Wed, Apr 26, 2017|Justin Brill

New Highs for Porter's 'No Risk' Recommendation

Signs of the top... 'This time is different'... Is the next credit-market 'domino' about to fall?... New highs for Porter's 'no risk' recommendation...

**We begin today's Digest with signs of the top...**

To recap our thoughts on the market today... stocks are expensive. But we remain cautiously bullish for now.

Yes, large-cap U.S. stocks are now trading at higher levels than any other time in history, outside of the Internet bubble. But as Porter explained in the April 7 Digest, valuation alone is not a reason to get bearish...

The chart below shows you the ratio between the market value of these companies and their annual sales. This "price to sales" ratio is one of the best ways to measure the real value (or lack of value) in the stock market because there are ways to inflate other measures, like book value ratios and earnings...

One vital point to remember, however: just because stocks are extremely expensive compared with history doesn't mean they can't become more expensive. I don't advocate shorting individual stocks just because they're expensive in terms of their ratios. Nor do I advocate shorting markets merely because they're expensive relative to history. Valuation doesn't equal timing.

But we're also starting to see examples of the absurd beliefs that always accompany a top in the market...

History shows investors can come up with all kinds of convincing – but ultimately foolish – reasons why "this time is different."

For example, in the late '90s, everyone loved tech stocks. If you were an investor at the time, you may remember there were plenty of reasons these stocks weren't expensive and could only go higher. Back then, they said profits didn't matter in the "new economy." It was all about "clicks and eyeballs."

In the mid-2000s, everyone loved housing... And there were plenty of reasons to buy. "They aren't making any more land," they said. "And home prices never go down."

We were reminded of this while reading yesterday's Wall Street Journal. In an article titled "This Time Is Different: Two Reasons Not to Be Alarmed by the Nasdaq Record," the authors presented a simple argument...

The companies in the index collectively traded at 27.5 times their last 12 months of earnings, according to Thomson DataStream.

While that's the highest such reading for the multiple since 2004, it just barely eclipses levels seen in early 2010. And it's only a fraction of the peak of 72.2 seen in March 2000, when euphoria over tech stocks crested.

The current valuations, though high relative to much of the post-crisis economic recovery, suggest that the recent climb in share prices hasn't gotten out-of-whack with recent earnings. This time really is different. So far.

In other words, tech stocks aren't really that expensive, because they're still cheaper than they were at the peak of one of the biggest manias in history.

How's that for an investment thesis?

Is the next credit-market 'domino' about to fall?

Regular readers know we've also been warning about the looming problems in the credit markets.

In recent months, we've shown default rates for auto loans, student loans, and even high-yield "junk" corporate debt have been quietly ticking higher.

Today, we have new evidence that one of the riskiest corners of the credit markets is rolling over, too...

Last night, Capital One Financial (COF) – one of the country's largest credit-card lenders – reported first-quarter earnings. And they weren't good...

The firm reported a stunning 20% year-over-year decline in net income, far worse than analysts had predicted. And it said larger-than-expected credit-card losses were to blame. As the Journal reported yesterday...

The bank, often looked at by analysts as a gauge of consumers' ability to pay back their debts, reported that domestic credit-card net charge-offs reached 5.14% in the first quarter. [This] was up from 4.16% a year prior. The companywide provision for credit losses jumped 30% from a year earlier to $1.9 billion.

**This news should sound familiar to Stansberry's Investment Advisory subscribers...**

Porter and his team predicted this trend more than a year ago... And it is likely just getting started. As they explained in the December 2015 issue, where they warned about the rising risks to credit-card lenders for the first time...

Like the financers of subprime auto and student loans, Capital One's margins depend on low cost of capital and keeping loan losses to a minimum. If either one of these numbers rise significantly, profits can evaporate quickly. Our bet is that the company's credit-card loan losses are about to start rising...

Back in 2007, credit-card loan losses for Capital One totaled around $3.6 billion. In 2008, losses nearly doubled to $6.1 billion, wiping out the company's entire profits. The stock plunged from around $83 in 2007 to $8 a share by March 2009.

Capital One's credit-card loan losses reached 8% of its loan book in 2008. Today, its loan losses are half that at around 4% for credit-card loans... We expect they will head much higher. They could approach 10% of the company's loan-book value. When this happens, Capital One's profits will disappear... once again.

Unfortunately, Capital One's own management team still doesn't appear to understand the magnitude of these problems. More from the Journal (emphasis added)...

Chief Executive Richard Fairbank said the bank raised its outlook for full-year, domestic card charge-off rates to the high end of a 4%-to-around 5% range. That was up from the bank's prior expectation of the mid-4% range. Mr. Fairbank said this revision is "based on portfolio dynamics and industry conditions [the bank] observed in the first quarter."

"Against this backdrop, we have been tightening our underwriting," he added. "We still see growth opportunities in our domestic card business, but our growth window is gradually getting smaller."

In other earnings news, fast-food giant McDonald's (MCD) reported a stellar quarter on Tuesday...

The Stansberry's Investment Advisory holding reported revenue of $5.7 billion and earnings of $1.47 per share. Analysts had expected just $5.5 billion and $1.33 per share.

The company reported U.S. same-store sales grew 1.7%, compared with an expected decline of 0.8%. And it said global sales at stores open for at least one year jumped 4%, compared with expectations of just 1.3%.

In other words, despite an industry-wide slowdown in restaurant visits, McDonald's is growing again.

Porter and his team originally recommended shares in 2012...

But three years later – in early 2015 – McDonald's shares had become incredibly cheap again. So Porter did something he had never done before: He re-recommended McDonald's to all Digest readers, calling it the closest thing to a "no risk" investment they'll find in the markets. As he wrote in the April 10, 2015 Digest...

So far, investors who bought McDonald's way back in 2006 – just before the worst financial Armageddon of our lifetimes – have already made nearly 200% on their money. I'm confident that based on its current share price, similar (or even superior) returns are currently available to any investor wise enough and patient enough to buy the stock today.

There's essentially no risk to this investment at this price given McDonald's brand, locations, price point, margins, and capital efficiency. So... if you're looking to protect your wealth during a financial crisis (you should be), look no further than the oldest recommendations still sitting in our Top 10 list... These types of companies are a great way to get rich, no matter what happens to the economy or to the stock market.

As Porter discussed at that time, McDonald's had suffered under poor leadership for years. Earnings had gone nowhere since 2011. But it had recently hired a new CEO – Steve Easterbrook – who promised to return the company to growth. More from that Digest...

Incredibly, over the last three years (all of which came during the previous CEO's reign), McDonald's was able to return more than $15 billion to its investors via dividends and share buybacks... without growing. Even at this reduced pace, McDonald's shareholders will receive capital returns (via dividends and buybacks) equal to the entire value of the company today in about 17 years...

Of course, it won't actually take that long. The new management team will reboot the company's franchise. Perhaps it will buy growing burger chain Shake Shack, similar to its previous stake in burrito chain Chipotle. Or maybe it will create some new product or promotion that takes off. Brands like McDonald's don't just go away. They come back. There's a big growth spurt at least once a decade. And when that happens, these cash distributions will soar.

That's exactly what has happened so far...

Easterbrook's initiatives – like all-day breakfast and new sizes of the iconic Big Mac – have helped the company increase sales while other restaurants are struggling.

Shares jumped to a new all-time high above $140 on the news.

Digest readers who took Porter's advice are up more than 60% in about two years... And they're already collecting an annual "yield on cost" of more than 4% and growing.

If You've Ever Wanted to Make a Living Reading, Writing, and Thinking, We Want to Hear From You

Stansberry Research is hiring an assistant editor for the Stansberry Digest. We're looking for someone with an eye for quality content and a passion for finance.

This is an opportunity to communicate daily with one of the biggest lists of financial readers in the world. And you'll work closely with Digest editors Porter Stansberry and Justin Brill.

The ideal candidate lives and breathes the world's markets, is a voracious consumer of financial news and analysis, and can think and write clearly. Formal experience is preferred but may not matter, depending on the candidate.

Please note: We're located in Baltimore, Maryland. The position will be full-time and on-site. If you're not hardworking and curious, don't apply. If you don't love finance and investing, don't apply.

If you're interested, please send us an e-mail at digesteditor@stansberryresearch.com. The subject line should read, "I'd like to join the Digest team." In the e-mail, please include...

1. A basic resume. Tell us what you've done before. We admire people who aren't afraid of hard work or odd jobs.

2. A writing sample. Tell us about an investment opportunity you like today. We're interested in the fundamentals of your best idea, not something that's based solely on charts. Macro ideas are welcome.

3. Answers to the following questions:

What is McDonald's ticker, market cap, and average trading volume? (Please also include a definition of each term.)

What was the best-performing individual stock and stock market of 2016? What did they each return?

How many years has Coca-Cola consecutively raised its dividend?

No other information is necessary. If someone you know would be a great addition to the Digest team, please feel free to forward this posting.

New 52-week highs (as of 4/25/17): Tencent Holdings (0700.HK), American Financial (AFG), Aflac (AFL), AMETEK (AME), Allianz (AZSEY), Alibaba (BABA), iShares MSCI BRIC Fund (BKF), Cheesecake Factory (CAKE), Quest Diagnostics (DGX), iShares MSCI Italy Capped Fund (EWI), Facebook (FB), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), Alphabet (GOOGL), PureFunds ISE Mobile Payments Fund (IPAY), JD.com (JD), Nuveen Preferred Securities Income Fund (JPS), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), 3M (MMM), Monsanto (MON), Microsoft (MSFT), AllianzGI Equity & Convertible Income Fund (NIE), Naspers (NPSNY), PowerShares S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), iShares MSCI India Small-Cap Fund (SMIN), Sanofi (SNY), Tencent Holdings (TCEHY), and Verisign (VRSN).

A quiet day in the mailbag. Send your questions, comments, and concerns to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail.

Regards,

Justin Brill
Baltimore, Maryland
April 26, 2017