In the December 5 and December 6 Digest Premiums, we discussed the downfall of troubled department store JC Penney…
Hedge-fund billionaire Bill Ackman owns around 18% of JC Penney. And he hired Ron Johnson, the man behind Apple's retail success, as the company's CEO.
Johnson immediately made big changes at the retailer... He eliminated promotions and discounts (a JC Penney trademark) in favor of a "fair and square" pricing model. He also rebranded the company as "JCP" and made the stores more upscale by creating a "store within a store" shopping experience with brands like Levi's and Izod.
We respect Ackman. He's made a fortune for himself and his investors over the years. But we knew his foray into retail would be a disaster. As billionaire investor Warren Buffett once said: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."
And just today, Ackman lost $180 million on his JC Penney position...
Since Ackman and Johnson launched their turnaround efforts, JC Penney's sales and traffic have fallen off a cliff. And the company is burning through cash. As we wrote in the December 6 Digest Premium:
JCP only has $525 million of cash on the balance sheet. That's down 41% from last quarter. The company burned through $380 million in free cash flow last quarter. That will amount to a roughly $1.3 billion burn rate for the year.
The company was expected to generate more than $500 million in free cash flow in the fourth quarter. But after another 20%-plus sales decline (Internet sales fell 37%), that's not going to happen. Keep in mind, the sales downtrend is getting worse each passing quarter... not better.
If the company continues reporting 20%-plus sales declines, it will burn through its cash within nine months.
[Small Stock Specialist editor] Frank Curzio sent research from investment bank Credit Suisse about Penney's sales declines. The bank found 17 retailers that reported year-over-year sales declines of 15%-20% between 2000 and 2011... Only four retailers ever recovered the lost revenues. And it took them an average of three years.
The other 13 – 76.5% of the group – never recovered the revenues.
We think JC Penney falls into the latter camp...
Today, shares of JC Penney fell nearly 20% after the company announced yet another sales drop...
The retailer announced it lost nearly one-third (31.7%) of its sales in the 2012 Christmas shopping season from the same period the year before. Closing out 2012 – the first year of Johnson's reforms – JCP lost $4.3 billion in revenue compared with 2011.
Total revenue fell to $3.9 billion... The company lost $428 million in the quarter, bringing full-year losses to nearly $1 billion. Store traffic fell by 17% in the fourth quarter.
There was one bright spot... The company ended the year with $930 million in gross cash, more than analysts expected. But when asked if the company could finance its plans with the cash, CFO Ken Hannah said, "The customer is ultimately going to decide that for us."
CEO Johnson also changed his tune on coupons. On the retailer's conference call with Wall Street analysts, he said he was "very excited" to reintroduce the discounts... "We learned that she prefers a sale," he said of the prototypical JCP shopper. "At times, she loves a coupon."
JC Penney is bleeding cash. Customers are leaving. The executive team is waffling on strategy. And the company has received so much negative press throughout its turnaround efforts, it would need to completely rebrand itself to survive. It looks like this retailer is in its death throes...
Who says Obama isn't good for business?
Gun-maker Sturm Ruger & Co. just posted its highest annual profit since at least 1987. People are flocking to buy guns, anticipating stifling new regulations. The company's net income increased to $70.6 million in 2012, up from $40 million in 2011. Revenue increased 50% to $491.8 million last year.
The stock is up 14% this year.
Major Zane Purdy's life imploded in just three months...
Purdy, a defense contractor and Air National Guard officer, used to earn a six-figure salary. Then, according to the Montgomery Advertiser, thieves stole his identity. They decimated his credit rating. Bad credit or excessive debts flag someone as a national security risk. He had his top-secret security clearance revoked. His company was forced to fire him. Even the Air National Guard couldn't bring the 18-year veteran back onto active duty.
Now, the father of two is waiting tables for $7.25 an hour... he has tax liens levied against his property... and the IRS is claiming he owes them more than $10,000 in back taxes.
His identity thief was a data-entry clerk at a nearby hospital. She stole more than 800 patients' personal information. She had access to names, Social Security numbers, birth dates, and addresses. She sold this data to a unique brand of scammers – experts in manufacturing "synthetic identities" – for $8,000 in 2010. By 2012, they had turned this personal-information stash into $1.6 million.
A typical fraudster racks up charges as soon as he gets access to the victim's account. This restricts the size of his take to the account's preset limit. The synthetic process takes longer than conventional credit fraud... but the returns are higher.
Over time, the crooks use these conjured persons to open bank accounts, start fake businesses, get personal and corporate credit cards, take out home and auto loans, and file tax returns. In the beginning, they pay bills and establish superior credit ratings. Once the credit nozzles open up, look out...
NBC News reports a handful of these synthetic identity thieves in New Jersey stole at least $200 million over the last six years. The group gathered small snippets of personal data – stolen utility bills here, pilfered Social Security cards there, hacked online logins elsewhere – and used them to stitch together fake credit identities.
The FBI determined the criminals manufactured at least 7,000 synthetic identities. Banks issued them 25,000 fake credit cards. They established at least 169 fake bank accounts... through which $60 million in cash flowed out.
Current law allows everyone a free peek at his or her credit reports once per year. Conventional wisdom says that's enough to protect you from identity theft. But with this new threat, it's not. Your information may already be part of a synthetic identity... and your credit score could still look amazing. What you need to know is whether new accounts are being opened in your name.
A few services charge by the month to monitor your credit report. The services start at around $10. They'll alert you to any newly opened accounts or other suspicious activity. One offers a $1 million guarantee if your identity gets stolen on its watch.
There are other ways to take even more control over your credit profile. For example, the law allows you to force credit-rating agencies to notify you of new activity. You can even make them freeze your credit outright. These actions may also be free, depending on your age and home state. Either way, you can reduce the chances of a synthetic identity thief turning you into the next Major Purdy.
Dr. David "Doc" Eifrig has written a special report for his Retirement Millionaire readers that shows exactly what to do to safeguard your identity. It includes a little-known company that can give you unfettered access to your credit report for free. The report is entitled "The Easy Way to Maintain Your Privacy in America."
In his report, Doc shows where our digital lives are most vulnerable to snooping governments, greedy corporations, and cyber criminals. And he describes easy ways to plug these holes. One of his subscribers wrote back to say the content is "easily worth the cost of several years' subscriptions." To learn more about Doc's Retirement Millionaire – and how to get access to his strategies for protecting yourself – click here.
Are you a buy-and-hold investor? If you – like millions of Americans – believe the safest way to grow your wealth is to sock your money away in stock index funds and leave it there for years on end… you may want read the essay at the bottom of today's Digest…
Today, we're continuing our series of putting Steve Sjuggerud's True Wealth Systems to the test...
As we've written over the past week… We've spent nearly $1 million to build a sophisticated set of proprietary programs that model the investing strategies Steve developed over his career.
The result is the high-end trading service, True Wealth Systems. The system helps Steve analyze a vast array of market data and yields buy/sell signals on asset classes like commodities, currencies, and stocks…
To demonstrate the power of applying these programs to Steve's strategies… we've designed a series of tests. We asked Steve to examine popular investment "truths." We want to see if the numbers back up these widely accepted theories…
We've been publishing the results this week. And today, Steve takes on the question of buy-and-hold investing – whether it really is the best, safest way to make money in stocks. You'll find the results of his analysis at the end of the Digest.
Also, we encourage you to join in the challenge. Have you heard something repeated over and over on CNBC that you'd like to see proven (or disproven)? Is there an investing principle you've followed for years… that you're starting to question? Let us know at feedback@stansberryresearch.com. (We cannot answer individual questions… and we cannot run individualized portfolio tests.)
New 52-week highs (as of 2/27/13): Eli Lilly (LLY), Automatic Data Processing (ADP), Hershey (HSY), Range Resources (RRC), Government Properties Income Trust (GOV), and Fluidigm (FLDM).
Lots of great feedback today from subscribers who have purchased investment properties. Have you made money on real estate in the past few years? We'd love to hear about it at feedback@stansberryresearch.com.
"Last Sept I bought a rental home for $59,000 and put $1,000 into clean up. I had renters in within 3 weeks. The house built in 2003 is a small 1,100 sq foot 3 bed 1 and half bath that rents for $800 a month on a year lease. So the gross is $9,600 on a $60,000 investment for a 16% return. Taking into account management fees, taxes and insurance my net works out to about 12% a year. I would tell you where it is but I am going back to the location in May to buy another rental and don't want too much competition. I paid cash for the first one but may finance the next one only because rates are so low but closing on a house without having to go through financing is so much easier." – Paid-up subscriber Gary Rattray
"I've bought one duplex in Florida 1 1/2 yr ago, rented out both sides for a rental return of better than 10%. Unrealized capital gains is already about 50% on money invested. I am currently buying anther property in Florida that is priced at 1/3 the peak valuation of 2006-2007. I expect to get a 7-10% return on this investment, with additional capital gains expected. Thanks for the encouragement!" – Paid-up subscriber Dan
"I bought a one bedroom condo in vegas about 1 year ago. They are mostly all cash deals. I paid 38k, 50 dollars a square foot way below replacement costs. Now, I rent it out for 7,200 a year!" – Anonymous
"Hi I noticed you wanted to hear about real estate stories I recently purchased 2 foreclosed homes in Northern California. I paid $29,000 for one and $32,000 for the other.
"They now rent for $850 and $900. I used to drive a tow truck now I have 35 of these little homes. And I get to do what I want and best of all no more tow truck." – Paid-up subscriber Philip
Regards,
Sean Goldsmith
New York, New York
February 28, 2013
Can Simple Trend Following Beat the Stock Market?
By Steve Sjuggerud
Many investors dismiss the idea of trend following…
They've bought into the thinking – promoted by reams of faulty research from the mutual-fund industry – that it's impossible to time markets… that the best and safest way to make money in stocks is to buy shares of the right companies and hold on, come what may…
Today, our True Wealth Systems computers tested that idea. Our analysis of 40 years of market data shows a clear outcome: Following a simple trend can help you beat the market…
For today's study, we looked at the last 40 years of data on the benchmark S&P 500 stock index. Simply buying an S&P 500 index fund and holding over that period would have returned 6.6% a year (not including dividends).
Then, we had the computers test a simple trend-following strategy – buying when the market is above its 10-month simple moving average. Buying shares of the index when it traded for more than its average price over the preceding 10 months returned 9.8% a year – nearly a 50% increased annualized gain.
Now, following this strategy would have kept you out of the market about one-third of the time. To ensure we were comparing strategies that were 100% invested at all times… we invested in basic 90-day Treasury bonds during the periods you were out of the market. That dropped the systems' return to 8.4%.
That might not seem like an outsized gain. But it adds up over time…
Simply owning the market turned $10,000 into $128,000. Following this simple trend system turned $10,000 into $250,000. That's nearly double the overall gain.
Incredibly, following a simple trend works on dozens of asset classes. We ran the same numbers on gold, foreign stocks, and REITs. The results are in the table below…
|
Investment
|
Buy & Hold (B&H)
|
Trend-Following System
|
$10,000 B&H
|
$10,000 System
|
|
Gold
|
8.5%
|
12.5%
|
$264,000
|
$1,118,000
|
|
World Stocks
|
4.2%
|
8.8%
|
$52,000
|
$290,000
|
|
REITs
|
6.1%
|
8.4%
|
$109,000
|
$258,000
|
I know a lot of investors won't want to believe it. But these results are clear. Following a simple trend beats simply owning the market over the long term.
Good investing,
Steve Sjuggerud
OBAMA! said he wants to guarantee preschool for all four-year-olds from families whose income totals 200% of the poverty line or less. For a family of four, that's $47,000 a year in income. For a single parent with two children, that's a $39,000 annual income.
We should stop having any government spending until the government balances the budget. I (Porter) am all in favor of helping single moms send their kids to preschool. I would even be willing to pay an extra tax to fund that… but I wouldn't demand any of my fellow citizens pay it… because it's none of our business.
We have to get out of the idea that the government is the best way to allocate capital or solve a problem. Again, I am all for supporting single mothers and getting their children an education. But this is an issue for local school boards. The public school system in this country is organized at the local level… so every system reflects that community's standards.