Editor's note: Today's Digest will be brief. Porter was supposed to write it, but he's busy making last-minute changes to his latest issue of Stansberry's Investment Advisory. We will publish his issue today as scheduled.
Porter and I drove to the "rough" part of town today to try Baltimore Magazine's newly awarded "best crab cake in Baltimore." If you've ever visited Baltimore, you know we take our crab cakes seriously. The winner, Faidley Seafood, is located in Baltimore's historic Lexington Market. The crab cakes (and the dozen raw oysters) were excellent. Porter and I agreed, they are Baltimore’s best.
But the stock idea Porter shared with me in the car – the topic of his latest issue – was even better. Porter's theme this year has been shorting stocks. He's hedging every long recommendation with a short... preparing for the inevitable downfall. And his track record is incredible. He's up huge on his short of hard-drive manufacturers, Seagate and Western Digital (both of which hit 52-week lows yesterday). He nailed Barnes & Noble. Readers are still up more than 20% despite the rumored takeover. He's also up big on his short sale of USAToday publisher Gannett.
But I think his latest short will best them all. It's as close to a "sure thing" as you can get. I can't give away too many details, but this company is essentially a luxury toymaker. Its products are 100% discretionary... And no one is buying them anymore. Plus, the stock recently had a massive rally... from less than $3 in the midst of the crisis to the mid-teens today. If I told you what this company does, you'd laugh. Then, you'd rush to your computer to short as many shares as you could.
I think Porter's long recommendation this month will also prove a huge winner. The sector this company operates in has been blown out. It's trading at super-depressed levels – half of book value. You could double your money if this company simply liquidated its assets. But we think you'll make way more as this sector starts recovering. Buying today is basically a free call option on the sector's recovery. The last time Porter recommended a stock like this was in his September 2009 issue. He recommended buying onshore driller Bronco Drilling, which was trading for less than one-third of net asset value...
This isn't a tough stock to analyze. Bronco owns more than $400 million of oil-and-gas drilling equipment. It has $72 million in current assets (cash and like-cash investments). It has another $80 million in long-term investments. Altogether, Bronco controls about $550 million in high-quality assets, almost all of which could be readily sold. Meanwhile, the company has total liabilities of only $200 million, or a net asset value of around $350 million. But its market cap (the total value of all its shares outstanding) is a little more than $100 million.
In theory, you could buy all of these shares, liquidate the company's assets, pay off its debts, and still earn about 200% on your money. – Porter Stansberry, September 2009 Stansberry's Investment Advisory
Porter's readers made more than 30% in two months on Bronco Drilling. According to efficient-market theorists (aka MBA professors across the globe) situations like this don't exist. You should never be able to buy a stock for one-third its true value. Well, as we saw with Bronco, these situations do exist... Though they don't come around too often. When they do, that's the time to back up the truck. To sign up for Stansberry's Investment Advisory and access Porter's two latest recommendations, click here...
To follow up on Dan's housing commentary yesterday, infrastructure stocks are also getting crushed. Nobody is building anything. Vulcan Materials, the largest U.S. producer of construction aggregate, is trading at a 52-week low. Cemex, the world's third-largest cement producer, is trading at a 52-week low. Martin Marietta, the second-largest U.S. producer of construction aggregate, is trading at a 52-week low. If you're in the construction industry, and you're seeing this lack of demand firsthand, we'd love to hear from you... feedback@stansberryresearch.com.
Kudos again to Jeff Clark... Even after Germany announced strong GDP numbers, the euro still fell to less than $1.28 today. The market is waking up to the fact that the euro is doomed... The currency has fallen from $1.33 to $1.28 this week. Jeff's short euro trade is up for the third day in a row... His readers are up between 85% and 100% since Tuesday. If you haven't already taken advantage of Jeff's Short Report, you really should. It's the best way to make huge, quick gains in this choppy market. Click here to learn more.
New highs: Keyera Facilities Income Trust (KEY-UN.TO), Seagate (STX), Western Digital (WDC).
In the mailbag... a mortgage lender actually lending responsibly. Imagine that... feedback@stansberryresearch.com.
"My wife and I both bought a pair of Skechers. They don't cure cancer, world hunger, etc like the tag suggests, but I was impressed nonetheless. Definitely have strengthened my ankles and put the taper back in my lower legs. All I could ask for as a 52 yr old. As an investment? I'll leave it to you guys.
"We also just refinanced our home. Two huge changes since the last one in 2004. First, no more drive-by appraisals. Someone is coming by to walk through the house this time. Shocking – for only $125 more, you get a real appraisal. Also, we had to provide copies of our drivers licenses and sign a form allowing access to our tax returns for verification of income. Barney Frank would have a cow! Oh, that's right – we actually work for a living. He doesn't care about us. If you qualify, we locked at 4.5% and no pts. We're down to 4.375% (and dropping?) with three wks left." – Paid-up subscriber LK
"I know you can't give individual advice. This is just in general. You have several stocks recommended as 'sell short. ' I don't want to do that because I don't want to pay the dividends. So isn't buying well out of the money puts sort of the same thing? And, if that is true, why not put that in the newsletters, too?" – Paid-up subscriber Bruce Bannon
Goldsmith comment: Buying out-of-the-money puts and selling a stock short are only similar in that they are both a bet that the stock in question will fall. The price you pay for the option already reflects the dividend.
Now for the differences... Buying options is much more volatile than stocks. You can quickly and easily lose 100% of your money if you don't know what you're doing. On the other hand – as Jeff Clark has recently demonstrated – options also allow for massive upside potential if used properly. People often say that your losses are "unlimited" if you short a stock because the stock technically could rally to infinity. If you're a conservative investor who uses stops, you don't have to worry about "unlimited" losses.
For the majority of our readers, shorting a stock is the best way to profit from the stock's demise. But if you're shorting stocks that pay healthy dividends, you may want to reconsider since it's often the sign of a healthy company. As hedge-fund manager Carlo Cannell told me in Los Angeles a few years ago, "I like to look for a company that's already dying on the side of the road... Where all I have to do is give it a kick to finish it off."
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Regards,
Sean Goldsmith
Baltimore, Maryland
August 13, 2010