Mon, Feb 2, 2015|Sean Goldsmith

Still more reasons to be bullish on gold...

Still more reasons to be bullish on gold... Three assets to own to protect yourself from currency wars... What McDonald's can do to improve its business... The types of gold stocks you should own...

More and more editors are seeing big opportunities in gold...

The title of Jeff Clark's latest Stansberry Short Report, published this morning, was simply "Buy Gold Now." He told readers "gold just flashed a major buy signal." In the issue, Jeff told subscribers, "This is the first long-term buy signal for the precious metal since 2009. And it could lead to terrific gains for gold bugs over the next year."

The blue circle marks times when Jeff's "buy" indicator is flashing. As you can see, the last time this indicator flashed in 2009, the gold price soared from about $1,000 an ounce to its highs near $1,900.

The global collapse in currencies happening today (what Porter has called "a 100-year storm hitting the world's currency markets") makes the macro case for owning gold today stronger than it has ever been.

And despite the volatility in the currency markets, gold has held steady in price (and soared versus these falling currencies). Porter wrote in Friday's Digest:

Gold is an economic constant. For thousands of years, an ounce of gold has purchased the equivalent of a fine men's suit. It still does.

Gold's real value doesn't change because all of the gold that has ever been mined is still in existence. Additional mining barely increases the total supply of gold. That's what makes gold such a unique form of money: Its value never changes.

What's changing is the value of these paper currencies. They're being massively debased. And the stunning falls of the currencies I mention above are warning shots. Our dollar will soon follow. For paper money, the race to zero has begun.

DailyWealth Trader editors Brian Hunt and Ben Morris echoed the sentiment in today's issue...

So why is gold holding steady now, while the U.S. dollar is soaring?

There's a special factor supporting the gold price today. Currencies all over the world are plummeting in value. In a desperate bid to stimulate their economies, the central banks of Europe and Japan are rapidly devaluing their currencies...

This decline in global paper currencies is so big... so severe... and so broad... it has overwhelmed the traditional tendency for gold to decline when the dollar rallies.

People are fleeing paper currencies and buying gold. They see the metal as a safe haven. It is the only currency that is not someone else's liability. It is a store of purchasing power that can't be printed at will. This has allowed gold to hold steady in the face of the dollar rally. It is holding steady when it isn't "supposed to." And when an asset refuses to fall when it's supposed to, it's a very bullish sign.

The metal also experienced bullish price action last week...

Gold fell 1.4% on Thursday after fears the Federal Reserve could raise interest rates. Remember, dismal interest rates around the world are one of the reasons we like gold today. When global sovereign bonds yield essentially nothing (and in some cases, sport negative yields), it makes gold – which also yields nothing – more attractive.

Gold sank again early Friday. But in a huge reversal, it ended the day up 1.9% at $1,278.50 an ounce... It closed January up 6.8% – the biggest monthly gain since July 2013.

In addition to owning physical gold in your portfolio to hedge against a global currency collapse, Porter also recommends owning a special type of company... one that can easily raise prices to keep pace with inflation and whose greatest assets are intangible.

These are what Porter calls "capital efficient" companies. They don't have to invest much capital in maintaining their business, so they're able to return lots of capital to shareholders.

Fast-food giant McDonald's (MCD) is one of those companies. And today you can pick up shares "on sale." We explained why we're bullish on McDonald's in the January 29 Digest.

Today, Extreme Value editor Dan Ferris shares his thoughts on McDonald's valuation... And why one corporate shift could cause the company's valuation to soar...

McDonald's is by far the most profitable restaurant company in the world, and one of the most productive uses ever for a McDonald's-sized piece of land. As I recall from hedge-fund manager Bill Ackman's old MCD presentation, the company gets paid a 4% system-wide royalty and maybe another 9% on the real estate. It's the fattest royalty in the world, and it'll keep getting fatter as more stores go up, and more are refranchised...

McDonald's has 36,000 restaurants worldwide. It has 6,700 company-owned restaurants, close enough to call it an 80/20 split. It intends to "refranchise" 1,500 restaurants by the end of next year.

I hope 1,500 is only the beginning. Because I have to wonder how many of these company stores it really needs. They're supposed to be for maintaining brand standards and product development. Couldn't they locate several hundred such restaurants around the world to provide these functions?

Even if MCD refranchised 80% of its 6,700 company stores, that's still 1,300 company stores. Dan says it can still do better...

Think about the company stores' function: Maintaining brand standards? OK, sure. Product development? Um, where'd the Big Mac come from? Jim Delligati, one of Ray Kroc's early franchisees around Philly. Where'd the Egg McMuffin come from? Herb Peterson, a franchisee.

Here's the big unasked, unanswered question... What new blockbuster products aren't being developed by MCD restaurants that haven't been refranchised yet? And remember, most of the new refranchising is in big, fast-growing markets like Asia.

McDonald's is about giving people what they want, so of course, the entrepreneurs on the front lines, who depend on the store for their livelihoods, will be in close touch with those trends. So I say speed up the refranchising and get more restaurants out of corporate's hands and into franchisee's hands, pronto.

The question remains, what is McDonald's business actually worth? From Dan...

What would a guy like billionaire activist investor Nelson Peltz or maybe Jorge Lemann (founder of Brazilian private-equity firm 3G, which owns Heinz and Burger King) pay to get and KEEP control of it? Probably more than the 18 times earnings or 10 times earnings before interest, taxes, amortization, and depreciation (EBITDA), where it's been trading recently.

Also, the more stores they refranchise, the more the intrinsic value rises to that of a pure franchising operation. Ackman compared MCD to Choice Hotels (CHH), PepsiCo (PEP), and Coca-Cola (KO) in his 2005 presentation. Those three companies trade between 20 and 27 times earnings today. McDonald's should trade at the mid to high end of the range.

Dan outlines yet another reason for McDonald's to refranchise its company stores... The franchise stores are far more profitable...

Leaving selling, general, and administrative (SG&A) expenses out of the equation, McDonald's company store operating margin is around 16%. The franchise restaurant operating margin is around 82%. I don't know the exact split of SG&A between the two, but even if you assigned 100% of SG&A to the franchise operation (which can't possibly be true), it wouldn't change the huge difference in profitability between operating restaurants and franchising them. Getting rid of company stores makes the business more profitable and more valuable.

So getting rid of the company stores makes the business more profitable and therefore, more valuable...

I think adjusting the franchise/company-owned mix from 80/20 down to 96/4 will cause a quantum leap of perception in the market place.

And if the company pursues a more aggressive track on refranchising, you could be looking at your last chance to get this stock while it's still valued like a fantastic restaurant company, instead of what it really is – a global royalty on whatever the world is eating, delivered to more customers with more value and convenience than the competition.

Finally, Porter recommended putting 5%-10% of your equity portfolio in companies that own high-quality gold deposits or royalty rights on those deposits.

If you buy gold in the ground cheaply, you can ignore the typical volatility in gold mining stocks... You know you own a chunk of a fantastic asset.

We know one analyst who's better at finding and valuing these types of gold companies than almost anyone else in the world – John Doody. Over the years, he has developed a proprietary method for ferretting these companies out. And the stocks he holds in his portfolio vastly outperform any other type of gold investing we know of – typically with less volatility (thanks to the nature of the company he's buying).

Unfortunately, not many people know about John or his method for choosing gold stocks. But one man wanted to go on record to tell John Doody's story. You can learn more about it here...

New 52-week highs (as of 1/30/15): Blackstone Group (BX), Nuveen Quality Preferred Income Fund 2 (JPS), Nuveen AMT-Free Municipal Income Fund (NEA), Nuveen Municipal Opportunity Fund (NIO), Nuveen Municipal Value Fund (NUV), and ProShares Ultra 20+ Year Treasury Fund (UBT).

In today's mailbag, a subscriber asks about central banks' role in controlling the price of gold. Do you buy into the theory or do you, like us, think it's bogus? Tell us at feedback@stansberryresearch.com.

What makes you believe the Fed [and other central banks] won't suppress the gold price now, just as they have for the last three years? Or is this just a tin hat theory?" – Paid-up subscriber Phil G.

Hunt comment: Contrary to what some in our industry believe, we don't think any central bank is suppressing the price of gold. And if central banks actually are trying to suppress the price of gold, they're doing a piss-poor job of it. In 2002, gold traded for $300 an ounce. It skyrocketed to $1,900 an ounce in 2011. What has happened in the past few years is a needed correction. Ultimately, market forces will send gold higher.

Regards,

Sean Goldsmith
February 2, 2015