When Mr. Market gets too excited about a particular business, you can rest assured investors who join him are in for a bad time. Right now, Mr. Market has gone gaga for agriculture...
- The Agricultural Bank of China on August 12 became the largest initial public offering in history at $22.1 billion.
- Just days ago, Canada-based fertilizer group Agrium, offered $1 billion for AWB, an Australian grain trader.
- Potash Saskatchewan, the world's largest fertilizer company, today rejected a takeover offer of $39.1 billion from BHP Billiton.
Only investment bankers understand IPO pricing, which has nothing to do with the intrinsic value of the business. It's reasonable to expect the biggest IPO of all time would also be one of the most overpriced. As for consolidation in the fertilizer business... Extreme Value readers have heard me say a dozen times that corporate managers the world over destroy value through mergers and acquisitions far more often than they create it. So an acquisition binge is something akin to a shareholder value-destroying binge. Be careful out there.
I've got a much better idea on how to be a part of the agricultural sector: own a farm. In fact, my readers got the chance to be among the first investors in what is now becoming the largest farm in Canada (and soon, the world). It pays less for fertilizer, farm machines, and everything else than most farms in North America.
We're planning a conference call with the folks in charge of this special company, whom I had the pleasure of meeting in May. It's a part of our new Off the Record conference call service. To find out how you can get access to Off the Record in time to learn about the biggest farming opportunity currently available in the stock market, click here.
Canadians are not only making waves in agriculture, they're also roaring into the U.S. commercial real estate market. The stronger Canadian dollar buys more square feet of U.S. real estate than ever these days.
Yesterday, RioCan, the Canadian REIT, announced a $107 million deal to buy an 80% stake in five retail properties in Pennsylvania, New Jersey, and Virginia. The other 20% is owned by U.S.-based Cedar Shopping centers. RioCan also bought 15% of Cedar's equity.
After announcing the deal, the company's CEO, Edward Sonshine, said, "If you're a cash buyer, it's amazing. It just keeps coming at us." RioCan has been looking at the U.S. market for four years, but didn't get interested until last year. Unlike U.S. REITs, their Canadian cousins can raise equity with relative ease these days. Low interest rates make levering up for higher returns a better idea than ever, too.
RioCan nearly doubled its U.S. holdings in the deal, to 1.94 million square feet. It will more than double after a planned 894,000-square-foot acquisition.
Canada, in fact, has rebounded nicely from the financial crisis. It has filled as many jobs as it lost in 2008-2009. The U.S. is still millions of jobs short of that goal. The Canadians are doing what Komrade Obama is too righteous and clueless to do: lowering taxes, with the stated goal of incentivizing entrepreneurs and businesses. Canadian corporate taxes were 28%, are now 18%, and by 2012, will be down to 15%. According to the Wall Street Journal, the current U.S. federal corporate rate is 35%.
"We're from the government, and we're here to help." At least that's how it felt to me as I scanned the American Banker and National Mortgage News headlines this morning...
- "Fed Issues Loan Officer Compensation Rule"
- "Fed Issues Final Mortgage Transfer Notification Rule"
- "Geithner: Federal Mortgage Guarantee Still Needed"
- "Fed Issues Lending Rules to Shield Against Abuses"
It's a good thing the federal government is getting more involved in the mortgage market. Otherwise, we might lend too much money to people who can't pay it back... then sell those bad loans to levered investment entities... then place those entities in banks all over the world, putting the whole financial system in jeopardy...
Big hedge-fund managers are as skeptical as we are of the financial system. Billionaire hedge-fund manager John Paulsen's biggest position is still the SPDR Gold Trust (GLD). He owns 31.5 million shares. Erich Mindich's Eton Park, a London-based mega-hedge fund, bought 6.58 million shares of GLD and added to its Goldman position. And George Soros (forgive us!) has 13% of his fund in GLD.
Some of the best investors in the world are preparing their portfolios for massive inflation with gold. Another way to fight inflation: Buy World Dominating companies with pricing power. I've been saying that for a couple years, and now no fewer than five other S&A editors are saying it, too...
On the long side of things, if you're interested in getting your hands on a blue-chip dividend payer in our portfolio, make sure to pick up some shares of health care giant Johnson & Johnson (NYSE: JNJ). The stock is yielding nearly 3.5% (the most it has in a decade except for the depths of 2009) and is extremely cheap.
Looking at the price of the stock either in terms of its (1) book value, (2) EBITDA, or (3) cash flow, it's sitting within 20% of five-year lows. From such a depressed level, there's not much downside left. JNJ is a fantastic buy here if you don't already have it in your portfolio. We've moved JNJ to a "1" on our risk scale, indicating the least amount of risk. – Braden Copeland, August 2010, Stansberry's Investment Advisory
In the latest issue of Stansberry's Investment Advisory, co-editor Braden Copeland noted how attractive pharma behemoth Johnson & Johnson currently is. And he wasn't the only one who noticed. Warren Buffett is also buying. According to Berkshire Hathaway's latest filing, Buffett added 41.3 million shares of JNJ in the quarter, increasing his position by 73%. To access the latest issue of Stansberry's Investment Advisory – which also includes a fantastic new short trade – click here...
In addition to gold, Mr. Paulson and a few other famous investors (like Bruce Berkowitz) have found another way to benefit from the creation of more currency units: Buy the largest and most politically favored company in the business of moving and storing currency units. Paulson recently bought a brand new 1.1 million-share position in Goldman Sachs. Ironically, he probably bought shares on the dip he caused (Goldman's recent settlement with the SEC involved the bank's creation of a mortgage security for Paulson to short, which it then sold to other investors). The Goldman position is in addition to Paulson's huge positions in Bank of America, Citigroup, and other beaten-down financials.
Speaking of famous investors buying companies that ought to thrive despite inflation... Buffett also added to his position in the world's largest retailer, World Dominator Wal-Mart. The company today announced a 3.6% earnings increase to $3.59 billion. Revenue also jumped nearly 3% to $103.7 billion. Wal-Mart raised its earnings guidance for the full year based on its cost-cutting efforts and global growth in China, Brazil, and Mexico. I first told my readers about the rapid growth in Wal-Mart's international division a few years ago:
Wal-Mart's international sales were nonexistent in 1991, when it entered its first international market, Mexico. In 1991, 100% of Wal-Mart's stores were in the United States. Today, more than 40% of Wal-Mart's stores are outside the United States. Last month, Wal-Mart opened its 3,000th international location, in Sao Paolo, Brazil.
Today, Wal-Mart's international division does more than $77 billion in sales, a little over one-fifth of Wal-Mart's total sales. During the last seven years, Wal-Mart's international sales have grown at an average annual compounded rate of 27.4% per year. – Extreme Value, December 2007
Today, Wal-Mart's international division does more than $100 billion in sales, and it's still growing, as the recent quarterly results indicate. Wal-Mart is something of a "sleeper" emerging-market stock. I can hear the complaints coming in now, about how Wal-Mart's share price has gone sideways the last several years. I understand most know-nothing stock market gamblers obsess over share prices because they know nothing about the businesses they buy and sell. Not a good tradeoff. Real investors learn the details of the business. They don't obsess daily about the stock price.
Another World Dominating retailer is TJX Companies, owner of the No. 1 and No. 2 discount department store chains in the world (TJ Maxx and Marshall's). TJX's second-quarter profit soared 17%. Consumers have traded down from luxury goods at any price to luxury goods and knockoffs at discount prices. Americans are funny like that. No matter what happens in life, there's always something to buy. If they're running out of money, they don't stop spending. They just look for more two-for-one deals.
In the mailbag, subscribers taking our advice and forming their own strategies... tell us your experiences at feedback@stansberryresearch.com.
"I also used options on Porter's [Western Digital] short recommendation. I sold some out of the money September calls. I know that with volatility as low as it was I should be buying puts and not selling calls, but the idea of letting the premium evaporate in my favor, rather than working against, me is appealing.
"They dropped 50% in a few days, which was the exit point. A few days later, I noticed they had regained 50% of what they lost, so I sold them once again. And again sold when they had lost a bit more than 50%. Now, I'm now working on the third time around with some October calls. I did this sometime after I had actually shorted the stock, so I've still got that going.
"When Jeff said he was confident that Exxon had hit its bottom (Short Report), I looked and using what Porter taught me from his Put Strategy, I noticed I could pick up some cash lying in the corner, getting 16% in 5 weeks by shorting Exxon 50 puts. What's the worst thing that could happen? I'd be forced to buy World Dominator Exxon for only $50? Dan (and probably Tom and others) would probably say I should be so lucky!" – Paid-up subscriber H.E.
Ferris comment: You should be so lucky!
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
August 17, 2010