Our annual Report Card, Part I...

Huge numbers from Doc's favorite bank stock...

The housing sector is rebounding and business for Wells Fargo – the nation's biggest mortgage lender – is booming… So why have investors shunned the stock? In today's Digest Premium, we discuss what's warding them off… and why they're wrong.

To subscribe to Digest Premium and access today's analysis, click here.

Our annual Report Card, Part I... The simple, two-part test we give all our products... The good news… Last year's turkey...

Today is one of my favorite days of the year...

I get to share with our readers an evidence-based evaluation of our products. As far as I know, I continue to be the only newsletter publisher who personally reviews all the recommendations his company made over the previous year... and then assigns a grade to the performance of each analyst.

I have been writing these "Report Cards" annually since 2006. And I continue to invite my peers in the financial newsletter industry to adopt a similar standard for their own businesses. (But I'm not holding my breath...)

Before we get to the numbers, let me share two thoughts with you.

First, we produce these Report Cards because we're dedicated to helping you become a better investor. Recognizing our mistakes is the only way to better ourselves. And unless we constantly improve, we can't serve you very well.

Second, my long-term goal is to make Stansberry Research the most trusted and respected brand name in financial research. The easiest way to earn your trust and respect is to deserve it.

Since I founded this company in 1999, I've tried to deserve your trust and respect by applying a simple two-part test to all our products and to the people who stand behind them. It's just two simple "yes or no" questions.

Question one is: Would I want my own family members to read these products and to follow these strategies? If it's not good enough for my family, it's not good enough for our customers.

Question two is: Can I personally stand behind the advice we're offering? Do I really believe the analyst we have in place is doing a great job? Do I have confidence in his work? Is it useful, accurate, and safe for investors to follow?

The annual Report Card is how I go about answering these two critical questions for myself. If you use our products for long, sooner or later, you'll ask yourself the same kinds of questions.

Is this product and this strategy right for me? Do I have confidence in this analyst and in his work? Do I trust the strategy enough to follow it with my own money?

We encourage you to examine all of our products and analysts critically. You can be sure that I will... And if they don't pass muster, they will be replaced. That's my promise to you.

So... how did we do in 2012? Let's start with our investment newsletters. (Next week, we'll repeat this procedure with our trading services.)

Our investment newsletters are almost all monthly publications that offer medium- to long-term investments and income strategies.

We publish nine such products:

Overall, we did very well.

These publications, as a group, made a total of 132 recommendations last year. Just over 66% (88) of these recommendations were profitable during 2012. The average return of all these recommendations was 4.9%, during an average holding period of 143 days. That gives us an annualized return of 12.6%, compared to the S&P 500's 2012 return of 16%.

These numbers make it look like we underperformed the stock market, on average. But the numbers are deceiving.

We use a plain, old-fashioned, simple average to measure our performance. However, it's not reasonable to compare a simple average return to the stock market, because the stock market was fully invested all year. Our picks, meanwhile, were made throughout the year. On average, then, we were only invested for 143 days, a good bit less than half the year.

To compare our results to the stock market's average return, we annualize our results, which gives you an idea of how our picks would have performed if we had been fully invested all year. This is only a simulated number, of course.

The better, more accurate comparison comes from measuring the weighted S&P 500 return, which shows what you would have made if you'd invested in the S&P 500 index on the same dates, and in the same amounts, as in our recommendations. This analysis gives you the weighted S&P 500 return of 2.2%.

Thus, on an apples-to-apples basis, we beat the S&P 500 handily.

But... there were significant differences in the performances of our analysts and our products. Here is the data and the grade I've given each newsletter product for 2012.

I hope two performances jump out at you – one incredibly good (Jeff Clark's "A++") and one incredibly bad (my own "F").

Let's discuss the good news first.

Jeff Clark's Advanced Income follows a covered-call/put-selling strategy. It's designed to provide income and capital appreciation. A typical trade for Jeff last year was buying blue-chip casino operator MGM in August for just under $10 and then immediately selling a $10 call against his position, picking up $0.95 in call premium. His effective entry price (the cost of the stock minus the premium he collected) was just $8.82. The stock was "called away" in December, generating a profit of more than 13% in less than half a year.

It's important to realize that in many cases with these trades, you could have earned more by simply buying the stock outright. By December, MGM was trading around $11.50. Investors could have made slightly more by not selling the option.

But... Jeff's trades are very profitable and his winning percentage is outrageous – 85% winners. That's because if the stock remains flat or even declines a little, selling the call can still make the position profitable. Giving up some of the upside allows him to greatly increase his odds of making a profit on each trade. And by trading frequently (he made 20 recommendations with an average holding period of 131 days), he can overcome the disadvantage of giving away some of his upside.

His average return on each recommendation was over 20%... producing an annualized return of 57%.

Jeff's performance last year was one of the best in the history of our company. He matched the power of a conservative strategy with outstanding analysis. The results should cause every subscriber to seriously consider adopting this approach with their own portfolio, especially since we believe the market conditions in 2013 will be similar to those we saw last year.

Now... let's look at last year's turkey.

Last year, I personally made several very costly investment mistakes. I let my readers down...

First, I recommended three of the new U.S. oil producers (EOG Resources, Chesapeake Energy, and Swift Energy), even though I believed the price of oil would fall. I made the classic mistake of believing that increases to production would overcome a falling oil price. Out of all the investment mistakes I've ever made, this one hurts the most... because I should have known better. We stopped out of all three positions, taking big losses on two of them.

Let my track record in 2012 convince you of a very important financial truth: increases to the production of a commodity will almost never overcome the falling price of that commodity for any producer.

We did turn things around in the portfolio in the second half of the year by focusing on the companies that were likeliest to profit from cheaper oil and natural gas liquids and the big increases in production. My subscribers made big gains in Cheniere Energy (27%), Chicago Bridge & Iron (29%) and our latest, Targa (9%).

We also did well with two of our other core themes, trophy asset investing (MGM, up 19%) and our tech-centric "sensory masters" (Ericsson, up 16%).

In truth, we could have overcome our stumble in the oil patch... if we didn't pair that intellectual error with simple bad luck.

Last April, we grew convinced real estate prices had finally turned the corner and would continue to increase. We knew this would greatly benefit big banks, like Bank of America, Citigroup, and the Royal Bank of Scotland.

These bank stocks have soared since our report was published. Sadly, they all declined by about 25% first, with the decline starting just as we published. The result? We stopped out of all three recommendations on just about the last day of their decline... and we didn't participate, at all, in the big rally.

I can't recall anything more frustrating in my entire career. But that's how it happens sometimes. The key is... if you're fundamentally right, more often than not the timing will fall into place. It just didn't this time.

I might have given myself a gentleman's "C" for the year, as we didn't actually suffer any significant loss overall (less than 2%). However, I'm so mad at myself for buying into a commodity sector when I knew the price of oil was surely going to decline that I'm giving myself a failing grade.

With my own notable exception, everyone's performance last year was either good... or great.

A few things you should note...

First, Dr. David "Doc" Eifrig has continued his unbelievable streak of mind-blowing investment performance. Last year, he picked nine stocks in Retirement Millionaire... and made money on all but one of them.

Doc has consistently been the highest-performing analyst we employ. I believe his track record of producing double-digit annualized gains with a 90% win rate – year after year – is unmatched by any other newsletter writer in the world today.

Likewise, last year saw yet another iconic performance from Dan Ferris in Extreme Value. As the market has gone up, the supply of stocks qualifying as "extreme values" has narrowed, substantially. As a result, Dan only picked three stocks last year.

This extreme selectiveness might be considered very risky. But to high-quality value investors like Dan, diversification only dilutes the best opportunities he finds. By concentrating his portfolio last year, Dan was able to produce a very high average and annualized return. While officially Dan's win rate was "only" 67%, the truth is his only "losing" position – IBM – is merely down 2%, a fact that's irrelevant to his investment thesis.

If you've been wondering why people would pay so much for a newsletter, just look at Dan's incredible ability in Extreme Value to pick very safe stocks that generate outstanding performance.

Dan pulls double-duty for us, too. In addition to Extreme Value, he also writes The 12% Letter.

The goals and strategies of the two letters are very different. Extreme Value seeks to maximize total returns, with the lowest possible risk, by investing for the long term in deeply undervalued and misunderstood businesses. The 12% Letter's goal is simply to maximize income generated from high-quality companies.

Dan says about his investing and about the differences between his two letters:

Having watched Dan develop as an analyst over many years, I was particularly impressed with a few of the specific calls he made this year, guiding his subscribers to stick with his best ideas, even during pullbacks.

For example, a deal to acquire one of his longtime recommended stocks, Prestige Brands, fell through. Dan told his subscribers that would probably happen, that the stock would fall as a result... and that it didn't change anything. He told me…

Another valuable trait I've seen Dan develop is to remain completely independent in his views. That's incredibly valuable for our readers. No matter what the market thinks about a company, Dan sticks with the facts as he sees them. The divergence between what the market thinks... and what Dan believes... is the key to making big, safe profits.

A great example is his longtime recommendation of Constellation Brands.

Dan isn't our only great stock-picker.

While it's possible to make a lot of money in small-cap stocks... it's not easy. Not at all. Luckily, we were able to recruit Frank Curzio, who used to pick small-cap stocks for Jim Cramer. He's spent his life understanding how to make money in this lucrative, but challenging, sector. Today, he writes Small Stock Specialist for Stansberry Research.

Curzio passed along this insight into his success with small caps:

Most subscribers don't know this... but I've been friends with Dr. Steve Sjuggerud since the mid-1980s. I've known him for all my adult life. We've worked together, in one capacity or another, since 1996. And even before we were professional colleagues, Steve was a mentor to me in academics and athletics. Unlike yours truly, Steve is a world-class waterman, excelling at surfing, windsurfing, kite surfing, and stand-up paddleboarding. Basically... if it floats, Steve can ride it across the ocean.

Steve is a tremendously experienced investor, with a background as both a mutual-fund manager and a hedge-fund manager. I don't believe there's anyone better than Steve in the world for safe, top-down, investing. Steve is great at finding big trends and making excellent profits for his readers. And he's done it consistently, year after year, for more than 15 years.

Last year was typical for "Sjug" as we call him (pronounced like the first syllable of "sugar.")

He picked 12 out of 15 winners (80%), including five different double-digit winning positions, led by his hyper-bullish call on the biotech sector (up 21%).

Of course, when I spoke to Steve about the year, he was more concerned with one of the most significant losses he took last year – on shares of Argentinian land baron Cresud.

Finally... I'll wrap up Part I of our Report Card with two newsletters that faced very significant challenges last year – the S&A Resource Report and True Income.

The S&A Resource Report, as I'm sure you can judge by the title, is focused on commodity producers. As a result, the performance of this letter will be inherently cyclical. When commodities have a good year (like they did in 2009, for example) our analyst, Matt Badiali, has a pretty easy job. It's inevitable that his picks will soar. (His average return in 2009 was over 50%.) But... when oil prices fall, when silver prices fall, when gold prices are basically stagnant... and the value of the dollar is rising (as it did last year)... it's extremely difficult to do very well. And last year, Matt didn't.

The thing I hope you'll understand and remember is, in a bad year for commodities, Matt's primary job is to prevent you from losing money. Believe me, last year, most investors in commodities got killed. But not Matt's readers. He kept the losses extremely small... essentially breakeven. And when the bull returns to commodity prices, as we know it must because of the actions of the Federal Reserve, there's no doubt that his recommended portfolio will trounce the others at S&A.

My advice to you is to follow his letter... and to keep some exposure to commodities.

That way, you'll know what to buy when it's time to "back up the truck" on resource stocks. There's no panic quite like a resource panic. Remember the fall of 2008? In October, my friend and legendary resource speculator Doug Casey told me his portfolio looked like "a medieval battlefield at dusk." That's the time to buy.

When it comes to resource stocks, you're either a contrarian or a victim. Don't be a victim.

Matt can help you, by constantly showing you where the markets have gotten overbought or oversold. Even last year, there were plenty of opportunities. Matt explained the best opportunity was silver:

The difficulty in True Income for our analyst Stephen Smart is that the Fed has manipulated interest rates so low that it's forced billions and billions of dollars to flow out of safe mortgage and Treasury bonds into the high-yield market where we prefer to buy bonds at a discount to par. The result is... high-yield bonds are trading at their lowest yields in history and almost all of them are actually trading at a premium to par.

Stephen told me his best idea last year was buying AIG bonds at $120 (par is $100).

I want to applaud Stephen (and Doc Eifrig, who pitched in on the letter prior to Stephen's arrival at our company) for doing an outstanding job in a very tough market.

But... I also want to warn our subscribers that buying high-yield bonds when they are trading at a premium to par is risky... and usually ends badly. Look at the average return at True Income this year – it's only 3%. That's not because our analysts did a bad job. They were right about 80% of the time. You can't do better than that, at least not consistently. The point is, there's so little yield available right now in bonds that this letter's core strategy is essentially unavailable.

I'm sure Stephen can find other ways to generate yield – like recommending preferred stock or convertible bonds. And I'm sure he'll continue to do a great job – bonds are literally his life. He's been trading them for more than 25 years.

But... as with resource stocks... the big returns in fixed income are only available during periods of crisis. And those conditions simply do not exist, at the moment, in the corporate bond market.

Next week, we'll finish up this year's Report Card with Part II, our analysis of Stansberry Research's trading products.

Also, please let us know how you did with our products last year. What grades would you assign the analysts you follow? What did we get right? What did we get wrong? We appreciate your notes and depend on you to help guide our decisions in developing new products.

Send your comments here: feedback@stansberryresearch.com.

New 52-week highs (as of 1/10/13): American Financial Group (AFG), Becton-Dickinson (BDX), Berkshire Hathaway (BRK), Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), Blackstone Group (BX), Chicago Bridge & Iron (CBI), Consolidated Tomoka (CTO), CVS Caremark (CVS), Emerson Electric (EMR), iShares Italy Fund (EWI), GenMark (GNMK), Hershey (HSY), iShares iBoxx High Yield Corporate Bond Fund (HYG), iShares Dow Jones U.S. Insurance Fund (IAK), SPDR International Health Care Fund (IRY), SPDR Barclays High Yield Bond Fund (JNK), KKR (KKR), Cheniere Energy (LNG), 3M (MMM), Magellan Midstream Partners (MMP), PowerShares BuyBack Fund (PKW), ProShares Ultra Health Care Fund (RXL), Southern Copper (SCCO), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Guggenheim China Real Estate Fund (TAO), Targa Resources (TRGP), Travelers (TRV), Union Pacific (UNP), and Walgreens (WAG).

Regards,

Retirement Millionaire editor Dr. David "Doc" Eifrig is bullish on banks... And his favorite bank stock is California-based Wells Fargo.

Wells Fargo is one of the few big banks that still makes the bulk of its money by issuing consumer loans and writing mortgages... It's the largest mortgage lender in the country.

And the bank announced blockbuster earnings today... Wells Fargo earned $5.1 billion in the fourth quarter of 2012, up 24% from a year ago, driven by its mortgage lending. This is the 12th quarter in a row the bank has increased earnings.

Revenue increased 7% to $21.95 billion.

Wells Fargo earned $3.1 billion in fees from mortgages (up from $2.4 billion a year ago) as homeowners rushed to refinance mortgages at low rates. The bank issued $125 billion in mortgages for the quarter, down from $139 billion in the previous quarter.

The bank also lowered its provision for loan losses to $1.8 billion from around $2 billion a year ago. This is a sign that credit quality is improving.

Despite its huge earnings, which beat analysts' expectations, the stock is down today. Why?

Banks, of course, make money borrowing at a low rate and lending at a higher rate. The difference between those two rates, the net interest margin, is the bank's profit.

And right now, due to the Federal Reserve pushing interest rates down across the board, net interest margins are shrinking. (It's the same phenomenon we discussed in our analysis of "virtual banks," like Annaly Capital Management and Hatteras Financial.)

Wells Fargo's net interest margin in the fourth quarter was 3.6%, down from 3.9% a year ago. Analysts wanted 3.7%.

But we're still bullish on Wells' prospects... The bank is earning more money than ever. Its credit quality is improving. And it's lending more. (Wells made total loans of $799.6 billion in the quarter, up $16.9 billion from the previous quarter.)

Net interest won't compress much more, if at all, for the next few years. And as long-term interest rates start creeping up (which is inevitable), Wells will be well-positioned to make huge profits.

Plus, the bank pays a 2.5% dividend, well above the 10-year Treasury's 1.9% yield.

Now is a great time to invest in banks (as we discussed in the January 3 Digest Premium). And the world's greatest investor agrees... In a recent interview with Bloomberg, superinvestor Warren Buffett discussed his views of the banking sector...

"The capital ratios are huge, the excesses on the asset side have been largely cleared out," Buffett said. "Our banking system is in the best shape in recent memory."

Huge numbers from Doc's favorite bank stock...

The housing sector is rebounding and business for Wells Fargo – the nation's biggest mortgage lender – is booming… So why have investors shunned the stock? In today's Digest Premium, we discuss what's warding them off… and why they're wrong.

To continue reading, scroll down or click here.

Huge numbers from Doc's favorite bank stock...