One of Porter's favorite stocks hits an all-time high... 'Time is the friend of a great business'... Steve Sjuggerud sees 200% gains for gold stocks... Why we're bearish on oil... An options debate...
In 2007, Porter recommended a stock he said "could easily become the best investment you make in your entire life."
In Stansberry's Investment Advisory, Porter devotes part of the model portfolio to "no-risk" stocks. Porter defines a no-risk stock as a company that generates enough cash flow to cover the payments on the bonds it would need to pay off its existing debts and buy back all its outstanding shares. Porter called his December 2007 recommendation "the best no-risk opportunity ever."
Longtime readers may recognize we're talking about Porter's recommendation of Hershey – one of the most recognizable and beloved companies in the world. Hershey has all the aspects of a great business... It treats shareholders well, it has a high return on equity, and it has a beloved brand (which allows it to increase prices to combat inflation). Here's what Porter wrote in his original recommendation...
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... notice how the dividend makes up a large percentage of profits – between 30% and 40% every year. This company has paid a dividend for 309 consecutive quarters – more than 77 years. It has raised its dividend every year since 1974. In almost every year, the company's dividends are larger than its capital expenditures – not including the share buybacks. This company rewards shareholders, not its managers... |
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This is the beauty of capital-efficient businesses: As sales and profits grow, capital investments don't. Thus, the amount of money that's available to return to shareholders not only grows in nominal dollars, it also grows as a percentage of sales... in 1999, dividends paid out equaled 3.4% of sales. But by 2006, the company spent $735 million on dividends and share buybacks, an amount equal to 14.8% of sales... |
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If sales accelerate, the rate of capital return will grow much faster than 15% per year. And if anything like that happens, this stock could easily become the best investment you make in your entire life... |
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There aren't many businesses that you can realistically expect to make you 20 times your money. There are even fewer businesses that you can expect to hold safely for 20 years. But in this case, you can. This company's leading product has remained totally unchanged for more than 100 years and is known throughout the world as a leading "luxury staple." |
Hershey hit an all-time high yesterday. Porter recommended it in December 2007 at $40.55 a share. Since then, readers are up 95%. That's a compound annual growth rate of 15%. And readers have already collected $5.80 in dividends (14% of their initial investment). Since owning the stock, Hershey has raised its dividend four times (from $0.298 to $0.38 per quarter).
In the future, Hershey will continue raising its dividend and buying more and more stock. While it's not sexy, buying companies like Hershey and holding for the long term is the surest way to get rich. Consider this bit from Warren Buffett's 2010 letter to Berkshire Hathaway shareholders (which we've quoted before). He discussed his Coca Cola position...
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Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke's annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business. |
Do everything you can to internalize this excerpt... Buffett finished building his Coke position in 1995. And by 2021 – 26 years after the buy date – he expects to make more than his initial investment every year. Time is the friend of a wonderful business, indeed.
In yesterday's DailyWealth, Steve Sjuggerud said he believes we're set for a rally in gold stocks...
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The last time gold stocks were this cheap, they soared 172% in eight months... |
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Today, by my favorite measure, gold stocks are record-cheap again... |
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They have only been this cheap once in the last decade – and that was in late 2008, when gold stocks (as measured by GDX, the main gold-stock fund) bottomed out at $17. |
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Just over two years later, shares of GDX reached $60 a share, for a phenomenal profit. |
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The stage is set for similar gains today... Take a look at the following chart. It shows the performance of gold versus gold stocks: |
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You can see how gold stocks crashed in the financial crisis in late 2008. That drove them to their biggest discount to the price of gold in the last 10 years – until now. |
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The astounding part today is, it is NOT late 2008. People are NOT selling all their investments like they were back then. Instead, investors today have simply given up on gold stocks. |
Billionaire hedge-fund manager John Paulson must have received the memo... Paulson is famous for making a fortune shorting the subprime mortgage market before it collapsed. He made another fortune going long financial stocks after the crash. Then, he turned his focus to gold, betting huge sovereign debts and weakening currencies would send the precious metal soaring. He also believes gold stocks are historically cheap.
In fact, he has an entire fund dedicated to gold... and it's down 23% this year. But Paulson is doubling down. He purchased an additional 4.5 million shares of SPDR Gold Trust (GLD). It's his firm's single largest position. He also bought more shares of the mining company NovaGold Resources, according to yesterday's filing with the Securities and Exchange Commission. Gold-related securities now make up 44% of the $21 billion in equity assets his firm, Paulson & Co., has under management.
And though it's a smaller position, Soros Fund Management – the hedge fund started by billionaire George Soros – doubled its position in GLD to 884,400 shares in the last quarter.
S&A Short Report editor Jeff Clark called for a rally in gold stocks earlier this month. We excerpted nearly his entire issue in the August 7 Digest. In short, Jeff agrees gold stocks are cheap. And several of his market indicators were flashing "buy."
Jeff recently recommended subscribers buy calls on one of the world's biggest gold miners. In only six trading days, Jeff's readers are up nearly 15% at the time of this writing. We expect that gain to get much larger... Jeff's track record in the precious metals space is incredible. Since May, S&A Short Report readers have made 100% in one week trading GDX, 95% in one week on Seabridge Gold, and 77% in less than a month on Gold Fields.
And his track record was amazing in 2011... He made 142% in seven days on the SPDR Gold Shares Fund, 100% in 22 days on Seabridge Gold, and 103% in 22 days on Gold Fields... Just to name a few. He also closed six other precious-metal trades for gains between 47% and 91%.
Jeff sent an update to S&A Short Report readers today saying he's looking for short-sale candidates in the oil sector. Last night in Jeff's Direct Line (his exclusive blog for S&A Short Report subscribers), he noted the stock charts and technical indicators for many oil companies are showing bearish patterns.
"Odds are the sector will make a swift short-term move lower and then bounce to set up an ideal shorting opportunity," he wrote.
Jeff said he may make a short recommendation as soon as tomorrow.
Jeff isn't the only expert on our staff who's bearish on oil... Porter believes the drilling work going on right now to tap the huge oil reserves in shale-rock formations – in places like North Dakota's Bakken shale and Texas' Eagle Ford – is going to create a huge glut in domestic crude supplies. It's the same thing that led to the current extreme lows in natural-gas prices.
And our natural resource expert, Matt Badiali, also says he's bearish on oil. A critical sentiment gauge – which he refers to as the "dumb money" – looks like it may soon reach an extreme level of bullishness. When that happens, a big downswing usually follows. Matt shared the details of what he's seeing in today's Growth Stock Wire.
New 52-week highs (as of 8/14/12): BlackRock Corporate High Yield Fund (HYV), Constellation Brands (STZ), Automatic Data Processing (ADP), Hershey (HSY), Sysco (SYY), Target (TGT), and Philip Morris International (PM).
One of our subscribers is angry we're trying to teach him about options... another thanks us for making him lots of money through selling options. Which side are you on? Let us know at feedback@stansberryresearch.com.
"I am soooo over options, calls, puts and all the other glitzy alternatives you seem to be pushing of late. You acknowledge that about 98% of your readers will never venture into these fields so please believe your own press and give us a break." – Paid-up subscriber Neil O.
Goldsmith comment: As Porter always says... We try to give subscribers the information we'd want if our roles were reversed. What you choose to do (or not do) with that information is up to you. But as J.M. attests (below), it's well-worth getting over your fear and inertia when it comes to trading options.
"As an Alliance member who reads all the publications and I can clearly say I have made the best investment gains in my life (I am 65) from the education material from Doc Eifrig and Jeff Clark. In Q3 2008 I lost about $450K in stocks because I did not follow the basic rule of Stop Loss Discipline (Steve Sjuggerud). This was almost one third of my investments.
"It took a long time to try anything again. After reading Porter's repeated recommendation to try naked puts and then checking out Doc's and Jeff's education material I made a small move into Options. This has been the best move of my investment life.
"In 2012 year to date I am playing with a small portion of my funds, less than $200K and have made more than $35k in Options, most of it from Puts. I am VERY cautious now at this point in my life because I am retired and don't have the means to replace any lost money quickly.
"At this rate we have a nice supplement to out retirement income and don't need to think about touching our base capital funds (WDDG's & Corp Bonds). I am in the Chris Weber and Doug Casey camp in that I believe it is better to keep a major portion of the money in bullion out of the reach of big brother. History is a clear teacher of what governments do to their fiat money systems.
"I have learned a lot from the Alliance team and am very happy with the results of my membership.
"In addition, I hope Porter's back has recovered and he is back to a normal life style." – Paid-up subscriber J.M.
Regards,
Sean Goldsmith
New York, New York
August 15, 2012