, and in an uptrend' approach. Steve looks at the macro picture and makes asymmetric bets where the downside has pretty much already happened, and the upside is huge. I'm convinced now that this is why he's so hard to beat over the long term. The practical utility of Steve's approach is undeniable. But the additional insight that Taleb's book layered onto it has given me confidence that I can recognize these situations for what they are – asymmetric bets that leverage the upside while protecting against catastrophic loss.
"So what are my high conviction asymmetric bets right now? China A-shares. Cannabis, as it goes from black market to a normal, regulated market like cigarettes and alcohol. Cryptos. Steve is doing the A-shares. Casey Research has a play on the emerging cannabis market. Teeka and Tama are doing the cryptos. But it all fits into the Anti-Fragile framework. Good idea or not, money will inevitably flow to Chinese A-shares. People are not going to stop smoking weed any more that they stopped drinking during Prohibition, and legal cannabis will be bigger than beer. Blockchain technology will reshape a lot of the world much like the Internet did.
"I had a terrific math teacher in high school. I'm not particularly talented in math, but I wanted to be in his advanced class my senior year. He took a chance on me. Everything I ever understood about math is due to that man. In one way or another, everything I understand about investing leads back to you. In the end, I think I value the learning as much as the money. I know that there are thousands of people in your subscriber base that feel the way I do.
"Someone once asked Ross Perot how he became a billionaire. He replied: 'I helped a thousand people become millionaires.' Thanks for all you do." – Paid-up Stansberry Alliance member Joe B.
Porter comment: Wow! What a wonderful letter. Thank you so much.
Regards,
Justin Brill and Corey McLaughlin
Baltimore, Maryland
May 1, 2019